FILED PURSUANT TO RULE 424(B)(2)
FILE NO. 33-99316
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 14, 1995)
$928,529,000
(Approximate)
MERIT Securities Corporation
Collateralized Mortgage Bonds, Series 8
The Collateralized Mortgage Bonds, Series 8 (the "Bonds"), consist of
three classes: Class A-1, Class A-2 and Class A-3, each of which is being
offered hereby. The Bonds will be secured, to the extent described herein, by
Mortgage Collateral consisting substantially of conventional, one- to
four-family, fully amortizing first lien mortgage loans (the "Mortgage Loans")
having original terms to maturity of not more than 30 years, an aggregate
Scheduled Principal Balance of approximately $956,805,906 as of September 1,
1996 (the "Cut-off Date"), and a weighted average remaining term to stated
maturity of approximately 323 months as of the Cut-off Date. Approximately 98%
of the Mortgage Loans are expected to be adjustable rate Mortgage Loans, and
approximately 2% of the Mortgage Loans are expected to be fixed rate Mortgage
Loans. MERIT Securities Corporation (the "Issuer") will acquire the Mortgage
Collateral from Issuer Holding Corp. (the "Participant"). Capitalized terms used
and not otherwise defined herein are defined in the Glossary in the Prospectus.
Principal of and interest on the Bonds are payable on or about the 28th
day of each month, beginning in October 1996. Payments of interest at the Class
Interest Rates on each Payment Date will include interest accrued through the
applicable Accrual Period (as defined herein). Principal payments on the Bonds
will be allocated as described herein.
Simultaneously with the issuance of the Bonds, the Issuer will obtain
from Financial Security Assurance Inc. (the "Insurer") a guaranty insurance
policy (the "FSA Insurance Policy") in favor of the Trustee. The FSA Insurance
Policy will require the Insurer to make certain Insured Payments (as defined
herein) on the Bonds.
[LOGO]
For a discussion of certain significant matters affecting an investment
in the Bonds, see "Risk Factors" on page 7 of the Prospectus and on page S-17
herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================================
Original Class Weighted Stated
Principal Interest Average Life at Maturity CUSIP
Amount(1) Rate Pricing Speed(5) Date(6) Number
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Class A-1........... $700,000,000 (2) 2.2 years September 28, 2030 589962 AY5
Class A-2........... $140,000,000 (3) 7.3 years September 28, 2030 589962 AZ2
Class A-3........... $ 88,529,000 (4) 12.5 years September 28, 2030 589962 BA6
===================================================================================================================================
</TABLE>
Footnotes appear on next page.
The Class A-1 and Class A-2 Bonds will be purchased from the Issuer by
Lehman Brothers Inc. (the "Underwriter") and will be offered by the Underwriter
from time to time to the public in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. An affiliate of the
Participant has agreed to purchase the Class A-3 Bonds in a negotiated
transaction and may, from time to time, offer the Class A-3 Bonds for sale to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Issuer from the sale of the
Bonds (based on the Original Principal Amounts set forth above) are anticipated
to be approximately $934,143,525 before deducting expenses payable by the
Issuer, estimated to be approximately $300,000.
The Class A-1 and Class A-2 Bonds are offered when, as and if delivered
to and accepted by the Underwriter, subject to prior sale, withdrawal or
modification of the offer without notice, the approval of counsel and other
conditions. It is expected that delivery of the Bonds will be made only in
book-entry form through the book-entry facilities of The Depository Trust
Company, CEDEL and Euroclear on or about September 26, 1996.
LEHMAN BROTHERS
The date of this Prospectus Supplement is September 20, 1996.
<PAGE>
(cover continued from previous page)
(1) Subject to a permitted variance of plus or minus 5% depending
on the Mortgage Collateral actually pledged to secure the Bonds.
(2) The Class Interest Rate for the Class A-1 Bonds will initially be the
per annum rate equal to One-Month LIBOR (as defined herein), as
determined on the applicable Floating Rate Determination Date (as
defined herein), plus 0.22% accrued during the applicable Accrual
Period on the outstanding principal balance of the Class A-1 Bonds
immediately prior to such Payment Date. For the initial Payment Date,
the Class Interest Rate on the Class A-1 Bonds will be 5.7825% per
annum. The Class Interest Rate for the Class A-1 Bonds will be
increased as described herein if the Issuer does not exercise its
option to redeem the Class A-1 Bonds when it is first permitted to do
so. See "Description of the Bonds--Optional Redemption" herein.
(3) The Class Interest Rate for the Class A-2 Bonds will initially be the
per annum rate equal to One-Month LIBOR, as determined on the
applicable Floating Rate Determination Date, plus 0.60%, subject to a
cap of 10.00% per annum, accrued during the applicable Accrual Period
on the outstanding principal balance of the Class A-2 Bonds immediately
prior to such Payment Date. For the initial Payment Date, the Class
Interest Rate on the Class A-2 Bonds will be 6.1625% per annum. The
Class Interest Rate and cap for the Class A-2 Bonds will be increased
as described herein if the Issuer does not exercise its option to
redeem the Class A-2 Bonds when it is first permitted to do so. See
"Description of the Bonds--Optional Redemption" herein.
(4) The Class Interest Rate for the Class A-3 Bonds will equal,
subject to a cap of 12.00% per annum, (a) twelve times the sum
of (i) the amount of interest at the per annum rate equal to
the weighted average (by principal balance) of the Net Rates on
the Mortgage Loans accrued during the Accrual Period for the
Class A-3 Bonds on the outstanding principal balance of the
Class A-3 Bonds immediately prior to such Payment Date; and
(ii) the amount of interest at the per annum rate equal to the
excess of (x) the weighted average (by principal balance) of
the Net Rates on the Mortgage Loans over (y) the weighted
average (by principal balance) of the Class Interest Rate on
the Class A-1 and Class A-2 Bonds, accrued during the
applicable Accrual Period for the Class A-1 and Class A-2 Bonds
on a notional principal balance equal to the outstanding
principal balance of the Class A-1 and Class A-2 Bonds
immediately prior to such Payment Date, divided by (b) the
outstanding principal balance of the Class A-3 Bonds
immediately prior to such Payment Date. For the initial Payment
Date, the Class Interest Rate for the Class A-3 Bonds is
expected to be 12.00% per annum.
(5) Determined on the basis of an assumed pricing speed of 21% CPR (as
described herein), the assumption that there is no optional redemption
of the Bonds, and the other assumptions set forth herein under
"Maturity and Prepayment Considerations." Based on the same
assumptions, but assuming optional redemption, the weighted average
life of the Class A-1 Bonds would be approximately 2.2 years, the
weighted average life of the Class A-2 Bonds would be approximately 4.3
years and the weighted average life of the Class A-3 Bonds would be
approximately 4.3 years.
(6) Determined on the basis of the assumptions set forth herein
under "Summary of Terms--Stated Maturity Date."
It is a condition to their issuance that the Bonds be rated "Aaa" by
Moody's Investors Service Inc. ("Moody's") and "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's").
There is currently no secondary market for the Bonds. The Underwriter
intends to establish a market in the Class A-1 and Class A-2 Bonds but is not
obligated to do so. There is no assurance that any such market, if established,
will continue or that any investor will be able to sell its Class A-1 or Class
A-2 Bonds at a price equal to or greater than the price at which such Bonds were
purchased. It is not expected that there will be a secondary market for the
Class A-3 Bonds.
NEITHER THE MORTGAGE COLLATERAL NOR THE BONDS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY, THE ISSUER, THE PARTICIPANT, ANY AFFILIATE
OF THE PARTICIPANT, THE BOND ADMINISTRATOR, THE MASTER SERVICER, ANY SERVICER,
OR ANY OTHER PERSON (OTHER THAN THE INSURER TO THE EXTENT SET FORTH HEREIN).
PAYMENTS ON THE BONDS WILL BE PAYABLE SOLELY FROM THE COLLATERAL PLEDGED TO
SECURE THE BONDS AND THE FSA INSURANCE POLICY. THERE WILL BE NO RECOURSE TO THE
ISSUER, THE INSURER OR ANY OTHER PERSON FOR ANY DEFAULT ON THE BONDS, EXCEPT AS
SPECIFICALLY SET FORTH HEREIN.
Until ninety days have passed from the date of this Prospectus
Supplement, all dealers effecting transactions in the Bonds, whether or not
participating in this distribution, may be required to deliver this Prospectus
Supplement and the Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
The Bonds offered by this Prospectus Supplement are part of a Series of
Collateralized Mortgage Bonds being offered by the Issuer from time to time
pursuant to its Prospectus dated November 14, 1995, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information about the offering of the Bonds that
is not contained herein, and prospective investors are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Bonds may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
The Issuer has filed with the Commission certain materials relating to
the Mortgage Loans and the Bonds on Form 8-K. Such materials were prepared by
the Underwriter for certain prospective investors, and the information included
in such materials is subject to, and is superseded by, the information set forth
in this Prospectus Supplement.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Terms................................................................................................S-5
Risk Factors...................................................................................................S-17
Potential Delinquencies...................................................................................S-17
Cooperative Loans; Unrecognized Security Interests........................................................S-17
Mortgage Loan Concentration...............................................................................S-17
Interest-Only Payments....................................................................................S-17
High Balance Mortgage Loans...............................................................................S-17
Uncertain Timing of Principal.............................................................................S-17
Limited Recourse..........................................................................................S-18
Non-Recourse..............................................................................................S-18
The Status of the Mortgage Loans in the Event of
Insolvency............................................................................................S-18
Description of the Bonds.......................................................................................S-18
General...................................................................................................S-18
Book-Entry Bonds..........................................................................................S-19
The Trustee and Custodian.................................................................................S-20
Payments of Principal and Interest........................................................................S-20
Issuance of Subordinated Bonds............................................................................S-24
Payment Shortfalls; Events of Default.....................................................................S-24
Losses....................................................................................................S-25
Stated Maturity Date......................................................................................S-25
Optional Redemption.......................................................................................S-25
Security for the Bonds.........................................................................................S-26
The Mortgage Collateral...................................................................................S-26
The Mortgage Certificates.................................................................................S-26
The Mortgage Loans........................................................................................S-26
Selected Data.............................................................................................S-27
Mortgage Pool and Other Insurance for the Underlying
Mortgage Loans........................................................................................S-29
Additional Collateral.....................................................................................S-29
Cooperative Loans.........................................................................................S-30
Realizing Upon Cooperative Loan Security..................................................................S-30
Additional Information....................................................................................S-31
Substitution of Mortgage Loans............................................................................S-31
Delivery of Directly Held Mortgage Loans..................................................................S-32
Conversion Option.........................................................................................S-32
The Insurer....................................................................................................S-33
General...................................................................................................S-33
Reinsurance...............................................................................................S-33
Ratings of Claims-Paying Ability..........................................................................S-33
Capitalization............................................................................................S-34
Incorporation of Certain Documents by Reference...........................................................S-34
Insurance Regulation......................................................................................S-34
FSA Insurance Policy...........................................................................................S-35
Servicing of the Mortgage Loans................................................................................S-36
General...................................................................................................S-36
Loan Servicing Activities at The Boston Company...........................................................S-36
Advances..................................................................................................S-36
Forbearance and Modification Agreements...................................................................S-37
Events of Default.........................................................................................S-37
Master Servicers..........................................................................................S-37
Servicing and Other Compensation and Payment of
Expenses..............................................................................................S-37
Special Servicer..........................................................................................S-38
Maturity and Prepayment Considerations.........................................................................S-38
Weighted Average Life of the Bonds........................................................................S-38
Factors Affecting Prepayments on the Mortgage
Loans.................................................................................................S-38
Modeling Assumptions......................................................................................S-40
Yield Considerations...........................................................................................S-44
Use of Proceeds................................................................................................S-46
Underwriting...................................................................................................S-46
Experts........................................................................................................S-46
Legal Matters..................................................................................................S-46
Ratings........................................................................................................S-46
ERISA Considerations...........................................................................................S-47
Annex I.........................................................................................................I-1
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
Page
<S> <C>
Additional Information............................................................................................2
Incorporation of Certain Documents by
Reference.......................................................................................................2
Reports to Bondholders............................................................................................2
Prospectus Summary................................................................................................3
Risk Factors......................................................................................................7
Credit Considerations...........................................................................................7
Second Lien Mortgage Loans......................................................................................8
Limited Liquidity...............................................................................................8
Bankruptcy or Insolvency of the Issuer..........................................................................9
Bankruptcy or Insolvency of Resource............................................................................9
Deficiency on Sale of Collateral................................................................................9
Underwriting Standards and Potential
Delinquencies.................................................................................................9
Modification and Substitution of Mortgage
Loans........................................................................................................10
Pledge of Additional Collateral................................................................................10
Average Life and Yield Considerations..........................................................................11
Limited Nature of Ratings......................................................................................11
Legal Investment Considerations................................................................................11
Consolidated Tax Return........................................................................................12
Description of the Bonds.........................................................................................12
General........................................................................................................12
Book-Entry Procedures..........................................................................................12
Payments of Principal and Interest.............................................................................13
Redemption.....................................................................................................14
Maturity and Prepayment Considerations...........................................................................15
Yield Considerations.............................................................................................15
Security for the Bonds...........................................................................................16
General........................................................................................................16
The Mortgage Collateral........................................................................................16
The Mortgage Loans.............................................................................................16
Second Liens...................................................................................................17
Repurchase of Converted Mortgage Loans.........................................................................18
Substitution of Mortgage Collateral............................................................................18
Pledge of Additional Collateral and
Issuance of Additional Bonds..................................................................................19
Master Servicer Custodial Account..............................................................................19
Collateral Proceeds Account....................................................................................19
Reserve Fund or Accounts.......................................................................................20
Other Funds or Accounts........................................................................................20
Investment of Funds............................................................................................20
Mortgage Insurance on the Mortgage Loans.......................................................................20
Pool Insurance.................................................................................................21
Credit Enhancement for the Mortgage Loans......................................................................22
Insurance Policies and Surety Bonds............................................................................23
Origination of the Mortgage Loans................................................................................23
General........................................................................................................23
Representations and Warranties.................................................................................24
Servicing of the Mortgage Loans..................................................................................25
General........................................................................................................25
Payments on Mortgage Loans.....................................................................................26
Advances.......................................................................................................26
Collection and Other Servicing Procedures......................................................................27
Defaulted Mortgage Loans.......................................................................................27
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon
Defaulted Mortgage Loans......................................................................................28
Evidence as to Servicing Compliance............................................................................28
Events of Default and Remedies.................................................................................29
Master Servicing Agreement.....................................................................................29
Special Servicing Agreement....................................................................................29
The Indenture....................................................................................................30
General........................................................................................................30
Modification of Indenture......................................................................................30
Events of Default..............................................................................................31
Authentication and Delivery of Bonds...........................................................................32
List of Bondholders............................................................................................32
Annual Compliance Statement....................................................................................32
Reports to Bondholders.........................................................................................32
Trustee's Annual Report........................................................................................33
Trustee........................................................................................................33
Satisfaction and Discharge of the
Indenture.....................................................................................................33
Certain Legal Aspects of the Mortgage
Loans...........................................................................................................33
Mortgages......................................................................................................33
Foreclosure....................................................................................................34
Second Mortgages...............................................................................................35
Equity Rights of Redemption....................................................................................35
Statutory Rights of Redemption.................................................................................35
Due-on-Sale Provisions.........................................................................................35
Subordinate Financing..........................................................................................36
Environmental Considerations...................................................................................36
Equitable Limitations on Remedies..............................................................................36
Anti-Deficiency Legislation and Other
Limitations on Lenders.........................................................................................37
Soldiers' and Sailors' Civil Relief Act of
1940...........................................................................................................37
The Issuer.......................................................................................................38
Resource Mortgage Capital, Inc...................................................................................38
Certain Federal Income Tax Consequences..........................................................................38
General........................................................................................................38
Original Issue Discount........................................................................................40
Market Discount................................................................................................46
Amortizable Premium............................................................................................47
Gain or Loss on Disposition....................................................................................48
Miscellaneous Tax Aspects......................................................................................48
State Tax Considerations.........................................................................................49
ERISA Considerations.............................................................................................49
Legal Investment.................................................................................................50
Use of Proceeds..................................................................................................51
Plan of Distribution.............................................................................................51
Legal Matters....................................................................................................51
Financial Information............................................................................................51
Glossary.........................................................................................................52
</TABLE>
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement, in the
attached Prospectus and in the Indenture (as defined below). Whenever reference
is made herein to a percentage of the Mortgage Loans or to the characteristics
of the Mortgage Loans, the calculation is based on the projected Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date. Whenever
reference is made herein to the principal balance or amount of the Bonds, the
balance or amount is calculated based on the outstanding principal balance of
the Bonds as of the most recent Payment Date or the Closing Date, as applicable.
Capitalized terms used and not defined herein or in the Prospectus have the
meanings assigned to them in the Glossary contained in the Prospectus.
Issuer.............................. MERIT Securities Corporation (the
"Issuer"), a limited purpose finance
subsidiary of Issuer Holding Corp. (the
"Participant") and an indirect
subsidiary of Resource Mortgage Capital,
Inc. ("Resource"). See "The Issuer" and
"Resource Mortgage Capital, Inc." in the
Prospectus.
The Bonds........................... Collateralized Mortgage Bonds, Series 8
(the "Bonds"). The Bonds will consist of
the following Classes:
Approximate Original
Principal Amount
--------------------------
Class A-1 Bonds $700,000,000
Class A-2 Bonds $140,000,000
Class A-3 Bonds $ 88,529,000
The original principal amount of each
Class of Bonds may be increased or
decreased by up to 5% on the Closing
Date, depending upon the Mortgage
Collateral actually acquired by the
Issuer and pledged to the Trustee. An
affiliate of the Participant will
acquire the Class A-3 Bonds from the
Issuer in a negotiated transaction.
Bond Payment Structure
Considerations..................... Unlike standard corporate bonds, the
timing and amount of principal payments
on the Bonds are not fixed and will be
determined by, among other things, the
timing and amount of principal payments
(including prepayments, defaults,
liquidations and repurchases) on the
related Mortgage Loans, the timing and
amount of losses realized on such
Mortgage Loans and the principal payment
structure (including redemption
provisions) of the Bonds. The timing and
amount of principal payments on mortgage
loans are affected by a variety of
economic, geographic, legal, tax, and
social factors primarily because
mortgage loans are prepayable by the
borrowers at any time. Mortgage loan
prepayments also are affected by sales
of the underlying residential properties
and mortgage loan default rates. See
"Risk Factors--Uncertain Timing of
Principal" and "Maturity and Prepayment
Considerations" herein. In addition to
affecting the weighted average life of
mortgage-backed bonds, mortgage
prepayment rates will affect the yields
on bonds purchased at a premium to or
discount from par. Faster than
anticipated mortgage prepayment rates
will adversely affect the yields on
bonds purchased at a premium. Slower
than anticipated mortgage prepayment
rates will adversely affect the yields
on bonds purchased at a discount. See
"Yield Considerations" herein.
For an additional discussion of factors
affecting mortgage loan prepayments and
the effect of prepayments and other
factors on the yield on the Bonds,
S-5
<PAGE>
see "Maturity and Prepayment
Considerations," "Yield Considerations"
and "Risk Factors--Average Life and
Yield Considerations" in the Prospectus.
Indenture............................ The Bonds will be issued pursuant to an
indenture supplement to be dated as of
September 1, 1996 (the "Indenture
Supplement"), to an indenture dated as
of November 1, 1994 (the "Original
Indenture"), between the Issuer and the
Trustee (the Original Indenture as so
supplemented, the "Indenture").
Trustee and Custodian................ Texas Commerce Bank National
Association, a national banking
association, will act as Trustee (the
"Trustee") for the Bonds pursuant to the
Indenture. The Trustee will also act as
custodian of certain Mortgage Loan
documents and is trustee with respect to
a portion of the Mortgage Collateral.
See "Description of the Bonds--The
Trustee and Custodian" herein.
Participant.......................... Issuer Holding Corp. (the
"Participant"). The Participant acquired
the Mortgage Collateral from (i) its
affiliates, which originated a portion
of the Mortgage Loans or purchased them
from various mortgage banking
institutions; (ii) affiliates of
Capstead Mortgage Corporation
("Capstead"), which purchased a portion
of the Mortgage Loans from various
mortgage banking institutions; and (iii)
Boston Safe Deposit and Trust Company
("The Boston Company"), which originated
a portion of the Mortgage Loans.
Servicers and Master
Servicers............................ Approximately 21% of the Mortgage Loans
are serviced by The Boston Company (and
subserviced by its affiliate, Mellon
Mortgage Company); and the remaining
Mortgage Loans are serviced by other
mortgage servicing institutions
(together with The Boston Company and
Capstead, the "Servicers" and each a
"Servicer"). Norwest Bank Minnesota,
N.A. ("Norwest"), will serve as master
servicer of approximately 58% of the
Mortgage Loans; Capstead will act as
administrator of approximately 20% of
the Mortgage Loans; Resource will serve
as master servicer of the balance of the
Mortgage Loans (Resource in such
capacity, together with Norwest and
Capstead, the "Master Servicers" and
each a "Master Servicer").
Each Servicer will be entitled to a
Servicing Fee and each Master Servicer
will be entitled to a Master Servicing
Fee (each, as defined herein) from
interest collected on the Mortgage
Loans. As described herein, the
Servicing Fee and Master Servicing Fee
will vary among the Mortgage Loans. The
sum of the weighted averages of the (i)
Servicing Fee Rates and (ii) the Master
Servicing Fee Rates is expected to equal
approximately 0.44% per annum as of the
Cut-off Date. On any Payment Date, the
applicable Master Servicer will be
obligated to pay interest ("Month End
Interest") through the end of the
preceding calendar month with respect to
Mortgage Loans that are prepaid in full
during the Prepayment Period that begins
in the preceding calendar month. See
"Servicing of the Mortgage Loans"
herein.
Bond Administrator.................. Resource Mortgage Capital, Inc., will
act as Bond Administrator, will be
entitled to a Bond Administration Fee
equal to 0.02% per annum on the
aggregate Scheduled Principal Balance of
the Mortgage Loans and will be
responsible for the fees of the Trustee.
Denominations....................... The Bonds will be issued as Book-Entry
Bonds in minimum denominations of
$100,000 and in integral multiples of
$1,000 in excess thereof, except
S-6
<PAGE>
that one Bond of each Class may be
issued in a different denomination. See
"Description of the Bonds--Book-Entry
Procedures" herein and in the
Prospectus.
Payment Date........................ The 28th day of each month (or if such
day is not a Business Day, then the next
succeeding Business Day), beginning in
October, 1996.
Closing Date........................ On or about September 26, 1996.
Cut-off Date........................ September 1, 1996.
Record Date......................... The last Business Day of the month
preceding the month in which the related
Payment Date is deemed to occur or, for
the first Payment Date, the Closing
Date.
Due Period.......................... With respect to each Payment Date, the
period commencing on the second day of
the month preceding the month in which
the Payment Date is deemed to occur and
ending on the first day of the month in
which the Payment Date is deemed to
occur.
Prepayment Period................... With respect to each Payment Date, the
period commencing on the twenty-first
day (in the case of a portion of the
Mortgage Collateral) or the eighteenth
day (in the case of the balance of the
Mortgage Collateral) of the month
preceding the month in which the Payment
Date is deemed to occur (or, in the case
of the first Payment Date, September 13,
1996) and ending on the twentieth day or
seventeenth day, respectively, of the
month in which the Payment Date is
deemed to occur.
Accrual Period...................... With respect to each Payment Date: (i)
for the Class A-1 and Class A-2 Bonds,
the period commencing on the 28th day of
the preceding month through the 27th day
of the month in which such Payment Date
is deemed to occur (except that the
first such Accrual Period will be the
period from the Closing Date through
October 27, 1996); and (ii) for the
Class A-3 Bonds, the calendar month
preceding the month in which such
Payment Date is deemed to occur.
Computation of Interest............. Interest will be computed on the basis
of a 360-day year consisting of twelve
30-day months.
Class A-1 Bonds..................... The Class Interest Rate for the Class
A-1 Bonds will initially be the per
annum rate equal to One-Month LIBOR (as
defined herein), as determined on the
applicable Floating Rate Determination
Date (as defined herein), plus 0.22%
accrued during the applicable Accrual
Period on the outstanding principal
balance of the Class A-1 Bonds
immediately prior to such Payment Date.
For the initial Payment Date, the Class
Interest Rate on the Class A-1 Bonds
will be 5.7825% per annum. The Class
Interest Rate for the Class A-1 Bonds
will be increased as described herein if
the Issuer does not exercise its option
to redeem the Class A-1 Bonds when it is
first permitted to do so. See
"Description of the Bonds--Optional
Redemption" herein.
Class A-2 Bonds..................... The Class Interest Rate for the Class
A-2 Bonds will initially be the per
annum rate equal to One-Month LIBOR, as
determined on the applicable Floating
Rate Determination Date, plus 0.60%,
subject to a cap of 10.00% per annum,
accrued during the applicable Accrual
Period on the outstanding principal
balance of the Class A-2 Bonds
immediately prior to such Payment Date.
For the initial Payment Date, the Class
Interest Rate on the Class A-2
S-7
<PAGE>
Bonds will be 6.1625% per annum. The
Class Interest Rate and cap for the
Class A-2 Bonds will be increased as
described herein if the Issuer does not
exercise its option to redeem the Class
A-2 Bonds when it is first permitted to
do so. See "Description of the
Bonds--Optional Redemption" herein.
Class A-3 Bonds..................... The Class Interest Rate for the Class
A-3 Bonds will equal, subject to a cap
of 12.00% per annum, (a) twelve times
the sum of (i) the amount of interest at
the per annum rate equal to the weighted
average (by principal balance) of the
Net Rates on the Mortgage Loans accrued
during the Accrual Period for the Class
A-3 Bonds on the outstanding principal
balance of the Class A-3 Bonds
immediately prior to such Payment Date;
and (ii) the amount of interest at the
per annum rate equal to the excess of
(x) the weighted average (by principal
balance) of the Net Rates on the
Mortgage Loans over (y) the weighted
average (by principal balance) of the
Class Interest Rate on the Class A-1 and
Class A-2 Bonds, accrued during the
applicable Accrual Period for the Class
A-1 and Class A-2 Bonds on a notional
principal balance equal to the
outstanding principal balance of the
Class A-1 and Class A-2 Bonds
immediately prior to such Payment Date,
divided by (b) the outstanding principal
balance of the Class A-3 Bonds
immediately prior to such Payment Date.
For the initial Payment Date, the Class
Interest Rate for the Class A-3 Bonds is
expected to be 12.00% per annum.
One-Month LIBOR..................... With respect to any Accrual Period for
the Class A-1 and Class A-2 Bonds,
One-Month LIBOR is expected to be
determined on the basis (rounded to the
nearest five decimal places) of the
London Interbank Offered Rate ("LIBOR")
for one-month Eurodollar deposits
appearing on the Bloomberg Screen
LIUS01M Index Page as of 11:00 a.m.,
London time, on the related Floating
Rate Determination Date. See
"Description of the Bonds--Payments of
Principal and Interest" herein.
Floating Rate
Determination Date................ The Floating Rate Determination Date for
each Accrual Period for the Class A-1
and Class A-2 Bonds after the initial
Accrual Period will be the second London
Banking Day prior to the commencement of
the applicable Accrual Period. A
"London Banking Day" is any day on which
commercial banks and foreign exchange
markets settle payments in London and
New York City.
Principal Payments on the
Bonds............................. On each Payment Date, (a) the Principal
Payment Amount (as defined herein) will
be applied first to pay the Class A-1
Bonds until paid in full, second to pay
the Class A-2 Bonds until paid in full
and third to pay the Class A-3 Bonds
until paid in full. Principal payments
to a Class will be made to the
Bondholders of such Class pro rata in
the proportion that the outstanding
principal balance of each Bond of such
Class bears to the aggregate outstanding
principal balance of all Bonds of such
Class. See "Description of the
Bonds--Payments of Principal and
Interest" herein.
Stated Maturity Date................ The Stated Maturity Date for the Bonds
is set forth on the cover page hereof
and represents the date that the Bonds
are payable in full. The Stated Maturity
Date for the Bonds has been calculated
by adding approximately four years to
the latest scheduled payment date on the
Mortgage Loans included in the Mortgage
Collateral originally pledged to secure
the Bonds. See "Bond Payment Structure
Considerations" in this Summary and
"Maturity and Prepayment Considerations"
herein and in the Prospectus.
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<PAGE>
Non-Recourse Obligations............ The Bonds will be non-recourse
obligations of the Issuer. In accordance
with the terms of the Indenture, the
Bondholders will have no rights or
claims against the Issuer directly for
the payment of principal of and interest
on the Bonds and may look only to the
Collateral pledged to the Trustee as
security for the Bonds to satisfy the
Issuer's obligations to make interest
and principal payments on the Bonds.
None of the Issuer, the Bond
Administrator, the Participant, any
affiliate of the Participant, any Master
Servicer, any Servicer, any governmental
agency or any other person has
guaranteed or insured the Bonds, except
as specifically set forth herein with
regard to the FSA Insurance Policy. See
"FSA Insurance Policy" herein. Each
Bondholder will be deemed, by acceptance
of its Bond, to have agreed not to file
or cause a filing against the Issuer of
an involuntary petition under any
bankruptcy or receivership law and to
treat its Bonds as debt instruments for
purposes of federal and state income
tax, franchise tax and any other tax
measured in whole or in part by income.
Security for the Bonds.............. The Mortgage Collateral will be pledged
as a portion of the Trust Estate
securing the Bonds. The Mortgage
Collateral will consist of (i) mortgage
loans (the "Directly Held Mortgage
Loans") and (ii) securities (the
"Mortgage Certificates") representing
substantially the entire interest in
mortgage loans (the "Underlying Mortgage
Loans" and, together with the Directly
Held Mortgage Loans, the "Mortgage
Loans"). The Mortgage Collateral is
more specifically described under
"Security for the Bonds" herein and in
the Prospectus.
A. Mortgage Loans................. The Mortgage Loans will be conventional,
one- to four-family, residential
Mortgage Loans having an aggregate
Scheduled Principal Balance as of the
Cut-off Date of approximately
$956,805,906. Approximately 98% of the
Mortgage Loans are expected to be
adjustable rate Mortgage Loans (the "ARM
Mortgage Loans"), and approximately 2%
of the Mortgage Loans are expected to be
fixed rate Mortgage Loans (the "Fixed
Mortgage Loans"). All the Mortgage Loans
are expected to be secured by first
liens on residential real properties
(the "Mortgaged Premises") and to have
original terms to maturity of not more
than 30 years. Certain of the Mortgage
Loans are secured by Additional
Collateral as described herein.
Approximately 10% of the Mortgage Loans
were delinquent by one or more Scheduled
Payments.
The Mortgage Loans are expected to have
a weighted average remaining term to
stated maturity of approximately 323
months. The Directly Held Mortgage
Loans are expected to have an average
Scheduled Principal Balance of
approximately $506,100. The Underlying
Mortgage Loans are expected to have an
average Scheduled Principal Balance of
approximately $220,700. All the ARM
Mortgage Loans are expected to have Note
Rates that adjust after an initial
period (the "Initial Period"), based on
the Six- Month LIBOR Index, the One-Year
CMT Index or the Six-Month Certificate
of Deposit Index (each an "Index" as
described herein), subject to Periodic
Rate Caps and maximum and minimum
lifetime Note Rates, as described
herein. Of the ARM Mortgage Loans,
approximately 55% are expected to have
Note Rates that adjust by reference to
the Six-Month LIBOR Index, approximately
23% are expected to have Note Rates that
adjust by reference to the One-Year CMT
Index and approximately 22% are expected
to have Note Rates that adjust by
reference to the Six-Month Certificate
of Deposit Index.
S-9
<PAGE>
Approximately 21% of the Mortgage Loans
provide for monthly payments of interest
at the related Note Rate but no payments
of principal for the first 10 years
after origination (or, in some cases,
modification). Following such 10-year
period, the monthly payment on each such
Mortgage Loan will be increased to an
amount sufficient to amortize fully its
outstanding principal balance over its
remaining term and to pay interest at
the related Note Rate.
Less than 1% of the ARM Mortgage Loans
are secured in part by, in addition to
real estate or shares of stock in a
cooperative housing corporation,
Additional Collateral, generally
consisting of marketable securities. See
"Security for the Bonds--Additional
Collateral" herein.
Less than 1% of the Mortgage Loans are
Unrecognized Cooperative Loans (as
defined herein); the value of the
related collateral may prove to be
substantially less, in the event of
foreclosure, than the unpaid balance of
the related Mortgage Loan. See "Risk
Factors--Cooperative Loans; Unrecognized
Security Interests" herein.
Approximately 49% of the Mortgage Loans
provide that the borrower may, on
certain dates and subject to certain
conditions, as specified in the related
Note, convert the adjustable note rate
of the related Mortgage Loan to a fixed
rate.
Mortgage Insurance................. Approximately 46% of the Mortgage Loans
are expected to have original
loan-to-value ratios, giving effect to
Additional Collateral (as defined
herein), in excess of 80%, and the
weighted average original loan-to-value
ratio, giving effect, if applicable, to
Additional Collateral, is expected to be
approximately 80%. At least 98% of the
Mortgage Loans with a loan-to-value
ratio (at origination), giving effect to
Additional Collateral, greater than 80%
will be covered by a Primary Mortgage
Insurance Policy (covering at least the
amount of the Mortgage Loan in excess of
75% of the original fair market value of
the related Mortgaged Premises) unless
such policy is canceled with the consent
of the Master Servicer. Certain of the
Underlying Mortgage Loans will be
covered by other limited forms of credit
enhancement as described herein. See
"Security for the Bonds--Mortgage Pool
and Other Insurance for the Underlying
Mortgage Loans" herein.
Note Rate.......................... The Note Rate of each Mortgage Loan is
the per annum interest rate required to
be paid by the borrower under the terms
of the related Note. The Note Rate of
each ARM Mortgage Loan will adjust as of
a date specified in the related Note
(each such date, an "Interest Adjustment
Date") to a rate that is calculated in
accordance with the related Index plus a
fixed percentage (the "Gross Margin"),
subject to (i) a maximum periodic
increase or decrease in the Note Rate of
1% or 2% per annum (a "Periodic Rate
Cap") and (ii) any minimum and maximum
lifetime Note Rates.
As of the Cut-off Date, (i) the Note
Rates on the ARM Mortgage Loans are
expected to range from 4.25% to 10.88%
per annum, and the weighted average Note
Rate on the ARM Mortgage Loans is
expected to be approximately 8.30% per
annum, (ii) the Gross Margins for the
ARM Mortgage Loans are expected to range
from 1.75% to 4.50%, with a weighted
average of approximately 2.89%, (iii)
the maximum lifetime Note Rates for the
Mortgage Loans are expected to range
from 9.25% to 22.88% per annum, and the
weighted average maximum lifetime Note
Rate for the Mortgage Loans is expected
to be approximately 11.70% per annum and
S-10
<PAGE>
(iv) the minimum lifetime Note Rates for
the ARM Mortgage Loans are expected to
range from 1.25% to 10.88% per annum,
and the weighted average minimum
lifetime Note Rate is expected to be
approximately 3.77% per annum. In no
case will the minimum lifetime Note Rate
of an Mortgage Loan be less than the
Gross Margin of such Mortgage Loan. As
of the Cut-off Date, the Note Rates for
the Fixed Mortgage Loans are expected to
range from 7.5% to 12.13% per annum, and
the weighted average Note Rate for the
Fixed Mortgage Loans is expected to be
approximately 11.23% per annum.
Administrative
Cost Rate........................ The Administrative Cost Rate with
respect to each Mortgage Loan will be
equal to the sum of (i) the related
Servicing Fee Rate, (ii) the related
Master Servicing Fee Rate, (iii) the
rate used to calculate premiums, if any,
on mortgage pool and other insurance
policies and certain other
administrative expenses, if any,
applicable to such Mortgage Loan, (iv)
the Bond Administration Fee Rate and (v)
the rate used to calculate premiums due
under the FSA Insurance Policy, in each
case attributable to that Mortgage Loan.
For purposes of calculating the
Administrative Cost Rate, the rate used
with respect to the premium for the FSA
Insurance Policy is a fixed percentage
of the outstanding principal balance of
each Mortgage Loan, although the premium
for the FSA Insurance Policy paid is
equal to such fixed percentage of the
outstanding principal balance of the
Bonds. As of the Cut-off Date, the
weighted average Administrative Cost
Rate is expected to be approximately
0.55% per annum for all the Mortgage
Loans.
Net Rate........................... The Net Rate of each Mortgage Loan will
be equal to the Note Rate for such
Mortgage Loan less the Administrative
Cost Rate for such Mortgage Loan.
B. Mortgage Certificates........... The Underlying Mortgage Loans are
indirectly pledged to secure the Bonds
through the pledge of the Mortgage
Certificates, which represent
substantially the entire interest in the
Underlying Mortgage Loans and, in
addition, provide limited credit
enhancement for the Underlying Mortgage
Loans.
C. Collateral Proceeds
Account.......................... All collections on the Mortgage
Collateral will be remitted (net of
certain administrative fees and expenses
and payments and reimbursements to the
applicable Servicer, the applicable
Master Servicer and the Bond
Administrator) monthly to the Collateral
Proceeds Account to be established by
the Trustee and will be available for
application to the payment of interest
and principal due on the Bonds and for
the payment of certain administrative
fees and expenses. On each Payment Date,
after required payments are made on the
Bonds and to the Insurer for any
unreimbursed amounts paid on the Bonds
under the FSA Insurance Policy (as
described below), any Available Funds
(as defined herein) remaining in the
Collateral Proceeds Account on such
Payment Date shall be released from the
lien of the Indenture and will not be
available for payment to the
Bondholders. See "Security for the
Bonds--Collateral Proceeds Account" in
the Prospectus.
D. FSA Insurance Policy............ Financial Security Assurance Inc. (the
"Insurer") will issue a financial
guaranty insurance policy (the "FSA
Insurance Policy") pursuant to which it
will irrevocably and unconditionally
guarantee payment on each Payment
S-11
<PAGE>
Date to the Trustee for the benefit of
the holders of each Class of Bonds of an
amount equal to the Payment Amount (as
described herein) for such Payment Date.
Except upon the occurrence of an Insurer
Default (as defined herein), the Insurer
shall have the right to exercise certain
rights of the Bondholders, as specified
in the Indenture, without any consent of
the Bondholders; and the Bondholders may
exercise such rights only with the prior
written consent of the Insurer, except
as provided in the Indenture. In
addition, to the extent of unreimbursed
payments under the FSA Insurance Policy,
the Insurer will be subrogated to the
rights of the Bondholders on which such
Insured Payments were made. In
connection with each Insured Payment on
a Bond, the Trustee, as attorney-in-fact
for the Holder thereof, will be deemed
to have assigned to the Insurer the
rights of such Holder with respect to
such Bond to the extent of such Insured
Payment. "Insurer Default" is defined
under the Indenture as (x) the failure
by the Insurer to make a required
payment under the FSA Insurance Policy
or (y) the bankruptcy or insolvency of
the Insurer.
The Insurer is a New York monoline
insurance company engaged exclusively in
the business of writing financial
guaranty insurance, principally in
respect of asset-backed and other
collateralized securities offered in
domestic and foreign markets. The
Insurer's claims paying ability is rated
"Aaa" by Moody's Investors Service, Inc.
("Moody's"), and "AAA" by each of
Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Nippon
Investors Service, Inc., and Standard &
Poor's (Australia) Pty, Ltd. See "The
Insurer" herein.
E. Other Credit Support............ Additional credit support for the Bonds
will be provided through limited
overcollateralization, i.e., the pledge
to the Trustee on the Closing Date of
Mortgage Collateral having a principal
amount in excess of the original
principal balance of the Bonds (such
excess, the "Overcollateralization
Amount"). The Overcollateralization
Amount, on the Closing Date, is expected
to equal approximately 0.50% of the
aggregate Scheduled Principal Balance of
the Mortgage Loans as of the Cut-off
Date. The actual percentage may be lower
or higher than 0.50%, depending on the
final requirements of the Insurer and
the Rating Agencies. The
Overcollateralization Amount generally
will be reduced to the extent of Losses
(as defined herein) on the Mortgage
Loans and to the extent that the
Overcollateralization Amount would
otherwise exceed the Target
Overcollateralization Amount (as defined
herein). To the extent Available Funds
for a Payment Date exceed (i) amounts
due on the Bonds on such Payment Date
and (ii) amounts payable to the Insurer
for any unreimbursed amounts paid on the
Bonds under the FSA Insurance Policy,
such excess funds will be released from
the lien of the Indenture.
On the Closing Date, the Issuer will
establish a fund (the "Collateralization
Fund") and deposit therein, as
additional security for the Bonds, cash
or other assets selected by the Issuer
with the consent of FSA with a value
equal to the Overcollateralization
Amount on the Closing Date. The Issuer
may substitute other assets for the
assets initially deposited in the
Collateralization Fund with the consent
of the Insurer, but the Issuer will not
have any obligation to make further
deposits to the Collateralization Fund.
On any Payment Date interest on amounts
in the Collateralization
S-12
<PAGE>
Fund and the excess in the
Collateralization Fund over the
Collateralization Fund Requirement (as
defined herein) may be distributed to
the Issuer. Once released from the
Indenture, excess funds will not be
available to make payments on the Bonds.
See "Description of the Bonds--Payments
of Principal and Interest" herein.
Losses will be covered first by the
Overcollateralization Amount (and
Collateralization Fund) and second by
the FSA Insurance Policy to the extent
described herein or, in the event of any
default by the Insurer, losses will be
incurred pro rata by the Bondholders.
See "Description of the Bonds--Losses"
herein.
Subordinated Bonds................. Without the consent of the Bondholders,
the Issuer may issue additional bonds of
this Series to the extent such bonds are
fully subordinated to the Bonds or may
pledge its interest in the Mortgage
Loans, subject to the indebtedness
evidenced by the Bonds, to secure bonds
of other series. Any such issuance of
additional bonds will be conditioned
upon confirmation from the Rating
Agencies of the then current ratings on
the Bonds (without regard to the
existence of the FSA Insurance Policy),
the consent of the Insurer and the
satisfaction of certain other conditions
set forth in the Indenture.
Substitution and Modification of
Mortgage Loans................... If a Mortgage Loan is in material
default or a payment default is
imminent, the related Servicer, with the
consent of the related Master Servicer,
may be authorized to enter into a
forbearance or modification agreement
with the borrower. The terms of any such
forbearance or modification agreement
may alter the scheduled amortization of
such Mortgage Loan and, consequently,
may affect the amount and timing of
payments on the Bonds. In addition,
under certain circumstances, a mortgage
loan (a "Substitute Mortgage Loan") may
be substituted for a defaulted Mortgage
Loan or REO. The terms of a Substitute
Mortgage Loan may differ from those of
the Mortgage Loan for which it is
substituted. In particular, the Note
Rate of a Substitute Mortgage Loan may
be less than that of the Mortgage Loan
for which it is substituted and, indeed,
may be less than the then current market
interest rate for mortgage loans with
similar characteristics. Furthermore, a
Bondholder may prefer that such
defaulted Mortgage Loan or REO be
liquidated rather than have it replaced
with a Substitute Mortgage Loan,
particularly if the Substitute Mortgage
Loan has a Note Rate less than the then
current market interest rate for
mortgage loans with similar
characteristics. See "Security for the
Bonds--Substitution of Mortgage
Collateral" in the Prospectus.
Generally, as a condition to any
modification or forbearance related to
any Mortgage Loan or to the substitution
of a Substitute Mortgage Loan, the
applicable Master Servicer is required
to determine, in its reasonable business
judgment, that such modification,
forbearance or substitution will
maximize the recovery on such Mortgage
Loan on a present value basis.
Additional Information............. On each Payment Date, information will
be available with respect to the
outstanding principal balance of each
Class of the Bonds and the applicable
Class Interest Rate. The information
may be obtained by telephone from the
corporate trust office of the Trustee.
As of the date of this Prospectus
Supplement, that telephone number is
(713) 216-2240. The Bond Administrator
will make available on an ongoing basis
current information relating to the
Mortgage Collateral, including (i)
Mortgage Loan delinquencies of 30 days,
60 days and 90 days or over, (ii)
Mortgage Loans
S-13
<PAGE>
in foreclosure, (iii) REO, (iv) Losses
on the Mortgage Loans, (v) the remaining
Overcollateralization Amount and (vi)
amounts paid on the Bonds by the Insurer
under the FSA Insurance Policy.
Advances........................... On or before each Payment Date, the
applicable Servicer generally will be
obligated (subject to the limitations
provided in the applicable servicing
agreement) to make cash advances
("Advances") with respect to any
delinquent Mortgage Loan in an amount
equal to the sum of (i) the Scheduled
Payment on such delinquent Mortgage Loan
(net of the Servicing Fee), (ii) amounts
for the payment of real estate taxes,
assessments, insurance premiums and
property protection expenses and (iii)
amounts to cover expenses relating to
Foreclosure and Liquidation, provided
that the applicable Master Servicer has
determined in its good faith business
judgment that such Advance is not a
Non-Recoverable Advance. The applicable
Master Servicer will be obligated to
make any required Advance if the
Servicer fails to make such Advance. The
Bond Administrator will be obligated to
make a required Advance if the
applicable Master Servicer fails to do
so. The Trustee will be obligated to
make a required Advance if the Bond
Administrator fails to do so.
Nevertheless, none of the applicable
Master Servicer, the Bond Administrator
or the Trustee is required to make any
Advance if it has determined in its good
faith business judgment that such
Advance would constitute a
Non-Recoverable Advance. The FSA
Insurance Policy will provide protection
to the Bondholders against any shortfall
in the Payment Amount resulting from
delinquencies as to which a required
Advance is not made as described above
or is determined to be nonrecoverable to
the extent such shortfall is not
otherwise covered by Available Funds.
See "Servicing of the Mortgage
Loans--Advances" herein and in the
Prospectus.
Book-Entry Registration............ The Bonds will initially be issued in
book-entry form. Persons acquiring
beneficial ownership interests in the
Bonds ("beneficial owners") may elect to
hold their interest through The
Depository Trust Company ("DTC") in the
United States, or CEDEL Bank, S.A.
("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers
within DTC, CEDEL or Euroclear, as the
case may be, will be made in accordance
with the usual rules and operating
procedures of the relevant system. So
long as the Bonds are Book-Entry Bonds
(as defined herein), such Bonds will be
evidenced by one or more Bonds
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one
of the European Depositories (as defined
below). Cross-market transfers between
persons holding directly or indirectly
through DTC, on the one hand, and
counterparties holding directly or
indirectly through CEDEL or Euroclear,
on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or
Chase Manhattan Bank ("Chase", and
together with Citibank, the "European
Depositories"), the relevant
depositories of CEDEL and Euroclear,
respectively, and each a participating
member of DTC. No beneficial owner will
be entitled to receive a definitive
certificate representing such person's
interest, except in the event that
Definitive Bonds (as defined herein) are
issued under the limited circumstances
described herein. All references in
this Prospectus Supplement to any Bonds
reflect the rights of beneficial owners
only as such rights may be exercised
through DTC and its participating
organizations for so long as such Bonds
are held by DTC. See "Description of
the Bonds--Book-Entry Bonds" herein and
Annex I hereto.
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<PAGE>
Optional Redemption................ The Issuer may, at its option, redeem a
Class or Classes of Bonds in whole, but
not in part, on any Payment Date on or
after the earlier of (i) September 28,
2003, or (ii) the Payment Date on which,
after taking into account payments of
principal to be made on such Payment
Date, the aggregate outstanding
principal balance of the Bonds is less
than 35% of the aggregate principal
amount of the Bonds on the Closing Date.
If the Issuer does not exercise its
option to redeem the Class A-1 or Class
A-2 Bonds on the first Payment Date on
which it is permitted to do so: (a) the
Class Interest Rate for the Class A-1
Bonds will be increased to the per annum
rate equal to One-Month LIBOR on the
applicable Floating Rate Determination
Date plus 0.44%; and (b) the Class
Interest Rate for the Class A-2 Bonds
will be increased to the per annum rate
equal to One-Month LIBOR on the
applicable Floating Rate Determination
Date plus 1.20%, subject to a cap of
10.60% per annum. In addition, the
Issuer may redeem a Class or Classes of
Bonds, in whole, but not in part, at any
time upon a determination by the Issuer,
based upon an opinion of counsel, that a
substantial risk exists that the Bonds
of the Class to be redeemed will not be
treated for federal income tax purposes
as evidences of indebtedness. Any such
redemption will be paid in cash at a
price equal to 100% of the aggregate
outstanding principal balance of the
Class of Bonds so redeemed, plus accrued
and unpaid interest for the applicable
Accrual Period. At the option of the
Issuer, an optional redemption of a
Class of Bonds may be effected without
retiring such Class of Bonds so that the
Issuer has the ability to own or resell
such Class of Bonds. Upon redemption and
retirement of all the Bonds, the
Collateral securing the Bonds will be
released from the lien of the Indenture.
See "Description of the Bonds--Optional
Redemption" herein and "Description of
the Bonds--Redemption" in the
Prospectus.
Certain Federal Income
Tax Consequences................. Based on the facts as they currently
exist, the Bonds will be taxable debt
obligations under the Internal Revenue
Code of 1986, as amended (the "Code")
and interest paid or accrued thereon,
including any original issue discount,
will be taxable to Bondholders. No
election will be made to treat the
Issuer, the Mortgage Loans or the
arrangement by which the Bonds are
issued as a real estate mortgage
investment conduit. Interest income
(including original issue discount and
market discount) will accrue on the
Bonds as described in "Certain Federal
Income Tax Consequences" in the
Prospectus. The Bonds may be issued with
original issue discount for federal
income tax purposes. See "Certain
Federal Income Tax
Consequences--Original Issue Discount"
in the Prospectus. The 1994 Proposed
Regulations described in the Prospectus
were issued in final form, without
substantial change, on June 11, 1996;
consequently, the final regulations do
not change the treatment of the Bonds
under Section 1272(a)(6) as described in
the Prospectus. In determining the rate
of accrual of market discount, if any,
on the Bonds, Bondholders should use a
prepayment assumption of 21% CPR (as
described under "Maturity and Prepayment
Considerations--Weighted Average Life of
the Bonds" herein). No representation,
however, is made herein as to the rate
at which prepayments on the Mortgage
Loans actually will occur.
Bonds owned by domestic building and
loan associations and other thrift
institutions will not be considered
"loans secured by an interest in real
property" or "qualifying real property
loans." Bonds owned by a REIT will not
be treated as "real estate assets" nor
will interest on the Bonds be
S-15
<PAGE>
considered "interest on obligations
secured by mortgages on real property."
By acceptance of its Bond, each
Bondholder will be deemed to have agreed
to treat its Bonds as debt instruments
for purposes of federal and state income
tax, franchise tax and any other tax
measured in whole or in part by income.
Ratings............................ It is a condition to their issuance that
the Bonds be rated "Aaa" by Moody's and
"AAA" by Standard & Poor's (together
with Moody's, the "Rating Agencies"). A
security rating is not a recommendation
to buy, sell or hold the Bonds and may
be subject to revision or withdrawal at
any time by the assigning Rating Agency.
A security rating does not represent any
assessment of the likelihood of
principal prepayments on the Mortgage
Loans or of the degree to which such
prepayments might differ from those
originally anticipated. Also, a security
rating does not represent any assessment
of the yield to maturity that investors
may experience. See "Ratings" and
"Maturity and Prepayment Considerations"
herein.
Legal Investment................... The Bonds will constitute mortgage
related securities for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as
they are rated in one of the two highest
rating categories by one or more
nationally recognized statistical rating
organizations. As such, the Bonds will
be legal investments for certain
entities to the extent provided in
SMMEA, subject to state laws overriding
SMMEA. A number of states have enacted
legislation overriding the legal
investment provisions of SMMEA. See
"Legal Investment" in the Prospectus.
ERISA Considerations............... Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements that are subject to ERISA
or corresponding provisions of the Code,
including individual retirement accounts
and annuities, Keogh plans and
collective investment funds in which
such plans, accounts, annuities or
arrangements are invested (any of the
foregoing a "Plan"), persons acting on
behalf of a Plan, or persons using the
assets of a Plan ("Plan Investors"),
should review carefully with their legal
advisors whether the purchase or holding
of the Bonds could either give rise to a
transaction that is prohibited under
ERISA or the Code or cause the
Collateral securing the Bonds to be
treated as plan assets for purposes of
regulations of the Department of Labor
set forth in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations"). Although
certain exceptions from the application
of the prohibited transaction rules and
the Plan Asset Regulations exist, there
can be no assurance that any such
exception will apply with respect to the
acquisition of a Bond. See "ERISA
Considerations" herein and in the
Prospectus.
The Issuer believes that the Bonds will
be treated as debt obligations without
significant equity features for purposes
of the Plan Asset Regulations.
Accordingly, a Plan that acquires a Bond
should not be treated as having acquired
a direct interest in the assets of the
Issuer. See "ERISA Considerations"
herein and in the Prospectus. However,
there can be no complete assurance that
the Bonds will be treated as debt
obligations without significant equity
features for purposes of the Plan Asset
Regulations.
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RISK FACTORS
Prospective Bondholders should consider the following factors (as well as
the factors set forth under "Risk Factors" in the Prospectus) in connection with
a purchase of the Bonds.
Potential Delinquencies
As of the Cut-off Date, approximately 10% of the Mortgage Loans were
delinquent by one or more Scheduled Payments.
Cooperative Loans; Unrecognized Security Interests
Less than 2% of the Mortgage Loans were made in connection with a
purchase or refinancing of cooperative apartments ("Cooperative Loans"). Certain
cooperative housing corporations permit purchasers to obtain mortgage financing
on only a portion, or on none, of a cooperative apartment's purchase price. Less
than 1% of the Mortgage Loans were made despite such restrictions and have not
been recognized by the related cooperative housing corporation (such loans,
"Unrecognized Cooperative Loans").
As described under "Security for the Bonds--Realizing Upon Cooperative
Loan Security" herein, there are certain risks attendant to foreclosure on
Cooperative Loans. In the case of the Unrecognized Cooperative Loans, such risks
are increased. A cooperative housing corporation may declare the borrower in
default under the related lease or occupancy agreement because of the
unrecognized financing and terminate such lease or occupancy agreement. The
cooperative housing corporation will be under no obligation to recognize the
lien against the related cooperative shares, and may actively oppose the efforts
to realize upon such collateral.
Investors should consider the risk that, in the event of a default
under an Unrecognized Cooperative Loan and resulting foreclosure, the related
collateral may have a value substantially lower than the unpaid principal
balance of the related Mortgage Loan, or may have no value. Any Loss on an
Unrecognized Cooperative Loan would reduce the Overcollateralization Amount and,
if the Overcollateralization Amount (and the Collateralization Fund) was not
adequate to cover the Loss, the Insurer would be obligated to make an Insured
Payment under the FSA Insurance Policy.
Mortgage Loan Concentration
Approximately 60% of the Mortgage Loans are expected to be secured by
Mortgaged Premises located in California. Consequently, losses and prepayments
on the Mortgage Collateral and resultant payments on the Bonds may be affected
significantly by changes in the housing markets and the regional economy of
California, and also by the occurrence of natural disasters (such as
earthquakes, fires and floods) in California. In addition, approximately 5% of
the Mortgage Loans are expected to be secured by Mortgaged Premises located in
each of Maryland and Virginia.
Interest-Only Payments
Approximately 21% of the Mortgage Loans provide for monthly payments of
interest at the related Note Rate but no payments of principal for the first 10
years after origination (or, in some cases, modification). Following such
10-year period, the monthly payment on each such Mortgage Loan will be increased
to an amount sufficient to amortize fully its outstanding principal balance over
its remaining term and to pay interest at the related Note Rate.
Borrowers may view the absence of any obligation to make a payment of
principal during the first ten years of the term of the such Mortgage Loans as a
disincentive to prepayment. To the extent that a recalculated monthly payment as
described above is substantially in excess of a borrower's previous monthly
payment providing solely for the payment of interest, such Mortgage Loan may be
subject to an increased risk of loss and delinquency.
High Balance Mortgage Loans
The average Scheduled Principal Balance of the Directly Held Mortgage
Loans is $506,100. Approximately 17% of the Directly Held Mortgage Loans have
Scheduled Principal Balances in excess of $1,000,000. Loss and delinquency
experience on such higher balance loans may have a disproportionate effect on
the Mortgage Collateral as a whole.
Uncertain Timing of Principal
Unlike standard corporate bonds, the timing and amount of principal
payments on the Bonds are not fixed and will be determined by, among other
things, the timing and amount of principal payments (including prepayments,
defaults, liquidations and repurchases) on the related Mortgage Loans, the
timing and amount of losses realized on such Mortgage Loans and the principal
payment structure (including redemption provisions) of the Bonds.
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Faster mortgage prepayment rates, which are generally associated with a
declining interest rate environment, will have the effect of reducing the
weighted average life of the Bonds and increasing the reinvestment risk
associated with the inability to achieve comparable yields on the available
investment alternatives in such reduced interest rate environment. As a
consequence, the price of a mortgage-backed bond that is trading at or above par
will not increase to the same degree as the price of a standard corporate bond
with a comparable interest rate if there is a significant decline in prevailing
interest rates. Conversely, slower mortgage prepayment rates, which are
generally associated with an increasing interest rate environment or declining
real estate values, will have the effect of increasing the weighted average life
of the Bonds and decreasing the amount of funds available to a Bondholder to
reinvest in higher yielding investment alternatives. See "Maturity and
Prepayment Considerations" and "Yield Considerations" herein and in the
Prospectus. See also "Risk Factors--Average Life and Yield Considerations" in
the Prospectus.
Limited Recourse
The Mortgage Collateral will not be guaranteed or insured by any
governmental agency, the Issuer, the Participant, any affiliate of the
Participant, any Master Servicer, any Servicer, or, except as set forth herein,
the Insurer or any other person.
Non-Recourse
The Bonds will be non-recourse obligations of the Issuer. In accordance
with the terms of the Indenture, the Bondholders will have no rights or claims
against the Issuer directly for the payment of principal of and interest on the
Bonds and may look only to the Collateral pledged to the Trustee as security for
the Bonds to satisfy the Issuer's obligations to make interest and principal
payments on the Bonds. None of the Issuer, the Bond Administrator, the
Participant, any affiliate of the Participant, any Master Servicer, any
Servicer, any governmental agency or any other person has guaranteed or insured
the Bonds, except as specifically set forth herein with regard to the FSA
Insurance Policy. See "FSA Insurance Policy" herein. Each Bondholder will be
deemed, by acceptance of its Bond, to have agreed not to file or cause a filing
against the Issuer of an involuntary petition under any bankruptcy or
receivership law and to treat its Bonds as debt instruments for purposes of
federal and state income tax, franchise tax and any other tax measured in whole
or in part by income.
The Status of the Mortgage Loans in the Event of Insolvency
The Issuer believes that the transfer of the Mortgage Collateral by the
Participant to the Issuer constitutes an absolute and unconditional sale.
Nevertheless, in the event of the bankruptcy of the Participant, a trustee in
bankruptcy could attempt to recharacterize the sale of the Mortgage Collateral
as a borrowing secured by a pledge of the Mortgage Collateral. Such an attempt,
even if unsuccessful, could result in delays in payments on the Bonds. If such
an attempt were successful, the trustee in bankruptcy could elect to accelerate
payment of the Bonds and liquidate the Mortgage Collateral, with the holders of
the Bonds entitled to no more than the then outstanding principal balance, if
any, of such Bonds together with interest at the applicable Class Interest Rate
to the date of payment. In the event of an acceleration of the Bonds, the
holders of the Bonds would lose the right to future distributions of interest,
might suffer reinvestment losses in a lower interest rate environment and may
fail to recover fully their initial investments.
DESCRIPTION OF THE BONDS
General
The Bonds offered hereby will consist of three Classes designated as
Class A-1, Class A-2 and Class A-3. The Bonds will constitute a portion of the
$3,200,000,000 aggregate principal amount of Collateralized Mortgage Bonds that
the Issuer may issue under its registration statements. As of the date of this
Prospectus Supplement, the Issuer has sold or committed to sell $3,024,868,590
aggregate principal amount of its Collateralized Mortgage Bonds. The following
summary of the provisions of the Bonds and the Indenture does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Prospectus and the Indenture. Reference is made to the
Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Bonds.
The Bonds will be non-recourse obligations of the Issuer. In accordance
with the terms of the Indenture, the Bondholders will have no rights or claims
against the Issuer directly for the payment of principal of and interest on the
Bonds and may look only to the Collateral pledged to the Trustee as security for
the Bonds to satisfy the Issuer's obligations to make interest and principal
payments on the Bonds. None of the Issuer, the Bond Administrator, the
Participant, any affiliate of the Participant, any Master Servicer, any
Servicer, any governmental agency or any other person has guaranteed or insured
the Bonds, except as specifically set forth herein with regard to the FSA
Insurance Policy. See "FSA Insurance Policy" herein. Each Bondholder will be
deemed, by acceptance of its Bond, to have agreed not to file or cause a filing
against the Issuer of an involuntary petition under any
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bankruptcy or receivership law and to treat its Bonds as debt instruments for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income.
Book-Entry Bonds
The Bonds will be Book-Entry Bonds, which will be represented by one or
more certificates registered in the name of a nominee of The Depository Trust
Company ("DTC"), and beneficial interests therein will be held by investors
through the book-entry facilities of DTC, as described herein, in minimum
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
except that, for each Class of Bonds, one Bond may be issued in a different
denomination. The Issuer has been informed by DTC that its nominee will be Cede
& Co. ("Cede"). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Bonds. No person acquiring a Book-Entry Bond (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Bond. A beneficial owner's interest in a Bond will be evidenced by appropriate
entries on the books and records of one or more financial intermediaries
(including a DTC Participant). Payments on Book-Entry Bonds will be effected by
credits to accounts maintained on the books and records of such financial
intermediaries for the benefit of the beneficial owners. See "Description of the
Bonds--Book-Entry Procedures" in the Prospectus.
Beneficial owners may elect to hold their Book-Entry Bonds directly
through DTC in the United States, or CEDEL or Euroclear (in Europe) if they are
participants of such systems ("Participants"), or indirectly through
organizations which are Participants. CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositories
which in turn will hold such positions in customers' securities accounts in the
depositories' names on the books of DTC. Citibank will act as depository for
CEDEL and Chase will act as depository for Euroclear (in such capacities,
individually the "Relevant Depository" and collectively the "European
Depositories").
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in the DTC. For information with respect to
tax documentation procedures relating to the Bonds, see "Certain Federal Income
Tax Consequences -- Miscellaneous Tax Aspects -- Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation Procedures --
Certain U.S. Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depository; 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 Depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositories.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
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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 Morgan Guaranty Trust Company of New
York, Brussels Office (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 an office of a New York trust company 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.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Bonds among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
The Trustee and Custodian
Texas Commerce Bank National Association will act as Trustee for the
Bonds and custodian for Directly Held Mortgage Loan documents and is trustee
with respect to a portion of the Underlying Securities. As of the date of this
Prospectus Supplement, the mailing address of the Trustee's corporate trust
office is 601 Travis, 8th Floor, Houston, Texas 77002, and its telephone number
is (713) 216-4181.
Payments of Principal and Interest
Payment Dates
The Payment Dates for the Bonds will be the 28th day of each month (or,
if such day is not a Business Day, then the next succeeding Business Day),
commencing in October 1996. For accounting purposes, the Payment Date will be
deemed to occur on the 28th day of the month without regard to whether such day
is a Business Day.
Payment Amount
On each Payment Date, the amount payable on the Bonds (the "Payment
Amount") will equal the sum of (i) the Interest Payment Amount (as defined
below) and (ii) the Principal Payment Amount (as defined below). The amount by
which the Payment Amount on any Payment Date exceeds the Available Funds (as
defined below) for such Payment Date is payable by the Insurer pursuant to the
FSA Insurance Policy as further described under "FSA Insurance Policy" herein.
Available Funds
The "Available Funds" on any Payment Date will equal the sum of (a) all
payments or distributions received in respect of the Mortgage Certificates and
deposited in the Collateral Proceeds Account (which represents substantially all
the principal and interest (at the Net Rate (excluding the rate used to
calculate premiums under the FSA Insurance Policy)) received in respect of the
Underlying Mortgage Loans during the related Due Period) and (b) the sum of the
following:
(i) all payments of interest (including payments of Month End
Interest by the Master Servicer) and principal with respect to
the Directly Held Mortgage Loans and any amounts in respect of
any REO (including Liquidation Proceeds (net of liquidation
expenses) and Insurance Proceeds) collected with respect to the
related Due Period (or Prepayment Period, in the case of
unscheduled prepayments and other Liquidation Proceeds) with
respect to Directly Held Mortgage Loans and deposited in the
Collateral Proceeds Account;
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(ii) any Advance of principal or interest due on a Directly Held
Mortgage Loan during the related Due Period with respect to
Directly Held Mortgage Loans deposited in the Collateral
Proceeds Account;
(iii) any Scheduled Payments with respect to the Directly Held
Mortgage Loans due during, but collected prior to, the related
Due Period;
(iv) all amounts received during the related Prepayment Period in
connection with (A) the purchase of any Directly Held Mortgage
Loan due to the delivery of defective loan documentation or
otherwise or (B) the purchase of a Converted Directly Held
Mortgage Loan;
(v) any amount required to be transferred from the Collateralization
Fund to the Collateral Proceeds Account on such Payment Date;
and
less (c) the sum of the following:
(i) one-twelfth of the Administrative Cost Rate multiplied by the
Scheduled Principal Balance for each Directly Held Mortgage Loan
(plus any additional fees payable to a Special Servicer, if any,
with respect to certain defaulted Directly Held Mortgage Loans);
(ii) all amounts required as reimbursement for any Advances
previously made on a Directly Held Mortgage Loan upon the
Liquidation of such Directly Held Mortgage Loan;
(iii) all amounts required to be reimbursed for any Non-Recoverable
Advances with respect to the Directly Held Mortgage Loans; and
(iv) from and after the occurrence of an Event of Default, all sums
due under the Indenture to the Trustee associated with the
disposition of all or a portion of the Trust Estate or the
exercise of any of the other remedies set forth in the
Indenture.
Interest Payments; Class Interest Rates
Interest on each Class of Bonds will be determined based on a 360-day
year of twelve 30-day months. Interest payments on the Bonds on any Payment Date
will include interest accrued during the applicable Accrual Period.
Class A-1 Bonds. The Class Interest Rate for the Class A-1 Bonds will
initially be the per annum rate equal to One-Month LIBOR (as defined herein), as
determined on the applicable Floating Rate Determination Date (as defined
herein), plus 0.22% accrued during the applicable Accrual Period on the
outstanding principal balance of the Class A-1 Bonds immediately prior to such
Payment Date. For the initial Payment Date, the Class Interest Rate on the Class
A-1 Bonds will be 5.7825% per annum. The Class Interest Rate for the Class A-1
Bonds will be increased as described herein if the Issuer does not exercise its
option to redeem the Class A-1 Bonds when it is first permitted to do so. See
"Description of the Bonds--Optional Redemption" herein. Each "Accrual Period"
for the Class A-1 Bonds (other than the initial Accrual Period) commences on the
28th day of each month and ends on the 27th day of the succeeding month; the
initial Accrual Period for the Class A-1 Bonds commences on the Closing Date and
ends on October 27, 1996.
Class A-2 Bonds. The Class Interest Rate for the Class A-2 Bonds will
initially be the per annum rate equal to One-Month LIBOR, as determined on the
applicable Floating Rate Determination Date, plus 0.60%, subject to a cap of
10.00% per annum, accrued during the applicable Accrual Period on the
outstanding principal balance of the Class A-2 Bonds immediately prior to such
Payment Date. For the initial Payment Date, the Class Interest Rate on the Class
A-2 Bonds will be 6.1625% per annum. The Class Interest Rate and cap for the
Class A-2 Bonds will be increased as described herein if the Issuer does not
exercise its option to redeem the Class A-2 Bonds when it is first permitted to
do so. See "Description of the Bonds--Optional Redemption" herein. Each "Accrual
Period" for the Class A-2 Bonds (other than the initial Accrual Period)
commences on the 28th day of each month and ends on the 27th day of the
succeeding month; the initial Accrual Period for the Class A-2 Bonds commences
on the Closing Date and ends on October 27, 1996.
Class A-3 Bonds. The Class Interest Rate for the Class A-3 Bonds will
equal, subject to a cap of 12.00% per annum, (a) twelve times the sum of (i) the
amount of interest at the per annum rate equal to the weighted average (by
principal balance) of the Net Rates on the Mortgage Loans accrued during the
Accrual Period for the Class A-3 Bonds on the outstanding principal balance of
the Class A-3 Bonds immediately prior to such Payment Date; and (ii) the amount
of interest at the per annum rate equal to the excess of (x) the weighted
average (by principal balance) of the Net Rates on the Mortgage Loans over (y)
the weighted average (by principal balance) of the Class Interest Rate on the
Class A-1 and Class A-2 Bonds, accrued during the applicable Accrual Period for
the Class A-1 and Class A-2 Bonds on a notional principal balance equal to the
outstanding principal balance of the Class A-1 and Class A-2 Bonds immediately
prior to such Payment Date, divided by (b) the outstanding principal balance of
the Class A-3 Bonds immediately prior to such Payment Date. For the initial
Payment Date, the Class
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Interest Rate for the Class A-3 Bonds is expected to be 12.00% per annum. Each
"Accrual Period" for the Class A-3 Bonds will be the calendar month preceding
each Payment Date.
Under certain circumstances, the weighted average of the Net Rates on
the Mortgage Loans for any period may not equal or exceed the weighted average
Class Interest Rate on the Class A-1 and Class A-2 Bonds. Under the FSA
Insurance Policy, the Insurer is obligated to pay the Interest Payment Amount on
the Class A-1 and Class A-2 Bonds even if the interest accrued at the Net Rate
on the Mortgage Loans during the related Due Period is less than interest due on
the Bonds for the applicable Accrual Period.
Floating Rate Determination
On the second London Banking Day prior to the commencement of each
Accrual Period after the initial Accrual Period (each a "Floating Rate
Determination Date"), the Bond Administrator will determine the arithmetic mean
of the LIBOR quotations for one-month Eurodollar deposits ("One-Month LIBOR")
for the succeeding Accrual Period on the basis of the offered LIBOR quotations
provided to the Bond Administrator as of 11:00 a.m. (London time) on such
Floating Rate Determination Date. As used herein with respect to a Floating Rate
Determination Date, "Reference Banks" means four leading banks engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Bloomberg Screen LIUS01M Index Page on the Floating Rate Determination Date
in question and (iii) which have been designated as such by the Bond
Administrator and are able and willing to provide such quotations to the Bond
Administrator on each Floating Rate Determination Date; and "Bloomberg Screen
LIUS01M Index Page" means the display designated as page "LIUS01M" on the
Bloomberg Financial Markets Commodities News (or such other pages as may replace
such page on that service for the purpose of displaying LIBOR quotations of
major banks). If any Reference Bank should be removed from the Bloomberg Screen
LIUS01M Index Page or in any other way fails to meet the qualifications of a
Reference Bank, the Bond Administrator may, in its sole discretion, designate an
alternative Reference Bank.
On each Floating Rate Determination Date, One-Month LIBOR for the next
succeeding Accrual Period for the Class A-1 and Class A-2 Bonds will be
established by the Bond Administrator as follows:
(i) If on any Floating Rate Determination Date two or more of
the Reference Banks provide offered One-Month LIBOR quotations on the
Bloomberg Screen LIUS01M Index Page, One-Month LIBOR for the next
applicable Accrual Period for the Class A-1 and Class A-2 Bonds will be
the arithmetic mean of such offered quotations (rounding such
arithmetic mean if necessary to the nearest five decimal places).
(ii) If on any Floating Rate Determination Date only one or
none of the Reference Banks provides such offered quotations, One-Month
LIBOR for the next applicable Accrual Period will be the higher of (x)
One-Month LIBOR as determined on the previous Floating Rate
Determination Date and (y) the Reserve Interest Rate. The "Reserve
Interest Rate" will be the rate per annum that the Bond Administrator
determines to be either (A) the arithmetic mean (rounding such
arithmetic mean if necessary to the nearest five decimal places) of the
one-month Eurodollar lending rate that New York City banks selected by
the Bond Administrator are quoting, on the relevant Floating Rate
Determination Date, to the principal London offices of at least two
leading banks in the London interbank market or (B) in the event that
the Bond Administrator can determine no such arithmetic mean, the
lowest one-month Eurodollar lending rate that the New York City banks
selected by the Bond Administrator are quoting on such Floating Rate
Determination Date to leading European banks.
(iii) If on any Floating Rate Determination Date the Bond
Administrator is required but is unable to determine the Reserve
Interest Rate in the manner provided in paragraph (ii) above, One-Month
LIBOR for the next applicable Accrual Period will be One-Month LIBOR as
determined on the previous Floating Rate Determination Date.
Notwithstanding the foregoing, One-Month LIBOR for the next succeeding
Accrual Period shall not be based on One-Month LIBOR for the previous Accrual
Period for the Class A-1 and Class A-2 Bonds for two consecutive Floating Rate
Determination Dates. If, under the priorities described above, One-Month LIBOR
for the next succeeding Accrual Period would be based on One-Month LIBOR for the
previous Floating Rate Determination Date for the second consecutive Floating
Rate Determination Date, the Bond Administrator shall select an alternative
index (over which the Bond Administrator has no control) used for determining
one-month Eurodollar lending rates that is calculated and published (or
otherwise made available) by an independent third party.
The establishment of One-Month LIBOR (or an alternative index) by the
Bond Administrator and the Bond Administrator's subsequent calculation of the
Class Interest Rate on the Class A-1 and the Class A-2 Bonds for the relevant
Accrual Period, in the absence of manifest error, will be final and binding. The
Class Interest Rate on the Class A-1 and Class A-2 Bonds for any applicable
Accrual Period may be obtained by telephoning the Trustee at (713) 216-2240.
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Definitions
"Bond Percentage": On each Payment Date, the aggregate outstanding
principal balance of the Bonds divided by the then aggregate Scheduled Principal
Balance of the Mortgage Loans as of such Payment Date (but may not be more than
100%). The initial Bond Percentage as of the Closing Date is expected to be
approximately 99.5%.
"Bond Payment Percentage": On each Payment Date, 100%; except that, if
on any Payment Date (a) the Overcollateralization Amount is greater than or
equal to the Target Overcollateralization Amount but only to the extent that the
Overcollateralization Amount continues to equal or exceed the Target
Overcollateralization Amount, and (b) over the prior six months, the average
Unpaid Principal Balance of the Directly Held Mortgage Loans delinquent 60 days
or more (including for this purpose any Directly Held Mortgage Loans in
foreclosure and REO) has not exceeded 4% of the average aggregate Unpaid
Principal Balance of all Directly Held Mortgage Loans, then the Bond Payment
Percentage for such Payment Date will be the Bond Percentage for such Payment
Date.
"Collateralization Fund Requirement": On any Payment Date, the
difference between (i) two times the Target Overcollateralization Amount and
(ii) the Overcollateralization Amount.
"Insured Payment": Has the meaning set forth in "FSA Insurance Policy"
herein.
"Interest Payment Amount": On each Payment Date, interest at the
applicable Class Interest Rate for the applicable Accrual Period on the
outstanding principal balance of each Class of Bonds immediately prior to such
Payment Date.
"Overcollateralization Amount": On each Payment Date, before giving
effect to any payments to be made on such Payment Date, the difference between
(i) the aggregate Scheduled Principal Balance of the Mortgage Loans and (ii) the
outstanding principal balance of the Bonds (which difference may be a negative
number). On the Closing Date, the Overcollateralization Amount is expected to
equal approximately 0.50% of the aggregate Scheduled Principal Balance of the
Mortgage Loans as of the Cut-off Date. The actual percentage may be lower or
higher than 0.50%, depending on the final requirements of the Insurer and the
Rating Agencies.
"Payment Amount": On any Payment Date, the sum of the Interest Payment
Amount and the Principal Payment Amount.
"Principal Payment Amount":
(a) on each Payment Date on which the Overcollateralization
Amount is greater than zero but less than the Target
Overcollateralization Amount, the amount, if any, by which (i) the
aggregate Scheduled Principal Balance of the Mortgage Loans as of the
immediately preceding Payment Date (or the Cut-off Date, in the case of
the first Payment Date) exceeds (ii) the aggregate Scheduled Principal
Balance of the Mortgage Loans as of the current Payment Date (without
regard to the decline in the Scheduled Principal Balance of the
Mortgage Loans attributable to any Losses incurred in the related
Prepayment Period);
(b) on each Payment Date on which the Overcollateralization
Amount is greater than or equal to the Target Overcollateralization
Amount (but only to the extent that the Overcollateralization Amount
continues to equal or exceed the Target Overcollateralization Amount),
the product of the Bond Payment Percentage and the amount, if any, by
which (i) the aggregate Scheduled Principal Balance of the Mortgage
Loans as of the immediately preceding Payment Date (or the Cut-Off
Date, in the case of the first Payment Date) exceeds (ii) the aggregate
Scheduled Principal Balance of the Mortgage Loans as of the current
Payment Date (without regard to the decline in the Scheduled Principal
Balance of the Mortgage Loans attributable to any Losses incurred in
the related Prepayment Period);
(c) on each Payment Date on which the Overcollateralization
Amount is less than or equal to zero, the greater of (i) the amount by
which (A) the aggregate principal amount of the Bonds outstanding
exceeds (B) the aggregate Scheduled Principal Balance of the Mortgage
Loans as of the current Payment Date or (ii) the amount by which (A)
the Scheduled Principal Balance of the Mortgage Loans as of the
immediately preceding Payment Date (or the Cut-Off Date in the case of
the first Payment Date) exceeds (B) the Scheduled Principal Balance of
the Mortgage Loans as of the current Payment Date; and
(d) on the Stated Maturity Date, the outstanding principal
balance, if any, of the Bonds.
"Target Overcollateralization Amount": On any Payment Date, an amount
equal to the product of (i) twice the percentage represented by the initial
Overcollateralization Amount and (ii) the aggregate Scheduled Principal Balance
of the Mortgage Loans.
S-23
<PAGE>
Principal Payments
Principal payments allocated to a Class of Bonds will be paid to the
Holders of the Bonds of such Class pro rata in the proportion that the
outstanding principal balance of each Bond of such Class bears to the aggregate
outstanding principal balance of all Bonds of such Class. See "Description of
the Bonds--Payments of Principal and Interest" in the Prospectus.
On each Payment Date, the Principal Payment Amount will be applied to
pay principal of the Bonds in the following priority:
FIRST, to pay principal on a pro rata basis on the Class A-1 Bonds
until paid in full;
SECOND, to pay principal on a pro rata basis on the Class A-2 Bonds
until paid in full; and
THIRD, to pay principal on a pro rata basis on the Class A-3 Bonds
until paid in full.
Collateralization Fund
Upon delivery of the Bonds, the Issuer will deposit in the
Collateralization Fund cash or assets selected by the Issuer with the consent of
FSA with a value equal to the Overcollateralization Amount on the Closing Date.
The Issuer may substitute other assets for the assets initially deposited in the
Collateralization Fund with the consent of the Insurer but the Issuer will not
have any obligation to make further deposits to the Collateralization Fund.
Unless an Insurer Default exists and is continuing, the Insurer may direct the
Trustee to apply amounts in the Collateralization Fund to reduce or eliminate
certain deficiencies in Available Funds or to apply amounts in the
Collateralization Fund to reimburse the Insurer for certain Insured Payments not
theretofore reimbursed. If on any Payment Date the Available Funds are less than
the Payment Amount and an Insurer Default exists and is continuing, the Trustee
shall apply amounts in the Collateralization Fund to reduce or eliminate the
deficiency. On any Payment Date, interest on amounts in the Collateralization
Fund and the excess in the Collateralization Fund over the Collateralization
Fund Requirement may be distributed to the Issuer. Amounts distributed to the
Issuer will no longer be available to pay the Bonds.
Excess Funds
To the extent Available Funds for a Payment Date exceed the Payment
Amount for such Payment Date, such excess funds shall be paid first to the
Insurer to the extent of any unreimbursed amounts paid on the Bonds under the
FSA Insurance Policy, and the balance shall be released from the lien of the
Indenture. Once released from the Indenture, any excess funds will not be
available to make payments on the Bonds.
Issuance of Subordinated Bonds
Without the consent of the Bondholders, the Issuer may issue additional
bonds of this Series to the extent such bonds are fully subordinated to the
Bonds or may pledge its interest in the Mortgage Loans, subject to the
indebtedness evidenced by the Bonds, to secure bonds of other series. Any such
issuance of additional bonds will be conditioned upon confirmation from the
Rating Agencies of the then current ratings on the Bonds (without regard to the
existence of the FSA Insurance Policy), the consent of the Insurer and the
satisfaction of certain other conditions set forth in the Indenture.
Payment Shortfalls; Events of Default
On any Payment Date, in the event the Payment Amount exceeds Available
Funds for that Payment Date and the Insurer defaults on its obligations under
the FSA Insurance Policy (and the Bonds have not been declared due and payable
following an Event of Default and there is not an optional redemption of all the
Bonds), the Available Funds for such Payment Date will be applied for the
following purposes and in the following order of priority:
(i) to pay to the Bondholders, pro rata, all unpaid interest
accrued in respect of the Bonds for the applicable Accrual Period; and
(ii) to pay to the Bondholders, pro rata, by principal
balance, all principal due and unpaid.
An Event of Default with respect to the Bonds is defined in the
Indenture as (i) a default for five days or more in the payment of interest or
principal on any Bond on any Payment Date, (ii) the failure to pay in full the
principal amount of any Bond by its Stated Maturity, (iii) a default in the
performance of any other covenants in the Indenture and the continuation of such
default for a period of 60 days after notice to the Issuer by the Trustee or to
the Issuer and the Trustee by the Insurer, or if the Insurer is in default, by
Bondholders representing at least 25% in principal balance of the Bonds then
outstanding or (iv) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
S-24
<PAGE>
Upon an Event of Default, the Bondholders shall have the remedies
described in the Indenture. See "The Indenture--Events of Default" in the
Prospectus. Funds collected by the Trustee following an Event of Default and
payable on the Bonds will be applied in the order of priority described in the
first paragraph above under "--Payment Shortfalls; Events of Default." Absent a
default by the Insurer under the FSA Insurance Policy, the Insurer may pay
amounts on the Bonds on an accelerated basis at any time following an Event of
Default.
Losses
If Available Funds are insufficient to make payments on the Bonds,
Bondholders will be dependent upon the ability of the Insurer to meet its
obligations under the FSA Insurance Policy. For any Payment Date, the amount of
Available Funds will be dependent in part upon whether any Losses have been
incurred on the Mortgage Loans during the most recent Prepayment Period. Losses
on a Mortgage Loan will be borne as follows: first, by the Overcollateralization
Amount (or the Collateralization Fund); second, by the FSA Insurance Policy; and
third, in the event of a default by the Insurer, by the Bondholders in the
manner described above in the first paragraph under "--Payment Shortfalls;
Events of Default."
Stated Maturity Date
The Stated Maturity Date for the Bonds is set forth on the cover page
hereof and represents the date that the Bonds are payable in full. The Stated
Maturity Date for the Bonds has been calculated by adding approximately four
years to the latest scheduled payment date on the Mortgage Loans included in the
Mortgage Collateral originally pledged to secure the Bonds.
The rate of payments (including payments attributable to prepayments,
defaults, liquidations, and repurchases) on the Mortgage Loans will depend on a
number of factors, including the characteristics of such Mortgage Loans, the
prevailing level of interest rates and other social and economic factors, and no
assurance can be given as to the actual payment experience. Because the rate of
payment (including payments attributable to prepayments, defaults, liquidations,
and repurchases) of principal on the Mortgage Loans may exceed the scheduled
rate of payments, and could exceed such scheduled rate by a substantial amount,
the actual final payment of principal of the Bonds may be earlier or later, and
could be substantially earlier, than the Stated Maturity Date of such Class. See
"Maturity and Prepayment Considerations" herein and in the Prospectus.
Optional Redemption
The Issuer may, at its option, redeem a Class or Classes of Bonds in
whole, but not in part, on any Payment Date on or after the earlier of (i)
September 28, 2003, or (ii) the Payment Date on which, after taking into account
payments of principal to be made on such Payment Date, the aggregate outstanding
principal balance of the Bonds is less than 35% of the aggregate principal
amount of the Bonds on the Closing Date. If the Issuer does not exercise its
option to redeem the Class A-1 or Class A-2 Bonds on the first Payment Date on
which it is permitted to do so: (a) the Class Interest Rate for the Class A-1
Bonds will be increased to the per annum rate equal to One-Month LIBOR on the
applicable Floating Rate Determination Date plus 0.44%; and (b) the Class
Interest Rate for the Class A-2 Bonds will be increased to the per annum rate
equal to One-Month LIBOR on the applicable Floating Rate Determination Date plus
1.20%, subject to a cap of 10.60% per annum. In addition, the Issuer may redeem
a Class or Classes of Bonds, in whole, but not in part, at any time upon a
determination by the Issuer, based upon an opinion of counsel, that a
substantial risk exists that the Bonds of the Class to be redeemed will not be
treated for federal income tax purposes as evidences of indebtedness. Any such
redemption will be paid in cash at a price equal to 100% of the aggregate
outstanding principal balance of the Class of Bonds so redeemed, plus accrued
and unpaid interest for the applicable Accrual Period. At the option of the
Issuer, an optional redemption of a Class of Bonds may be effected without
retiring such Class of Bonds so that the Issuer has the ability to own or resell
such Class of Bonds. Upon redemption and retirement of all the Bonds, the
Collateral securing the Bonds will be released from the lien of the Indenture.
See "Description of the Bonds--Optional Redemption" herein and "Description of
the Bonds--Redemption" in the Prospectus.
The sponsor of the Mortgage Certificates relating to the Capstead
Underlying Mortgage Loans (representing approximately 20% of the Mortgage Loans
as of the Cut-Off Date) may, at its option, repurchase all such Mortgage
Certificates on any distribution date relating thereto on which the aggregate
principal balance thereof is equal to or less than 10% of the aggregate
principal balance thereof on June 1, 1996 (which aggregate principal balance was
approximately $207,000,000 on such date). Any such repurchase, which would have
the same effect as a prepayment in full of such Mortgage Loans, could accelerate
the Payment Date on which the aggregate principal balance of the Bonds is less
than 35% of the aggregate principal amount of the Bonds on the Closing Date.
Any redemption of a Class of Bonds or repurchase of Mortgage
Certificates may have an adverse effect on the yield of such Class, because such
redemption would have the same effect on such Class as a prepayment in full of
the Mortgage Loans. See "Yield Considerations" herein.
S-25
<PAGE>
SECURITY FOR THE BONDS
The Mortgage Collateral
General
The Mortgage Collateral will consist of (i) mortgage loans (the
"Directly Held Mortgage Loans") and (ii) instruments or securities (the
"Mortgage Certificates") representing substantially the entire interest in
mortgage loans (the "Underlying Mortgage Loans" and, together with the Directly
Held Mortgage Loans, the "Mortgage Loans"). The Mortgage Collateral to be
pledged to secure the Bonds will be acquired by the Issuer from the Participant.
The Mortgage Certificates
The Underlying Mortgage Loans are indirectly pledged to secure the
Bonds through the pledge of the Mortgage Certificates, which represent
substantially the entire interest in the Underlying Mortgage Loans and, in
addition, provide credit enhancement for the Underlying Mortgage Loans.
The Mortgage Loans
Whenever reference is made herein to a percentage of the Mortgage Loans
or to the characteristics of the Mortgage Loans, the calculation is based on the
aggregate Scheduled Principal Balances of the Mortgage Loans projected as of the
Cut-off Date.
All the Mortgage Loans will have an original term to maturity of not
more than 30 years. As of the Cut-off Date, the weighted average remaining term
to stated maturity of the Mortgage Loans is expected to be approximately 323
months. All the Mortgage Loans will represent conventional, one- to four-family,
fully amortizing, first lien Mortgage Loans. Approximately less than 1% of the
Mortgage Loans will be secured by more than one Mortgaged Premises.
Approximately 98% of the Mortgage Loans are expected to be ARM Mortgage Loans
and approximately 2% of the Mortgage Loans are expected to be Fixed Mortgage
Loans.
Of the ARM Mortgage Loans, approximately 55% are expected to have Note
Rates that adjust by reference to the Six-Month LIBOR Index, approximately 23%
are expected to have Note Rates that adjust by reference to the One-Year CMT
Index and approximately 22% are expected to have Note Rates that adjust by
reference to the Six-Month Certificate of Deposit Index. Approximately 71% of
the ARM Mortgage Loans are expected to have an Initial Period of six months;
approximately 23% of the ARM Mortgage Loans are expected to have an Initial
Period of one year; and approximately 6% of the ARM Mortgage Loans are expected
to have an Initial Period of three years; and less than 1% of the ARM Mortgage
Loans are expected to have an Initial Term of five years.
The initial Note Rate for each of the ARM Mortgage Loans is expected to
remain in effect for the "Initial Period" following its origination. Thereafter,
as specified in the related Note, the Note Rate on each ARM Mortgage Loan (other
than a Converted Mortgage Loan) will adjust on each Interest Adjustment Date
applicable thereto to a rate that is calculated in accordance with (i) the
average of LIBOR for six-month Eurodollar deposits in the London market based on
quotations of major banks as published either by FNMA or The Wall Street Journal
(the "Six-Month LIBOR Index"), (ii) the weekly average yield on U.S. Treasury
securities adjusted to a constant term of maturity of one year as published by
the Federal Reserve Board (the "One-Year CMT Index"), or (iii) the weekly
average yield of the secondary market interest rates on six-month negotiable
certificates of deposit as published by the Federal Reserve Board (the
"Six-Month Certificate of Deposit Index"). As specified in the related Note, the
Note Rate of each ARM Mortgage Loan will be adjusted on each Interest Adjustment
Date to a rate equal to the sum (as rounded pursuant to the applicable rounding
convention) of the current LIBOR Index, the current One-Year CMT Index or the
current Six-Month Certificate of Deposit Index, (each, an "Index") and a fixed
percentage (the "Gross Margin"), subject to (i) a maximum periodic increase or
decrease in the Note Rate of 1% or 2% per annum (a "Periodic Rate Cap") and (ii)
any minimum and maximum lifetime Note Rates. After an ARM Mortgage Loan has been
"fully indexed", adjustments in the Note Rate will continue to be subject to
Periodic Rate Caps (with the exception of the Six-Month Certificate of Deposit
Index Mortgage Loans), and minimum and maximum lifetime Note Rates, and,
accordingly, the Note Rate on any such Mortgage Loan, as adjusted on any
Interest Adjustment Date, may not equal the sum of the applicable Index and the
applicable Gross Margin.
The Six-Month Certificate of Deposit Index Mortgage Loans, which
constitute approximately 21% of the Mortgage Loans, provide for payment of
interest, but no payment of principal, for a period of ten years following the
origination (or, in some cases, modification) of such Mortgage Loan. Following
such ten year period, the monthly payment with respect to each such Mortgage
Loan will be increased to an amount sufficient to fully amortize the principal
balance of such Mortgage Loan over the remaining term and to pay interest at the
Note Rate.
Substantially all the ARM Mortgage Loans were originated with an
initial Note Rate below the sum of the applicable Index and the applicable Gross
Margin. As of the Cut-off Date, it is expected that approximately 83% of the ARM
Mortgage Loans will have passed their first Interest Adjustment Date. The
weighted average next Interest Adjustment Date for the ARM Mortgage Loans as of
the Cut-off Date is approximately January 1, 1997.
S-26
<PAGE>
No ARM Mortgage Loan will be "fully indexed" until it bears interest at the
applicable Index plus its Gross Margin. Due to the application of Periodic Rate
Caps and minimum and maximum lifetime Note Rates, the Note Rate on any ARM
Mortgage Loan, as adjusted on any Interest Adjustment Date, may not equal the
sum of the applicable Index and the applicable Gross Margin. See "Maturity and
Prepayment Considerations--Factors Affecting Prepayments on the Mortgage Loans"
herein.
As of the Cut-off Date, (i) the Note Rates on the ARM Mortgage Loans
are expected to range from 4.25% to 10.88% per annum, and the weighted average
Note Rate on the ARM Mortgage Loans is expected to be approximately 8.30% per
annum, (ii) the Gross Margins for the ARM Mortgage Loans are expected to range
from 1.75% to 4.50%, with a weighted average of approximately 2.89%, (iii) the
maximum lifetime Note Rates for the Mortgage Loans are expected to range from
9.25% to 22.88% per annum, and the weighted average maximum lifetime Note Rate
for the Mortgage Loans is expected to be approximately 11.70% per annum and (iv)
the minimum lifetime Note Rates for the ARM Mortgage Loans are expected to range
from 1.25% to 10.88% per annum, and the weighted average minimum lifetime Note
Rate is expected to be approximately 3.77% per annum. In no case will the
minimum lifetime Note Rate of an Mortgage Loan be less than the Gross Margin of
such Mortgage Loan. As of the Cut-off Date, the Note Rates for the Fixed
Mortgage Loans are expected to range from 7.5% to 12.13% per annum, and the
weighted average Note Rate for the Fixed Mortgage Loans is expected to be
approximately 11.23% per annum.
As of the Cut-off Date, approximately 10% of the Mortgage Loans were
delinquent by one or more Scheduled Payments.
Approximately 60% of the Mortgage Loans are expected to be secured by
Mortgaged Premises located in California. Consequently, losses and prepayments
on the Mortgage Collateral and resultant payments on the Bonds may be affected
significantly by changes in the housing markets and the regional economy of
California, and also by the occurrence of natural disasters (such as
earthquakes, fires and floods) in California. In addition, approximately 5% of
the Mortgage Loans are expected to be secured by Mortgaged Premises located in
each of Maryland and Virginia.
Underwriting Policies
Notwithstanding anything to the contrary in the Prospectus, not all the
Mortgage Loans meet Resource's various credit appraisal and underwriting
standards although the Mortgage Loans generally were not underwritten in
accordance with guidelines that are less stringent than those of FNMA and FHLMC.
The Mortgage Loans are believed to have been originated pursuant to
underwriting standards that generally conform to the underwriting guidelines of
FNMA and FHLMC, except that such Mortgage Loans may have original principal
balances in excess of those permitted by FNMA or FHLMC, may have been
underwritten pursuant to "limited documentation" programs, and may have been
originated at debt-to-income and other ratios in excess of those permitted by
FNMA or FHLMC provided that compensating factors existed at the time of
origination.
Selected Data
Except as otherwise indicated, the Mortgage Loans and related Mortgaged
Premises have the characteristics set forth in the following tables as of the
Cut-off Date. Asterisks (*) in the following tables indicate values between 0.0%
and 0.5%. Whenever reference is made in the tables to a percentage of the
Mortgage Loans, such percentage is based on the Scheduled Principal Balances of
the Mortgage Loans as of the Cut-off Date.
S-27
<PAGE>
1) Current Scheduled Principal Balance
Current Scheduled Percent of Scheduled
Principal Balance Principal Balance (%)
----------------- ---------------------
$ 1 - 100,000 5
100,001 - 150,000 11
150,001 - 203,150 14
203,151 - 250,000 18
250,001 - 300,000 13
300,001 - 350,000 8
350,001 - 400,000 6
400,001 - 450,000 4
450,001 - 500,000 4
500,001 - 550,000 3
550,001 - 600,000 2
600,001 - 650,000 2
650,001 - 700,000 1
700,001 - 800,000 2
800,001 - 900,000 1
900,001 -1,000,000 2
1,000,001 -2,000,000 4
----
Totals: 100
====
The average Scheduled Principal Balance for the Mortgage Loans is approximately
$220,700. The maximum Scheduled Principal Balance of the Mortgage Loans is
approximately $2,000,000. The minimum Scheduled Principal Balance of the
Mortgage Loans is approximately $6,100.
2) Current Note Rates
Current Note Percentage of Scheduled
Rates (%) Principal Balance (%)
------------------ -----------------------
4.250 - 7.499 1
7.500 - 7.749 10
7.750 - 7.999 4
8.000 - 8.249 20
8.250 - 8.499 33
8.500 - 8.749 18
8.750 - 8.999 8
9.000 - 9.249 3
9.250 - 9.499 1
9.500 - 10.749 1
10.750 - 12.125 1
----
Totals: 100
====
The weighted average current Note Rate of the Mortgage Loans is approximately
8.35% per annum. The weighted average current Note Rate of the Fixed Mortgage
Loans and the ARM Mortgage Loans is approximately 11.23% and 8.30% per annum,
respectively.
3) Gross Margin on ARM Mortgage Loans
Percentage of Scheduled
Gross Margin (%) Principal Balance (%)
---------------- -----------------------
1.750 - 2.749 22
2.750 - 2.999 41
3.000 - 3.249 17
3.250 - 3.499 15
3.500 - 3.749 4
3.750 - 4.500 1
----
Totals: 100
====
The weighted average Gross Margin of the ARM Mortgage Loans is approximately
2.89% per annum.
4) Remaining Term to Stated Maturity
Remaining Term Percent of Scheduled
(Months) Principal Balance (%)
--------------- ---------------------
85 - 290 2
291 - 300 7
301 - 310 *
311 - 320 18
321 - 325 24
326 - 330 21
331 - 335 12
336 - 340 12
341 - 360 4
---
Totals: 100
===
The weighted average remaining term to stated maturity of the Mortgage Loans is
approximately 323 months.
S-28
<PAGE>
Mortgage Pool and Other Insurance for the Underlying Mortgage Loans
Norwest Underlying Mortgage Loans. The Underlying Mortgage Loans for
which Norwest is the Master Servicer (the "Norwest Underlying Mortgage Loans")
together, in certain cases, with other mortgage loans are covered by mortgage
pool insurance policies issued by either United Guaranty Residential Insurance
Company or General Electric Mortgage Insurance Corporation. The mortgage pool
insurance policies provided coverage for certain losses by reason of default on
the mortgage loans covered thereby equal to various percentages, ranging from
14.5% to 5.25%, of the initial principal balances of such mortgage loans. No
designated portion of the total coverage provided by such mortgage pool
insurance policies is allocated or segregated for the purpose of covering losses
with respect to the Norwest Underlying Mortgage Loans; coverage is reduced as
claims are paid and, accordingly, if claims with respect to other covered
mortgage loans were to be presented and paid before claims with respect to the
Norwest Underlying Mortgage Loans were presented, coverage might not be
available for losses on the Norwest Underlying Mortgage Loans. As of the Cut-Off
Date the coverage on each of the mortgage pool insurance policies remaining
after the payment of claims, as a percent of the outstanding principal balances
of the mortgage loans covered thereby, is not less than the original percentage.
In addition, the Mortgage Certificates with respect to the Norwest
Underlying Mortgage Loans provide for limited coverage for special hazard and
bankruptcy risks.
Capstead Underlying Mortgage Loans. The Underlying Mortgage Loans for
which Capstead (the "Capstead Underlying Mortgage Loans") acts as a Master
Servicer, together with other mortgage loans, are covered by a mortgage pool
insurance policy issued by PMI Mortgage Insurance Co. (which has since
discontinued its mortgage pool operations and reinsured its mortgage pool
insurance risk with Forestview Mortgage Insurance Co., a subsidiary of Allstate
Insurance Company). No designated portion of the total coverage provided by such
mortgage pool insurance policy is allocated or segregated for the purpose of
covering losses with respect to the Capstead Underlying Mortgage Loans; coverage
is reduced as claims are paid and, accordingly, if claims with respect to other
covered mortgage loans were to be presented and paid before claims with respect
to the Capstead Underlying Mortgage Loans were presented, coverage might not be
available for losses with respect to the Capstead Underlying Mortgage Loans.
In addition, underlying mortgage certificates with respect to the
Capstead Underlying Mortgage Loans provide for limited coverage for special
hazard and bankruptcy risks and certain of such underlying mortgage certificates
are covered by a financial guaranty insurance policy issued by FSA.
Directly Held Mortgage Loans. The Directly Held Mortgage Loans (for
which Resource is the Master Servicer) are not covered by any mortgage pool
insurance policy or any coverage with respect to special hazard or bankruptcy
risks.
Additional Collateral
Less than 1% of the Mortgage Loans are secured by, in addition to real
estate or shares of stock in a cooperative housing corporation, additional
collateral ("Additional Collateral") generally consisting of marketable
securities.
The Boston Company required that borrowers pledge Additional Collateral
to secure a Mortgage Loan to the extent that the loan-to-value ratio of such
Mortgage Loan would otherwise have exceeded applicable underwriting guidelines.
Additional Collateral may include publicly traded stocks, corporate and
municipal bonds, government securities, commercial paper, bank deposits, trust
accounts and mutual funds. The loan-to-value ratio of a Mortgage Loan secured in
part by Additional Collateral may, with respect to the real property securing
such loan, be greater than 100%.
All Additional Collateral is valued on a daily basis; if the market
value of such collateral with respect to any Mortgage Loan declines below
specified levels, the related borrower is required to pledge sufficient
Additional Collateral to meet such levels. The lien on some of or all the
Additional Collateral securing a Mortgage Loan will generally be released if,
within five years after origination of such loan, the borrower meets certain
requirements and the loan-to-value ratio has been reduced due to (i) an increase
in the appraised value of the real property securing such Mortgage Loan or (ii)
prepayment by the borrower of a portion of the loan balance. After five years
S-29
<PAGE>
have elapsed following origination of a mortgage loan, all or part of the
related Additional Collateral may be liquidated in order to reduce the
outstanding loan balance to a level within The Boston Company's loan-to-value
guidelines.
The security interests in all Additional Collateral pledged to secure
the Mortgage Loans will be assigned to the Trustee. The Boston Company will
continue to hold such Additional Collateral as custodian on behalf of the
Trustee.
Investors should consider that, due to changes in market conditions,
Additional Collateral pledged to secure a Mortgage Loan may not be readily
marketable at the time that the related borrower defaults on such Mortgage Loan
and foreclosure proceedings are commenced.
Because Additional Collateral is generally required to be pledged to
secure any Mortgage Loan that would otherwise have a loan-to-value ratio above
80%, none of the Boston Company Mortgage Loans are covered by primary mortgage
insurance policies.
Cooperative Loans
The Mortgage Loans include Cooperative Loans that were originated
primarily in the states of New York, Massachusetts and California. Such loans
are not secured by liens on real estate. The "owner" of a cooperative apartment
does not own the real estate constituting the apartment, but owns shares of
stock in a corporation which holds title to the building in which the apartment
is located, and by virtue of owning such stock is entitled to a proprietary
lease or occupancy agreement to occupy the specific apartment. A Cooperative
Loan is a loan secured by a lien on the shares and an assignment of the lease or
occupancy agreement. If the borrower defaults on a Cooperative Loan, the
lender's remedies are similar to the remedies which apply to a foreclosure of a
leasehold mortgage or deed of trust, in that the lender can foreclose the loan
and assume ownership of the shares and of the borrower's rights as lessee under
the related proprietary lease or occupancy agreement. Typically, the lender and
the cooperative housing corporation enter into a recognition agreement that
establishes the rights and obligations of both parties in the event of a default
by the borrower on its obligations under the lease or occupancy agreement.
As described herein, less than 1% of the Mortgage Loans are
Unrecognized Cooperative Loans. Investors should consider the risk that, in the
event of a default under an Unrecognized Cooperative Loan and resulting
foreclosure, the value of the related collateral may be substantially less than
the unpaid principal balance of the related Mortgage Loan. See "Risk
Factors--Cooperative Loans; Unrecognized Security Interests" and "Security for
the Bonds--Realizing Upon Cooperative Loan Security" herein.
There are certain risks that arise as a result of the cooperative form
of ownership which differentiate Cooperative Loans from other types of Mortgage
Loans. For example, the power of the board of directors of most cooperative
housing corporations to reject a proposed purchaser of a unit owner's shares
(and prevent the sale of an apartment) for any reason (other than reasons based
upon unlawful discrimination), or for no reason, significantly reduces the
universe of potential purchasers in the event of a foreclosure. Moreover, in
buildings where the "sponsor" (i.e., the owner of the unsold shares in the
corporation) holds a significant number of unsold interests in apartments,
cooperative apartment owners run a special risk that the sponsor may go into
default on its proprietary leases or occupancy agreements, and thereby cause a
default under the underlying mortgage loan to the cooperative housing
corporation which is secured by a mortgage on the building. In such event, the
unit owners may be forced to make up any shortfall in income to the cooperative
housing corporation resulting from the sponsor's default or risk losing their
apartments in a foreclosure proceeding brought by the holder of the mortgage on
the building. Not only would the value attributable to the right to occupy a
particular apartment be adversely affected by such an occurrence, but the
foreclosure of a mortgage on the building in which the apartment is located
could result in a total loss of the shareholder's equity in the building (and a
corresponding loss of the lender's security for its Cooperative Loan) and right
to occupy the apartment.
Realizing Upon Cooperative Loan Security
The cooperative shares and proprietary lease or occupancy agreement
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 certificate of
incorporation and by-laws of a cooperative housing corporation, as well as in
the proprietary lease or occupancy agreement. The proprietary lease or occupancy
agreement, even while pledged, may be cancelled by the
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cooperative housing corporation for failure by the tenant-stockholder to pay
rent or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. Commonly, rent and other obligations and charges arising
under a proprietary lease or occupancy agreement which are owed to the
cooperative housing corporation are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative housing
corporation to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the cooperative housing corporation 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 housing corporation 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 housing
corporation will recognize the lender's lien against proceeds from a sale of the
cooperative apartment, subject, however, to the cooperative housing
corporation's right to sums due under such proprietary lease or occupancy
agreement or which have become liens on the shares relating to the proprietary
lease or occupancy agreement. The total amount owed to the cooperative housing
corporation 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 the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the cooperative housing
corporation as required by the proprietary lease before transferring the shares
or assigning the proprietary lease.
In New York, lenders generally have realized upon the pledged shares
and proprietary lease or occupancy agreement given to secure a Cooperative Loan
by public sale in accordance with the provisions of Article 9 of the New York
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 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 sale. 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 housing 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.
Additional Information
On each Payment Date, information will be available with respect to the
outstanding principal balance of each Class of the Bonds and the applicable
Class Interest Rate. The information may be obtained by telephone from the
corporate trust office of the Trustee. As of the date of this Prospectus
Supplement, that telephone number is (713) 216-2240. The Bond Administrator will
make available on an ongoing basis current information relating to the Mortgage
Collateral, including (i) Mortgage Loan delinquencies of 30 days, 60 days and 90
days or over, (ii) Mortgage Loans in foreclosure, (iii) REO, (iv) Losses on the
Mortgage Loans, (v) the remaining Overcollateralization Amount and (vi) amounts
paid on the Bonds by the Insurer under the FSA Insurance Policy.
Substitution of Mortgage Loans
Under limited circumstances, the Issuer will be permitted to substitute
a mortgage loan for a Directly Held Mortgage Loan initially pledged to the
Trustee. The Issuer, with the consent of the Insurer, will have the option
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to pledge to the Trustee, in substitution for a defaulted Directly Held Mortgage
Loan or REO, a new mortgage loan (a "Substitute Mortgage Loan"), to the extent
that the Master Servicer has determined, in its reasonable business judgment,
that the present value of any potential Loss on such defaulted Directly Held
Mortgage Loan or REO will be reduced through the substitution of a Substitute
Mortgage Loan for such defaulted Directly Held Mortgage Loan or REO, and
provided that such Substitute Mortgage Loan (i) is secured by the Mortgaged
Premises that secure the defaulted Directly Held Mortgage Loan or by such REO,
(ii) has a Note Rate that is not less than the then current market rate for a
mortgage loan having similar characteristics (provided, however, that a
Substitute Mortgage Loan may have a Note Rate less than the then current market
rate so long as the aggregate Scheduled Principal Balance of all such Substitute
Mortgage Loans on their respective dates of substitution does not exceed 1.00%
of the initial aggregate Scheduled Principal Balance of the Mortgage Loans), and
(iii) has a maturity date that is not later than nine months prior to the
Maturity Date of the Bonds. The amount, if any, by which the Scheduled Principal
Balance of the defaulted Directly Held Mortgage Loan or REO exceeds the
Scheduled Principal Balance of the Substitute Mortgage Loan would constitute a
Loss on such Directly Held Mortgage Loan or REO. Upon the pledge of a Substitute
Mortgage Loan, the Trustee will release the defaulted Directly Held Mortgage
Loan or the REO from the lien of the Indenture. See "Security for the
Bonds--Substitution of Mortgage Collateral" in the Prospectus.
In addition, the Issuer may pledge to the Trustee a Mortgage Loan in
substitution for a Directly Held Mortgage Loan initially pledged (an "Original
Mortgage Loan") to secure the Bonds in the event of a breach of a representation
or warranty by the Participant with respect to such Original Mortgage Loan or in
the case of defective or incomplete documentation with respect to such Original
Mortgage Loan which materially and adversely affects the value of such Original
Mortgage Loan. It is anticipated that any substitution for an Original Mortgage
Loan will not materially change the characteristics of the Mortgage Loans as set
forth above. If a Mortgage Loan is not so pledged to the Trustee in substitution
for any such Original Mortgage Loan, the Participant is obligated to repurchase
such Original Mortgage Loan.
In certain cases, the Underlying Mortgage Loans are also subject to
similar rights of substitution (or obligations to repurchase).
Delivery of Directly Held Mortgage Loans
If any Directly Held Mortgage Loan proposed to be included in the
Mortgage Collateral is not delivered with all the required documentation on the
Closing Date, the Issuer intends to deposit cash on an interim basis with the
Trustee in an amount equal to the Scheduled Principal Balance of the Directly
Held Mortgage Loans not delivered, plus applicable interest for one month on the
amount of cash deposited. To the extent the required documentation for any such
Directly Held Mortgage Loan is not delivered prior to the October 1996 Payment
Date, the related cash so deposited will be applied to pay the Bonds and such
Directly Held Mortgage Loan shall be released from the lien of the Indenture.
Conversion Option
Approximately 49% of the ARM Mortgage Loans are expected to be
convertible, upon the fulfillment of certain conditions, from an adjustable to a
fixed Note Rate at the option of the borrower.
In order to be eligible to convert the adjustable Note Rate on a
convertible ARM Mortgage Loan to a fixed Note Rate, the borrower generally must
(a) execute and submit to the applicable Servicer certain conversion documents,
including a loan modification agreement, (b) pay the applicable conversion fee
and (c) not (i) be in default under the Note or the security documents related
to such ARM Mortgage Loan or (ii) have been delinquent thirty days in making any
payment under the Note in the previous twelve months. Furthermore, the borrower
must generally complete an updated credit review and, if the Servicer believes
the value of the Mortgaged Premises may have declined, provide an updated
appraisal. Upon conversion, the scheduled payment will be adjusted to provide
for fully amortizing, level monthly payments until maturity. Should interest
rates decline so that the fixed Note Rates applicable upon conversion are
significantly lower than the then current Note Rates, or are significantly lower
than the applicable maximum lifetime Note Rates on convertible ARM Mortgage
Loans, borrowers may have a significant financial incentive to effect
conversions.
The Participant has the option but is not obligated to purchase
Directly Held ARM Mortgage Loans which are converted to a fixed rate (a
"Converted Mortgage Loan"). The Servicers and/or the Master Servicers of the
Underlying Mortgage Loans in certain cases have the option and in other cases
are obligated to purchase Converted Underlying Mortgage Loans from the trustee
for the applicable Mortgage Certificates. If any Converted Mortgage
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Loan is purchased, the purchase price will be equal generally to 100% of the
Scheduled Principal Balance of such Converted Mortgage Loan plus 30 days'
interest thereon at the applicable Note Rate in effect immediately prior to such
conversion. Any Converted Directly Held Mortgage Loan not so purchased will
remain pledged to secure the Bonds, but with a fixed Note Rate. See "Maturity
and Prepayment Considerations" herein.
THE INSURER
The information set forth in this section has been provided by the
Insurer. No representation is made by the Underwriter, the Participant, the
Issuer, the Master Servicers, the Servicers, the Depositor or any of their
affiliates as to the accuracy or completeness of such information or any
information related to the Insurer incorporated by reference herein.
General
The Insurer is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. The Insurer is licensed to engage in
financial guaranty insurance business in all 50 states, the District of Columbia
and Puerto Rico.
The Insurer and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer. The
Insurer and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. The Insurer insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy the Insurer's underwriting criteria.
The Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders include Fund American Enterprises Holdings, Inc., US WEST
Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Insurer or any claim
under any insurance policy issued by the Insurer or to make any additional
contribution to the capital of the Insurer.
The principal executive offices of the Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the Insurer or any
of its domestic operating insurance company subsidiaries are reinsured among
such companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the Insurer reinsures a portion of its liabilities
under certain of its financial guaranty insurance policies with other reinsurers
under various quota share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by the Insurer as a risk management device and to
comply with certain statutory and rating agency requirements; it does not alter
or limit the Insurer's obligations under any financial guaranty insurance
policy.
Ratings of Claims-Paying Ability
The Insurer's claims-paying ability is rated "Aaa" by Moody's and "AAA"
by each of Standard & Poor's, Nippon Investors Service Inc. and Standard &
Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
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Capitalization
The following table sets forth the capitalization of the Insurer and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of June 30, 1996 (in thousands):
June 30, 1996
-------------
(Unaudited)
Deferred Premium Revenue (net of
prepaid reinsurance premiums) $351,180
--------
Shareholder's Equity:
Common Stock 15,000
Additional Paid-In Capital 681,470
Unrealized Loss on Investments
(net of deferred income taxes) (5,685)
Accumulated Earnings 94,287
--------
Total Shareholder's Equity 785,072
--------
Total Deferred Premium Revenue and
Shareholder's Equity $1,136,252
==========
For further information concerning the Insurer, see the Consolidated
Financial Statements of the Insurer and Subsidiaries, and the notes thereto
incorporated herein by reference. Copies of the statutory quarterly and annual
statements filed with the State of New York Insurance Department by the Insurer
are available upon request to the State of New York Insurance Department.
Incorporation of Certain Documents by Reference
The consolidated financial statements of the Insurer and Subsidiaries
included in, or as exhibits to, the following documents which have been filed
with the Securities and Exchange Commission by Holdings, are hereby incorporated
by reference in this Prospectus Supplement: (i) Annual Report on Form 10-K for
the year ended December 31, 1995 and (ii) Quarterly Report on Form 10-Q for the
three-month period ended June 30, 1996 which report included as an exhibit
unaudited consolidated financial statements of the Insurer and Subsidiaries for
the period ended June 30, 1996.
All financial statements of the Insurer and Subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Bonds 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.
Insurance Regulation
The Insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the Insurer and its insurance subsidiaries are
subject to regulation by insurance laws of the various other jurisdictions in
which they are licensed to do business. As a financial guaranty insurance
corporation licensed to do business in the State of New York, the Insurer is
subject to Article 69 of the New York Insurance Law which, among other things,
limits the business of each such insurer to financial guaranty insurance and
related lines, requires that each such insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each such insurer, and limits the size of individual
transactions ("single risks") and the volume of transactions ("aggregate risks")
that may be underwritten by each such insurer. Other provisions of the New York
Insurance Law, applicable to non-life insurance companies such as the Insurer,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of information regarding the Insurer set forth under the heading "The Insurer."
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FSA INSURANCE POLICY
Simultaneously with the issuance of the Bonds, the Insurer will issue
the FSA Insurance Policy to the Trustee for the benefit of the Bondholders
pursuant to which it will irrevocably and unconditionally guarantee payment on
each Payment Date to the Trustee for the benefit of the Bondholders of an amount
equal to the Payment Amount for such Payment Date calculated in accordance with
the original terms of the Bonds when issued and without regard to any amendment
or modification of the Bonds or the Indenture except amendments or modifications
to which the Insurer has given its prior written consent. The amount of the
insured payment (the "Insured Payment"), if any, made by the Insurer to the
Bondholders under the FSA Insurance Policy on each Payment Date is the sum of
(i) any shortfall in the amount required to pay the Payment Amount for such
Payment Date from a source other than the FSA Insurance Policy, and (ii) any
shortfall in the amount required to pay the Preference Amount from a source
other than the FSA Insurance Policy. The effect of the FSA Insurance Policy is
to guarantee the timely payment of interest on, and the ultimate principal
amount of, all Classes of the Bonds.
Payment of claims under the FSA Insurance Policy will be made by the
Insurer following Receipt by the Insurer of the appropriate notice for payment
on the later to occur of (a) 12:00 noon, New York City time, on the second
Business Day following Receipt of such notice for payment, and (b) 12:00 noon,
New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Insurer pursuant to the
FSA Insurance Policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law the Insurer will pay such
amount out of the funds of the Insurer on the later of (a) the date when due to
be paid pursuant to the Order referred to below or (b) the first to occur of (i)
the fourth Business Day following Receipt by the Insurer from the Trustee of (A)
a certified copy of the order (the "Order") of the court or other governmental
body which exercised jurisdiction to the effect that a Bondholder is required to
return principal or interest paid with respect to a Bond during the term of the
FSA Insurance Policy because such distributions were avoidable preferences under
applicable bankruptcy law, (B) a certificate of the Bondholder that the Order
has been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by the Bondholder, in such form as is reasonably required
by the Insurer and provided to the Bondholder by the Insurer, irrevocably
assigning to the Insurer all rights and claims of the Bondholder relating to or
arising under the Bonds against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Insurer from the Trustee of the items referred to in clauses (A), (B) and
(C) above if, at least four Business Days prior to such date of Receipt, the
Insurer shall have Received written notice from the Trustee that such items were
to be delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Order and not to the Trustee or any
Bondholder directly (unless a Bondholder has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Trustee for
distribution to such Bondholder upon proof of such payment reasonably
satisfactory to the Insurer).
The terms "Receipt" and "Received," with respect to the FSA Insurance
Policy, means actual delivery to the Insurer and to its fiscal agent appointed
by the Insurer at its option, if any, prior to 12:00 p.m., New York City time,
on a Business Day; delivery either on a day that is not a Business Day or after
12:00 p.m., New York City time, shall be deemed to be Receipt on the next
succeeding Business Day. If any notice or certificate given under the FSA
Insurance Policy by the Trustee is not in proper form or is not properly
completed, executed or delivered, it shall be deemed not to have been Received,
and the Insurer or the fiscal agent shall promptly so advise the Trustee and the
Trustee may submit an amended notice.
Under the FSA Insurance Policy, "Business Day" means any day other than
(i) a Saturday or Sunday or (ii) a day on which banking institutions in The City
of New York, New York, are authorized or obligated by law or executive order to
be closed.
The Insurer's obligations under the FSA Insurance Policy in respect of
Insured Payments shall be discharged to the extent funds are transferred to the
Trustee as provided in the FSA Insurance Policy, whether or not such funds are
properly applied by the Trustee.
The Insurer shall be subrogated to the rights of each Bondholder to
receive payments of principal and interest, as applicable, with respect to
payments on the Bonds to the extent of any payment by the Insurer under the FSA
Insurance Policy. To the extent the Insurer makes Insured Payments, either
directly or indirectly (as by paying through the Trustee), to the Bondholders,
the Insurer will be subrogated to the rights of the Bonders, as applicable, with
respect to such Insured Payment, shall be deemed to the extent of the payments
so made to be a registered Bondholder for purposes of payment and shall receive
all future Payment Amounts until all such Insured Payments by the Insurer have
been fully reimbursed, provided that the Bondholders have received the full
amount of the Payment Amount.
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Claims under the FSA Insurance Policy will rank equally with any other
unsecured and unsubordinated obligations of the Insurer except for certain
obligations in respect of tax and other payments to which preference is or may
become afforded by statute. The terms of the FSA Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Seller. The FSA Insurance Policy by
its terms may not be cancelled or revoked. The FSA Insurance Policy is governed
by the laws of the State of New York.
The FSA Insurance Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
The FSA Insurance Policy is not covered by the Florida Insurance Guaranty
Association created under Part II of Chapter 631 of the Florida Insurance Code.
In the event the Insurer were to become insolvent, any claims arising under the
FSA Insurance Policy are excluded from coverage by the California Insurance
Guaranty Association, established pursuant to Article 14.2 of Chapter 1 of part
2 of Division 1 of the California Insurance Code.
Pursuant to the terms of the Indenture, unless an Insurer default
exists, the Insurer shall be deemed to be the holder of a Bond for certain
purposes (other than with respect to payment on the Bonds), will be entitled to
exercise all rights of the Bondholders thereunder, without the consent of such
Bondholders and the Bondholders may exercise such rights only with the prior
written consent of the Insurer. In addition, the Insurer will have certain
additional rights as a third party beneficiary to the Indenture.
SERVICING OF THE MORTGAGE LOANS
General
The Mortgage Loans will be serviced by various Servicers that are (a)
approved by the applicable Master Servicer and (b) approved by and in good
standing with FNMA or FHLMC. Approximately 21% of the Mortgage Loans are
serviced by The Boston Company and the balance of the Mortgage Loans are
serviced by approximately 33 different Servicers.
Loan Servicing Activities at The Boston Company
When a mortgagor fails to make a required payment on a mortgage loan
and does not cure the deficiency promptly, the loan is classified as delinquent.
In most cases, delinquencies are cured promptly, but if not, foreclosure
proceedings are generally commenced. The procedural steps necessary for
foreclosure vary from state to state, but generally, if the loan is not
reinstated within certain periods specified by the relevant mortgage loan
documents, the property securing the loan can be acquired by the lender. If a
mortgagee takes title to the mortgaged property through foreclosure but the
mortgaged property had a value lower than the outstanding amount of the debt,
the law in certain states permits such mortgagee to obtain a deficiency judgment
in the amount of the difference. The laws of certain other states restrict or
prohibit such deficiency judgments. It is anticipated that in most cases The
Boston Company will not seek deficiency judgments against defaulted mortgagors.
Advances
On or before each Payment Date, each Servicer will be obligated to make
Advances with respect to any delinquent Mortgage Loan, in an amount equal to the
sum of (i) the Scheduled Payment on such delinquent Mortgage Loan (net of the
Servicing Fee), (ii) amounts for the payment of real estate taxes, assessments,
insurance premiums, and property protection expenses not paid by the related
borrower and (iii) amounts to cover expenses relating to Foreclosure and
Liquidation, provided that the applicable Master Servicer has determined in its
good faith business judgment that such Advance is not a Non-Recoverable Advance.
Advances will be deemed by a Master Servicer to be non-recoverable only to the
extent such amounts are not expected to be recovered from late collections,
Insurance Proceeds, Liquidation Proceeds and other proceeds of the related
Mortgage Loan. If a Servicer of a Mortgage Loan fails to make a required
Advance, the applicable Master Servicer will be obligated to make such Advance.
If the applicable Master Servicer fails to make a required Advance, the Bond
Administrator will be obligated to make the Advance. If the Bond Administrator
fails to do so, the Trustee will be obligated to make a required Advance.
Nevertheless, in no event will the applicable Master Servicer, the Bond
Administrator or the Trustee be required to make any Advance if it deems such
Advance to be a Non-Recoverable Advance. Subject to the terms of the FSA
Insurance Policy, the FSA Insurance Policy will provide protection to the
holders of the Bonds against any shortfall in the Payment Amount resulting from
delinquencies as to which a required Advance is not made as described above or
is determined to be nonrecoverable, to the extent such shortfall is not
otherwise covered by Available Funds.
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Forbearance and Modification Agreements
To the extent set forth in the related Servicing Agreement, each
Servicer may, with the approval of the applicable Master Servicer in most cases,
enter into a forbearance or modification agreement with the borrower under a
Mortgage Loan, provided that such Servicer and, if required, such Master
Servicer have determined in their good faith business judgment that granting
such forbearance or modification will maximize recovery on such Mortgage Loan to
the Trust Estate on a present value basis. The interests of the applicable
Master Servicer in determining whether to enter into a forbearance or
modification agreement (or in establishing the terms of any such forbearance or
modification agreement) may conflict with the interests of Bondholders.
Events of Default
The applicable Master Servicer will generally have the right pursuant
to the related Servicing Agreement to terminate any related Servicer in the
event of a breach by such Servicer of any of its obligations under such
Servicing Agreement. In the event of such termination, the applicable Master
Servicer generally assumes certain of such Servicer's servicing obligations
under such Servicing Agreement, including the obligation to make Advances
(limited as provided herein under the heading "Servicing of the Mortgage
Loans--Advances"), until such time as a successor servicer is appointed. If the
applicable Master Servicer is unable to act as servicer, the applicable Master
Servicer will generally appoint or petition a court of competent jurisdiction
for the appointment of a suitable mortgage loan servicing institution to act as
successor servicer under such Servicing Agreement. Pending such appointment, the
applicable Master Servicer will be obligated to service the related Mortgage
Loans subject to the same limitations as apply to the applicable Master
Servicer's obligation to fulfill the servicing responsibility of a terminated
servicer. Any successor servicer, including the applicable Master Servicer, will
be entitled generally to compensation arrangements similar to, and not in excess
of, those provided to the terminated Servicer.
Master Servicers
Norwest. Norwest, a national banking association, will act as Master
Servicer with respect to approximately 58% of the Mortgage Loans. The principal
executive offices of Norwest are located at Sixth and Marquette, Minneapolis,
Minnesota. Norwest performs its master servicing activity at 11000 Broken Land
Parkway, Columbia, Maryland. As of January 31, 1996, Norwest acted as master
servicer for approximately 111,000 mortgage loans with an aggregate principal
balance of approximately $17.5 billion.
Resource. Resource, in its capacity as Master Servicer, will supervise
the servicing of approximately 22% of the Mortgage Loans, principally The Boston
Company Mortgage Loans. Resource has been master servicing mortgage loans since
November of 1993 but is not an approved FNMA or FHLMC servicer.
Capstead. Capstead will act as Master Servicer with respect to
approximately 20% of the Mortgage Loans. The principal executive offices of
Capstead are located at 2711 N. Haskell, Suite 1000, Dallas, Texas. As of June
30, 1996, Capstead acted in the capacity of master servicer for approximately
24,369 mortgage loans with an aggregate principal balance of approximately
$6,857,528,122.
Servicing and Other Compensation and Payment of Expenses
As of the Cut-off Date, the sum of the weighted average of (i) the
Servicing Fee Rates and (ii) the Master Servicing Fee Rates is expected to equal
approximately 0.44% per annum.
The primary compensation payable to each Servicer is the monthly
servicing fee (the "Servicing Fee") applicable to the Mortgage Loans serviced by
such Servicer, which fee is expressed as one-twelfth a fixed percentage per
annum (the "Servicing Fee Rate") multiplied by the Scheduled Principal Balance
of each such Mortgage Loan on the first day of the Due Period preceding each
Payment Date. The maximum Servicing Fee Rate for each ARM Mortgage Loan will be
1.25% per annum and the maximum Servicing Fee for each Fixed Mortgage Loan will
be .85% per annum. In addition to the Servicing Fees, late payment fees, loan
assumption fees and conversion fees with respect to the Mortgage Loans, and any
interest or other income earned on collections with respect to the Mortgage
Loans pending remittance to the Master Servicer will be paid to or retained by
the related Servicer as additional servicing compensation. Each Servicer is
obligated to pay certain insurance premiums and certain ongoing expenses
associated with the related Mortgage Loans and incurred by the Servicer in
connection with its responsibilities under its Servicing Agreement.
The Bond Administration Fee (which will include the Master Servicing
Fee for the Directly Held Mortgage Loans, for which Resource is the Master
Servicer) will be equal to 0.02% per annum on the aggregate Scheduled Principal
Balances of the Mortgage Loans.
The other Master Servicers' compensation will range from 0.05% to
0.10%. On each Payment Date, the applicable Master Servicer will be obligated
(without regard to the amount of its Master Servicing Fee) to pay interest
("Month End Interest") through the end of the preceding calendar month with
respect to Mortgage Loans
S-37
<PAGE>
that are prepaid in full or liquidated during the portion of the related
Prepayment Period in the preceding calendar month. The Bond Administrator will
be responsible for the fees of the Trustee.
Special Servicer
The Participant, with the consent of the Insurer (absent the existence
of a default by the Insurer under the FSA Insurance Policy), may appoint a
Special Servicer acceptable to the Rating Agencies and the Insurer to undertake
some or all of the Servicer's obligations with respect to Directly Held Mortgage
Loans that are in default. The Special Servicer, if any, may be entitled to
various fees, including, but not limited to, (i) a special servicing fee
expressed as a fixed percentage of the remaining Scheduled Principal Balance of
each specially serviced Mortgage Loan, (ii) a performance fee applicable to each
liquidated Mortgage Loan based upon the Liquidation Proceeds of such loan, or
both. See "Servicing of the Mortgage Loans--Special Servicing Agreement" in the
Prospectus.
MATURITY AND PREPAYMENT CONSIDERATIONS
Weighted Average Life of the Bonds
Weighted average life refers to the average amount of time that will
elapse from the date of delivery of a bond until each dollar of principal of
such bond will be repaid to the investor. The weighted average life of the Bonds
will be influenced by the rate at which principal of the Mortgage Loans is paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes payments resulting from refinancings,
liquidations of the Mortgage Loans due to defaults, casualties, indemnifications
and purchases by or on behalf of the Issuer, the Participant or the Servicers,
as the case may be).
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment assumption model used in this
Prospectus Supplement is based on a Constant Prepayment Rate ("CPR"). CPR
represents a constant rate of prepayment on the Mortgage Loans each month
relative to the aggregate outstanding principal balance of the Mortgage Loans.
The Issuer does not make any representations about the appropriateness of the
CPR model.
Factors Affecting Prepayments on the Mortgage Loans
The rate of payments (including prepayments) on a pool of mortgage
loans is influenced by a variety of economic, geographic, social, tax, legal and
other factors. If prevailing mortgage rates fall significantly below the then
current Note Rates on the Mortgage Loans or significantly below the maximum
lifetime Note Rates on the ARM Mortgage Loans, the rate of prepayments on such
Mortgage Loans would be expected to increase. Conversely, if prevailing mortgage
rates rise significantly above the then current Note Rates on the Mortgage Loans
or significantly above the maximum lifetime Note Rates on the ARM Mortgage
Loans, the rate of prepayments would be expected to decrease. Other factors
affecting prepayment of Mortgage Loans include changes in borrowers' housing
needs, job transfers, unemployment, borrowers' net equity in the Mortgaged
Premises and servicing decisions. In addition, any purchase of a Converted
Mortgage Loan by the Participant or sale by the Master Servicer will have the
same effect as a prepayment in full of the Converted Mortgage Loan. The Mortgage
Loans may be prepaid, in whole or in part, at any time by the borrowers; less
than 1% of the Mortgage Loans provide for payment of a prepayment fee or
penalty. No assurance can be given as to the rate of principal payments or
prepayments on the Mortgage Loans.
Approximately 98% of the Mortgage Loans are expected to be ARM Mortgage
Loans. The Issuer is not aware of any publicly available statistics relating to
the principal prepayment experience of adjustable rate mortgage loans over an
extended period of time, and the Issuer's experience with respect to adjustable
rate mortgage loans is insufficient to draw any conclusions with respect to the
expected prepayment rates on the ARM Mortgage Loans. Defaults on ARM Mortgage
Loans leading to foreclosure and the ultimate liquidation of the related
Mortgaged Premises may occur with greater frequency in their early years,
although little data is available with respect to the rate of default on ARM
Mortgage Loans. Increases in the required monthly payments on the ARM Mortgage
Loans may result in a default rate higher than that on mortgage loans with fixed
Note Rates. The Issuer, at its option, may purchase, on any Payment Date, any
Mortgage Loan that is delinquent in payment by 90 days or more. Any such
purchase must be made at a price equal to the outstanding principal balance of
the related Mortgage Loan plus accrued and unpaid interest thereon at its Note
Rate through the Payment Date following the date of purchase. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
Furthermore, the Issuer will have the option to pledge to the Trustee a
Substitute Mortgage Loan in substitution for a defaulted Mortgage Loan or REO,
as more particularly described in "Security for the Bonds--Substitution of
Mortgage Loans" herein. The weighted average life of the Bonds may increase to
the extent that the Issuer exercises its option to pledge a Substitute Mortgage
Loan to the Trustee for a defaulted Mortgage Loan or REO, because such
substitution will be
S-38
<PAGE>
effected in lieu of foreclosure and disposition of the related Mortgaged
Premises or REO and the payment of Liquidation Proceeds to Holders of the Bonds.
See "Yield Considerations" herein.
Approximately 21% of the Mortgage Loans provide for monthly payments of
interest at the related Note Rate but no payments of principal for the first 10
years after origination (or, in some cases, modification). Following such
10-year period, the monthly payment on each such Mortgage Loan will be increased
to an amount sufficient to amortize fully its outstanding principal balance over
its remaining term and to pay interest at the related Note Rate. Accordingly,
the Bonds may amortize more slowly than would be the case if all the Mortgage
Loans provided for the amortization of principal over their entire term.
Although the Modeling Assumptions set forth below assume that there are not any
principal payments in the first 10-years, the Issuer is not aware of any
publicly available statistics relating to the principal prepayment experience of
mortgage loans having similar payment terms and the Issuer's experience with
respect to mortgage loans having similar payment terms is too limited to draw
any conclusions with respect to those Mortgage Loans and the Issuer's experience
with mortgage loans having such payment terms is insufficient.
The Note Rates on the ARM Mortgage Loans will adjust periodically
(although not on the same dates). None of the Note Rates on the Six-Month
Certificate of Deposit Index Mortgage Loans are subject to Periodic Rate Caps.
In addition, such Note Rates will be based on the current Six-Month Certificate
of Deposit Index, current Six-Month LIBOR Index or current One-Year CMT Index as
applicable (which may not rise and fall consistently with prevailing interest
rates or other ARM Mortgage Loans based on other indices), plus the Gross
Margins for the ARM Mortgage Loans (which may be different from the current
margins on residential ARM Loans). As a result, the Note Rates on the ARM
Mortgage Loans at any time may not equal the prevailing rates for similar ARM
Mortgage Loans, and the rate of prepayment may be lower or higher than would
otherwise be anticipated. See "Risk Factors--Uncertain Timing of Principal"
herein.
Approximately 56% of the ARM Mortgage Loans are expected to permit
assumption by a subsequent purchaser of the related Mortgaged Premises during a
specified period and subject to such purchaser's compliance with certain then
existing requirements and underwriting guidelines, except in the case of any ARM
Mortgage Loan that has converted to a fixed Note Rate. The Fixed Mortgage Loans
and any ARM Mortgage Loan that has converted to a fixed Note Rate will be
subject to "due-on-sale-clauses" and are not assumable. The weighted average
life of each Class of Bonds will be increased to the extent that the ARM
Mortgage Loans are assumed by purchasers of the Mortgaged Premises in connection
with sales of such Mortgaged Premises. Conversely, the weighted average life of
each Class of Bonds will be decreased upon the sale of Mortgaged Premises with
non-assumable Mortgage Loans, which will result in the prepayment of such
Mortgage Loans. See "Maturity and Prepayment Considerations" in the Prospectus.
Less than 49% of the ARM Mortgage Loans are expected to provide that
the borrower may, during a specified period of time, convert the adjustable Note
Rate of the related Mortgage Loan to a fixed Note Rate. The conversion option
may be exercised during periods of rising interest rates as borrowers attempt to
limit their risk of higher rates. If borrowers were to exercise their conversion
rights in such an interest rate environment, a purchase of the Converted
Mortgage Loan by the Participant would have the same effect on holders of the
Bonds as a prepayment at a time when prepayments generally would not be
expected. The availability of fixed rate mortgage loans at competitive interest
rates during periods of falling rates may also encourage borrowers to exercise
the conversion option. There can be no certainty as to the rate at which
conversions will take place or as to the rate of prepayments in stable or
changing interest rate environments.
Under certain circumstances, the sponsor of the Mortgage Certificates
relating to the Capstead Underlying Mortgage Loans (representing approximately
20% of the Mortgage Loans as of the Cut-Off Date) may, at its option, repurchase
all such Mortgage Certificates as described under "Description of the Bonds -
Optional Redemption." Any such repurchase, which would have the same effect as a
prepayment in full of such Mortgage Loans, could accelerate the Payment Date on
which the aggregate principal balance of the Bonds is less than 35% of the
aggregate principal amount of the Bonds on the Closing Date.
The average Scheduled Principal Balance of the Directly Held Mortgage
Loans is $506,100. Approximately 17% of the Directly Held Mortgage Loans have
Scheduled Principal Balances in excess of $1,000,000. The Issuer is not aware of
any publicly available statistics relating to the prepayment experience of
mortgage loans with high balances and the Issuer's experience with other high
balance mortgage loans is insufficient to draw any conclusions with respect to
the expected prepayment rates on those Directly Held Mortgage Loans. Prepayments
on such Directly Held Mortgage Loans may have a disproportionate effect on the
prepayment experience of the Mortgage Loans.
The rate at which borrowers exercise their conversion rights and the
resulting purchase of Converted Mortgage Loans by the Participant will affect
the rate of payment of principal and hence the weighted average life of the
Bonds. See "Security for the Bonds--Conversion Option" herein.
S-39
<PAGE>
In addition, defaults on ARM Mortgage Loans that lead to foreclosure
and the ultimate liquidation of the related ARM Mortgage Loans may occur with
greater frequency in their early years. Increases in the required monthly
payments on the ARM Mortgage Loans may result in a default rate higher than that
on mortgage loans with fixed interest rates. Prepayments, liquidations and
purchases of the Mortgage Loans will result in payments of principal to
Bondholders of amounts that would otherwise be distributed over the remaining
terms of the Mortgage Loans. See "Risk Factors--Credit Considerations" in the
Prospectus.
Modeling Assumptions
The following assumptions (the "Modeling Assumptions") have been used
in preparing the tables on pages S-42 through S-44 (the "DEC Tables"). It has
been assumed that the ARM Mortgage Loans consist of fifteen adjustable rate
Mortgage Loans and that the Fixed Mortgage Loans consist of six fixed rate
Mortgage Loans, each with the characteristics set forth in the following tables:
Assumed ARM Mortgage Loans:
<TABLE>
<CAPTION>
Remaining Original
Term to Term to
Outstanding Stated Stated Next Interest
Principal Gross Periodic Maturity Maturity Adjustment
Index Balance Note Rate Net Rate Margin Caps (in months) (in months) Date
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
6 mo. CD $195,948,635 7.750% 7.500% 2.500% 2% 338 360 10/1/96
1 Yr. CMT 152,636,290 7.296 6.500 2.800 2 352 360 1/1/97
6 mo. LIBOR 38,071,364 7.420 6.620 2.800 1 352 360 10/1/96
6 mo. LIBOR 37,256,886 8.174 7.465 2.781 1 297 360 11/1/96
6 mo. LIBOR 1,356,491 9.290 8.201 3.777 1 298 360 12/1/96
6 mo. LIBOR 32,742,778 8.419 7.567 2.941 1 319 360 11/1/96
6 mo. LIBOR 32,696,773 8.298 7.458 2.956 1 320 360 11/1/96
6 mo. LIBOR 19,939,701 8.305 7.398 2.970 1 322 360 12/1/96
6 mo. LIBOR 55,117,940 8.590 7.685 3.008 1 324 360 1/1/97
6 mo. LIBOR 88,312,783 8.443 7.350 3.032 1 326 360 11/1/96
6 mo. LIBOR 46,660,065 8.486 7.440 3.158 1 326 360 11/1/96
1 Yr. CMT 54,999,370 8.313 7.424 3.192 2 330 360 4/1/97
6 mo. LIBOR 132,064,590 8.642 7.604 3.202 1 331 360 11/1/96
6 mo. LIBOR 5,314,549 10.372 9.807 3.000 2 291 360 9/1/97
6 mo. LIBOR 26,455,599 8.602 7.767 2.934 1 294 360 11/1/96
</TABLE>
Assumed Fixed Mortgage Loans:
<TABLE>
<CAPTION>
Remaining Term to Stated Original Term to Stated
Outstanding Principal Balance Note Rate Net Rate Maturity (in months) Maturity (in months)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
$1,448,369 11.695% 11.079% 93 180
2,512,871 11.468 11.182 272 360
1,763,692 11.591 11.138 94 180
1,691,476 11.400 11.043 272 360
2,074,347 11.279 10.902 95 180
4,130,869 11.136 10.854 275 360
</TABLE>
It has been further assumed that:
(i) the One-Month LIBOR Index remains constant at 5.48%;
(ii) the Six-Month LIBOR Index remains constant at 5.88%, the
One-Year CMT Index remains constant at 5.92% per annum and the
Six-Month Certificate of Deposit Index remains constant at 5.80% per
annum for the assumed ARM Mortgage Loans; and the Note Rate remains
constant until the next Interest Adjustment Date (for the respective
Mortgage Loans), at which time the Note Rate on such Mortgage Loans is
adjusted to equal the index of the respective Mortgage Loan plus the
applicable Gross Margin, subject to any Periodic Rate Caps;
(iii) the assumed ARM Mortgage Loans are not converted;
(iv) all Scheduled Payments on the assumed Mortgage Loans are
received timely on the first day of each month, commencing September 1,
1996, and prepayments on such Mortgage Loans are received on the last
day of each month beginning August 31, 1996 and include 30 days of
interest thereon; and Scheduled Payments on the assumed Six-Month
Certificate of Deposit Index Mortgage Loans consist of interest only
through October 1, 2004;
S-40
<PAGE>
(v) the Scheduled Payments on the assumed ARM Mortgage Loans
are adjusted on the Payment Adjustment Date, subject to any Periodic
Rate Caps, to equal a fully amortizing payment as described above;
(vi) there are no defaults or shortfalls on the assumed
Mortgage Loans;
(vii) the assumed Mortgage Loans prepay monthly at the
specified constant percentages of CPR (the Scheduled Principal Balance
of assumed Mortgage Loans are based on the Scheduled Principal Balance
of the Mortgage Loans at August 1, 1996, adjusted for the September 1,
1996 payment and an assumed prepayment rate of 21% of CPR);
(viii) the Closing Date for the Bonds is September 26, 1996;
(ix) cash distributions are received by the Bondholders on the
28th day of each month, commencing in October 1996;
(x) the initial principal amount of each Class of Bonds is as
set forth on the cover hereof;
(xi) there is no optional redemption of the Bonds (except with
respect to the line entitled "Weighted Average Life with Redemption")
and no increase in the Class Interest Rate of the Class A-1 and Class
A-2 Bonds as a result of the Issuer's failure to redeem the Class A-1
and Class A-2 Bonds when it is permitted to do so;
(xii) there are no prepayment fees or penalties; and
(xii) the Principal Payment Amount on each Payment Date equals
the amount determined pursuant to clause (a) of the definition thereof
without reference to the Target Overcollateralization Amount.
If the Bonds are redeemed when the Issuer has the option to do so, the
weighted average life of the Bonds will be shorter than the weighted average
life set forth on the line entitled "Weighted Average Life Without Redemption",
and using the Modeling Assumptions, the weighted average life of the Bonds would
be as set forth on the line entitled "Weighted Average Life With Redemption."
See "Description of the Bonds--Optional Redemption" herein.
There will be discrepancies between the Mortgage Loans actually
included in the Mortgage Pool and the Modeling Assumptions. Any discrepancy may
have an effect upon the percentages of initial principal amount (and weighted
average lives) set forth in the DEC Tables. To the extent that the Mortgage
Loans actually included in the Mortgage Pool have characteristics that differ
from the Modeling Assumptions, the Bonds are likely to have weighted average
lives that are shorter or longer than indicated by such tables. Other things
being equal, to the extent that cash is used to redeem Bonds because Mortgage
Loans are not delivered together with all the required documentation to the
Trustee or Mortgage Loans are repurchased either because of Mortgage Loans
becoming Converted Mortgage Loans or otherwise, the Bonds will have shorter
weighted average lives than indicated by the DEC Tables, which will adversely
affect the yield of such Bonds to the extent that they are purchased at a
premium.
There is no assurance that prepayment of the Mortgage Loans will
conform to any of the percentages of CPR described in the DEC Tables. Among
other things, the DEC Tables assume that the Mortgage Loans prepay at the
indicated constant rates of CPR, notwithstanding the fact that such Mortgage
Loans may vary substantially as to geographic concentration of Mortgaged
Premises, interest rate and prepayment terms. Variations in actual prepayment
experience for the Mortgage Loans will increase or decrease the percentages of
initial principal balances (and weighted average lives) shown in the DEC Tables.
The DEC Tables indicate the projected weighted average life of the
Bonds and set forth the percentage of the initial principal amount of the Bonds
that would be outstanding after each of the dates shown at various percentages
of CPR. See "Maturity and Prepayment Considerations" in the Prospectus.
The Weighted Average Life values included in the following DEC Tables
have been determined by (a) multiplying the amount of each principal payment by
the number of years from the date of delivery of the Bonds to the related
Payment Date, (b) summing the results and (c) dividing the sum by the total
principal to be paid on the applicable Class of Bonds. Asterisks(*) in the
following tables indicate values between 0.0% and 0.5%.
S-41
<PAGE>
Class A-1 Bonds Outstanding as a Percentage of Original Principal Amount
<TABLE>
<CAPTION>
Class A-1 Bonds
September 28, at the following percentages of CPR
- --------------------------- ---------------------------------------------------------------------------------------------------
0% CPR 15% CPR 18% CPR 21% CPR 25% CPR 30% CPR 35% CPR
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100%
1997 99 79 75 71 66 59 53
1998 98 61 55 49 40 31 22
1999 97 47 38 31 22 11 2
2000 95 34 25 17 7 0 0
2001 94 23 14 6 0 0 0
2002 92 14 5 0 0 0 0
2003 91 6 0 0 0 0 0
2004 89 0 0 0 0 0 0
2005 86 0 0 0 0 0 0
2006 84 0 0 0 0 0 0
2007 81 0 0 0 0 0 0
2008 78 0 0 0 0 0 0
2009 74 0 0 0 0 0 0
2010 70 0 0 0 0 0 0
2011 66 0 0 0 0 0 0
2012 61 0 0 0 0 0 0
2013 56 0 0 0 0 0 0
2014 51 0 0 0 0 0 0
2015 45 0 0 0 0 0 0
2016 39 0 0 0 0 0 0
2017 32 0 0 0 0 0 0
2018 24 0 0 0 0 0 0
2019 15 0 0 0 0 0 0
2020 6 0 0 0 0 0 0
2021 0 0 0 0 0 0 0
2022 0 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
2028 0 0 0 0 0 0 0
2029 0 0 0 0 0 0 0
2030 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption (Years)(1) 16.8 3.2 2.6 2.2 1.9 1.5 1.3
Weighted Average Life With
Redemption (Years)(2) 6.7 3.1 2.5 2.2 1.8 1.5 1.2
</TABLE>
(1) Assuming no redemption of the Class A-1 Bonds.
(2) Assuming the Class A-1 Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
S-42
<PAGE>
Class A-2 Bonds Outstanding as a Percentage of Original Principal Amount
<TABLE>
<CAPTION>
Class A-2 Bonds
September 28, at the following percentages of CPR
- --------------------------- ---------------------------------------------------------------------------------------------------
0% CPR 15% CPR 18% CPR 21% CPR 25% CPR 30% CPR 35% CPR
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100%
1997 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 88 48
2001 100 100 100 100 84 40 7
2002 100 100 100 86 45 7 0
2003 100 100 88 52 16 0 0
2004 100 100 58 26 0 0 0
2005 100 72 34 5 0 0 0
2006 100 49 14 0 0 0 0
2007 100 29 0 0 0 0 0
2008 100 12 0 0 0 0 0
2009 100 0 0 0 0 0 0
2010 100 0 0 0 0 0 0
2011 100 0 0 0 0 0 0
2012 100 0 0 0 0 0 0
2013 100 0 0 0 0 0 0
2014 100 0 0 0 0 0 0
2015 100 0 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 85 0 0 0 0 0 0
2022 36 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
2028 0 0 0 0 0 0 0
2029 0 0 0 0 0 0 0
2030 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption (Years)(1) 25.8 10.1 8.5 7.3 6.0 4.9 4.1
Weighted Average Life With
Redemption (Years)(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
</TABLE>
(1) Assuming no redemption of the Class A-2 Bonds.
(2) Assuming the Class A-2 Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
S-43
<PAGE>
Class A-3 Bonds Outstanding as a Percentage of Original Principal Amount
<TABLE>
<CAPTION>
Class A-3 Bonds
September 28, at the following percentages of CPR
- --------------------------- ----------------------------------------------------------------------------------------------------
0% CPR 15% CPR 18% CPR 21% CPR 25% CPR 30% CPR 35% CPR
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100%
1997 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 70
2003 100 100 100 100 100 75 43
2004 100 100 100 100 91 50 25
2005 100 100 100 100 66 33 14
2006 100 100 100 82 47 21 7
2007 100 100 96 62 33 13 3
2008 100 100 76 47 22 7 0
2009 100 97 59 34 15 3 0
2010 100 79 46 25 9 0 0
2011 100 63 35 18 5 0 0
2012 100 50 26 12 2 0 0
2013 100 40 19 8 0 0 0
2014 100 31 13 4 0 0 0
2015 100 23 9 2 0 0 0
2016 100 17 5 0 0 0 0
2017 100 12 3 0 0 0 0
2018 100 7 0 0 0 0 0
2019 100 4 0 0 0 0 0
2020 100 1 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 100 0 0 0 0 0 0
2023 77 0 0 0 0 0 0
2024 24 0 0 0 0 0 0
2025 1 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
2028 0 0 0 0 0 0 0
2029 0 0 0 0 0 0 0
2030 0 0 0 0 0 0 0
0 0 0 0
Weighted Average Life
Without Redemption (Years)(1) 27.6 16.8 14.4 12.5 10.5 8.6 7.2
Weighted Average Life With
Redemption (Years)(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
</TABLE>
(1) Assuming no redemption of the Class A-3 Bonds.
(2) Assuming the Class A-3 Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
The DEC Tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
YIELD CONSIDERATIONS
The yield to maturity of, and the aggregate amount of payments on, the
Bonds will be related to the rate and timing of principal payments on the
Mortgage Loans and the Note Rates and Scheduled Payments on the ARM Mortgage
Loans, as they adjust from time to time. The rate of principal payments on the
Mortgage Loans will be
S-44
<PAGE>
affected by the amortization schedules of the Mortgage Loans and the rate of
principal prepayments thereon (including for this purpose payments resulting
from refinancings, liquidations of the Mortgage Loans due to default, casualties
and condemnations, repurchases by the Participant and repurchases in connection
with an optional redemption). No assurance can be given as to the rate of
principal payments or prepayments on the Mortgage Loans.
The timing of changes in the rate of prepayments on the Mortgage Loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a prepayment of principal of a
Mortgage Loan, the greater will be the effect on the investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Bonds
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal prepayments.
If the purchaser of a Bond offered at a discount from its Parity Price
calculates the anticipated yield to maturity of such Bond based on an assumed
rate of payment of principal that is faster than that actually received on the
Mortgage Loans, the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Bond offered at a premium over its
Parity Price calculates the anticipated yield to maturity of such Bond based on
an assumed rate of payment of principal that is slower than that actually
received on the Mortgage Loans, the actual yield to maturity will be lower than
that so calculated.
Because the rate of principal payments (including prepayments) on the
Mortgage Loans may significantly affect the weighted average life and other
characteristics of the Bonds, prospective investors are urged to consider their
own estimates as to the anticipated rate of future prepayments on the Mortgage
Loans and the suitability of the Bonds to their investment objectives. For
factors affecting principal prepayments on the Mortgage Loans, see "Maturity and
Prepayment Considerations" herein.
The Issuer at its option may pledge to the Trustee a Substitute
Mortgage Loan in substitution for a defaulted Mortgage Loan or REO, as more
particularly described in "Security for the Bonds--Substitution of Mortgage
Loans" herein. The amount, if any, by which the Scheduled Principal Balance of
the defaulted Mortgage Loan or REO exceeds the Scheduled Principal Balance of
the Substitute Mortgage Loan would constitute a Loss on such Mortgage Loan or
REO. Furthermore, to the extent that any Substitute Mortgage Loan has payment
terms that differ from the original Mortgage Loan such difference in payment
terms will affect the yield to maturity of investors in the Bonds. The Issuer's
ability to pledge Substitute Mortgage Loans may result in an increase in the
weighted average life of the outstanding Bonds, because such substitution would
be effected in lieu of a foreclosure and disposition of the related Mortgaged
Premises or REO and the resultant payment of Liquidation Proceeds to Holders of
the Bonds.
Investors in the Class A-2 Bonds also should understand that the Class
Interest Rate on the Class A-2 Bonds will remain at a maximum rate of 10.00% (or
10.60% in the event of an Optional Redemption Step Up) per annum at levels of
One-Month LIBOR equal to or greater than 9.40% per annum. Investors in the Class
A-2 Bonds should understand that the timing of changes in the level of One-Month
LIBOR may affect the actual yields to such investors even if the average level
is consistent with such investors' expectations. Each investor must make an
independent decision as to the appropriate LIBOR assumptions to be used in
deciding whether to purchase a Class A-2 Bond.
With respect to the ARM Mortgage Loans, a number of factors affect the
performance of the Six-Month LIBOR Index, the One-Year CMT Index and the
Six-Month Certificate of Deposit Index and may cause any such index to move in a
manner different from other indices. In a period of declining rates, the
Six-Month LIBOR Index, the One-Year CMT Index or the Six-Month Certificate of
Deposit Index may remain higher than other market interest rates, which may
result in a higher level of prepayments of the Mortgage Loans than of mortgage
loans that adjust in accordance with other indices.
A higher than expected rate of default could produce payment delays and
could lead to foreclosures. A foreclosure may produce proceeds upon sale that
are less than the Unpaid Principal Balance of such Mortgage Loan plus interest
accrued thereon and the expenses of sale. Such a shortfall upon foreclosure
would result in a Loss on such Mortgage Loan.
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USE OF PROCEEDS
The Issuer will retain from the proceeds from the sale of the Bonds an
issuance fee that will be used to cover its expenses and to compensate it for
facilitating the issuance of the Bonds. The proceeds from the sale of the Bonds
net of the issuance fee will be used by the Issuer to purchase the Mortgage
Collateral from the Participant.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement for the Class A-1 and Class A-2 Bonds dated as of the date hereof (the
"Underwriting Agreement") between Lehman Brothers Inc. (the "Underwriter"), and
Resource, the Participant and the Issuer, the Issuer has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Issuer, the
Class A-1 and Class A-2 Bonds.
The distribution of the Class A-1 and Class A-2 Bonds purchased by the
Underwriter will be effected from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of sale. The Underwriter may effect such transactions by selling such
Class A-1 and Class A-2 Bonds to or through dealers, and such dealers may
receive from the Underwriter, for whom they act as agent, compensation in the
form of underwriting discounts, concessions or commissions. The Underwriter and
any dealers that participate with the Underwriter in the distribution of such
Class A-1 and Class A-2 Bonds may be deemed to be underwriters, and any
discounts, commissions or concessions received by them, and any profit on the
resale of the Class A-1 and Class A-2 Bonds purchased by them, may be deemed to
be underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "Act").
The Underwriting Agreement provides that the Issuer and Resource will
indemnify the Underwriter against certain civil liabilities, including
liabilities under the Act to the extent and under the circumstances set forth
therein.
The Issuer proposes to offer the Class A-3 Bonds for sale to an
affiliate of the Participant in a privately negotiated transaction. Such
affiliate of the Participant may, from time to time, offer such Class of Bonds
for sale to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of sale.
Certain of the Mortgage Loans may have been the subject of financing
provided by an affiliate of the Underwriter.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1995, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Notwithstanding anything to the contrary in the Prospectus, certain
legal matters relating to the Bonds will be passed upon for the Issuer by Arter
& Hadden, and certain legal matters relating to the Bonds will be passed upon
for the Underwriter by Brown & Wood LLP, Washington, D.C.
RATINGS
It is a condition to the issuance of the Bonds that the Bonds be rated
"Aaa" by Moody's and "AAA" by Standard & Poor's. Publications of Moody's
indicate that it assigns a rating of "Aaa" to securities upon which "interest
payments are protected by an exceptionally stable margin and principal is
secure." Publications of Standard & Poor's indicate that it assigns an "AAA"
rating to bonds for which "the capacity to pay interest and repay principal is
extremely strong."
The ratings assigned to mortgage-backed bonds take into consideration
the credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such bonds and the
extent to which the payment stream on such mortgage pool is adequate to make
payments required on such
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bonds. Ratings on such bonds do not, however, constitute a statement regarding
frequency of prepayments on the related mortgage loans. As a result, the rating
does not address the possibility that the holders of the Bonds might suffer a
lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold Bonds
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. In the event that a rating initially assigned to the Bonds is
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to the Bonds. Each
security rating should be evaluated independently of any other security rating.
The Issuer has not requested a rating on the Bonds by any rating agency
other than Standard & Poor's and Moody's. However, there can be no assurance as
to whether any other rating agency will nonetheless issue a rating and, if it
does, what such rating would be. A rating assigned to the Bonds by a rating
agency that has not been requested by the Issuer to do so may be lower than the
rating assigned by a Rating Agency pursuant to the Issuer's request.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans, and collective investment funds in which such plans, accounts,
annuities or arrangements are invested, that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or corresponding
provisions of the Code (any of the foregoing a "Plan"), persons acting on behalf
of a Plan, or persons using the assets of a Plan ("Plan Investors"), should
carefully review with their legal advisors whether the purchase or holding of
the Bonds could give rise to a transaction that is prohibited under ERISA or the
Code or cause the Collateral securing the Bonds to be treated as "plan assets"
for purposes of regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware
that, although certain exceptions from the application of the prohibited
transaction rules and the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with respect to the acquisition of
a Bond. See "ERISA Considerations" in the Prospectus.
If the Bonds are treated as equity for purposes of ERISA, the purchaser
of a Bond could be treated as having acquired a direct interest in the
Collateral securing the Bonds. In that event, the purchase, holding, or resale
of the Bonds could result in a transaction that is prohibited under ERISA or the
Code. Furthermore, regardless of whether the Bonds are treated as equity for
purposes of ERISA, the acquisition or holding of the Bonds by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if the
Issuer, the Trustee, any Master Servicer, any Servicer or any of their
respective affiliates is or becomes a party in interest or a disqualified person
with respect to such Plan. Nevertheless, one or more alternative exemptions may
be available with respect to certain prohibited transaction rules of ERISA that
might apply in connection with the initial purchase, holding and resale of the
Bonds, depending in part upon the type of Plan fiduciary making the decision to
acquire Bonds and the circumstances under which such decision is made. Those
exemptions include, but are not limited to: (i) Prohibited Transaction Class
Exemption ("PTCE") 95-60, regarding investments by insurance company general
accounts; (ii) PTCE 91-38, regarding investments by bank collective investment
funds; (iii) PTCE 90-1, regarding investments by insurance company pooled
separate accounts; or (iv) PTCE 84-14, regarding transactions negotiated by
qualified professional asset managers. Before purchasing Bonds, a Plan subject
to the fiduciary responsibility provisions of ERISA or described in Section
4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult
with its counsel to determine whether the conditions of any exemption would be
met. A purchaser of a Bond should be aware, however, that even if the conditions
specified in one or more exemptions are met, the scope of the relief provided by
an exemption might not cover all acts that might be construed as prohibited
transactions. See "ERISA Considerations" in the Prospectus.
The Issuer believes that the Bonds will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
Accordingly, a Plan that acquires a Bond should not be treated as having
acquired a direct interest in the assets of the Issuer. However, there can be no
complete assurance that the Bonds will be treated as debt obligations without
significant equity features for purposes of the Plan Asset Regulations.
S-47
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Collateralized Mortgage Bonds, Series 8 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Bonds will be effected on a delivery-against-payment basis
through the respective Depositories of CEDEL and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, 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 or a 360-day year of
twelve
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30 day months as applicable to the related class of Global Securities. 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 Depository to the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days or a 360-day year of twelve 30 day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of CEDEL
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the CEDEL Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
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<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, 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 Holders 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 Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
<PAGE>
MERIT Securities Corporation
Collateralized Mortgage Bonds
(Issuable in Series)
MERIT Securities Corporation (the "Issuer") may sell from time to time
under this Prospectus and related Prospectus Supplements various series (each, a
"Series") of its Collateralized Mortgage Bonds (the "Bonds"). Capitalized terms
not otherwise defined herein have the meanings specified in the Glossary.
Each Series of Bonds will be secured primarily by collateral (the "Mortgage
Collateral") consisting of one-to four-family mortgage loans (the "Mortgage
Loans"). If specified in the related Prospectus Supplement, the Mortgage
Collateral securing a Series of Bonds may include Mortgage Loans secured by
second liens on residential properties, properties acquired by foreclosure or
deed-in-lieu of foreclosure ("REO Properties"), and Mortgage Loans that are past
due or non-performing as of the Cut-off Date. A Series of Bonds also may be
secured by certain debt service funds, Reserve Funds, Insurance Policies,
servicing agreements, additional mortgage collateral, and other credit support
as specified in the related Prospectus Supplement (together with the Mortgage
Collateral, the "Collateral").
The Mortgage Loans will have been originated by one or more affiliates of
the Issuer, by various financial institutions, and by other entities engaged
generally in the business of originating and/or servicing residential mortgage
loans. The Mortgage Loans may include fixed rate or adjustable rate loans, as
specified in the related Prospectus Supplement. See "Security for the
Bonds -- The Mortgage Loans" herein. The Mortgage Loans may be underwritten in
accordance with the underwriting standards for "non-conforming credits," which
include mortgagors whose creditworthiness and repayment ability do not satisfy
FNMA or FHLMC underwriting guidelines. Mortgage Loans underwritten pursuant to
underwriting standard for "non-conforming credits" will be likely to experience
rates of delinquency and foreclosure that are higher, and may be substantially
higher, than mortgage loans originated in accordance with FNMA or FHLMC
underwriting guidelines. As a result, losses on such Mortgage Loans may be
higher than losses on mortgage loans originated in accordance with such
guidelines. See "Risk Factors -- Underwriting Standards and Potential
Delinquencies" herein. The Mortgage Loans securing a Series will be serviced by
one or more Servicers that are subject to supervision by Resource Mortgage
Capital, Inc. ("Resource"), as Master Servicer. The Master Servicer's and each
Servicer's obligations will be limited to its contractual, supervisory and/or
servicing obligations. Unless otherwise specified in the related Prospectus
Supplement, each Servicer and the Master Servicer will be obligated under
certain circumstances to make Advances. See "Servicing of Mortgage Loans"
herein.
The Prospectus Supplement or Supplements relating to a Series of Bonds will
set forth, among other things, the following information if applicable to such
Series: (i) the Class or Classes of Bonds and authorized denominations of each
Class of Bonds of such Series; (ii) the aggregate principal amount, interest
rate (or method of determining the interest rate), payment dates and stated
maturity dates for each Class of Bonds; (iii) the order of application of
principal and interest payments to one or more Classes of Bonds of such Series,
which may differ as to timing, sequential order, priority of payment or amount
of payments of principal or interest or both; (iv) certain information as to the
nature of the Mortgage Loans and any other assets securing such Series; (v) the
redemption features pertaining to such Series; (vi) additional information with
respect to the form of any credit enhancement securing one or more Classes of
such Series; and (vii) additional information with respect to the plan of
distribution of Bonds of each Class of such Series. See "Description of the
Bonds" herein.
Bonds of a Series will be characterized for federal income tax purposes as
debt instruments. No election will be made to treat any Series of Bonds and the
related Collateral as a real estate mortgage investment conduit (a "REMIC") for
federal income tax purposes. See "Certain Federal Income Tax Consequences"
herein.
It is intended that the Bonds of a Series will be payable from the
Collateral pledged to secure the Bonds of that Series or other Series sold from
time to time under this Prospectus. The Issuer has no significant assets other
than those pledged as security for the Bonds. There will be no recourse to the
Issuer. Except as otherwise provided in a related Prospectus Supplement, neither
the Mortgage Loans nor the Bonds will be guaranteed or insured by any
governmental agency or any other party.
Under certain circumstances, the Issuer may pledge additional mortgage
loans or mortgage certificates ("Additional Mortgage Collateral") to the Trustee
and issue additional Bonds ("Additional Bonds") of a Series. Any such pledge of
Additional Mortgage Collateral and issuance of Additional Bonds may affect the
timing and amount of payments on any outstanding Bonds of that Series and an
investor's yield on any such outstanding Bonds. See "Security for the
Bonds -- Pledge of Additional Collateral and Issuance of Additional Bonds"
herein.
See "Risk Factors" on page 7 for a discussion of certain risk factors that
should be considered before purchasing Bonds of a Series.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales offered hereby unless accompanied by a related
Prospectus Supplement.
The date of this Prospectus is November 14, 1995
<PAGE>
ADDITIONAL INFORMATION
The Issuer 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 Bonds. This Prospectus, which is a part of the
Registration Statement, omits certain information contained in such Registration
Statement pursuant to the rules and regulations of the Commission. The
Registration Statement and the exhibits thereto can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The statements contained in this
Prospectus concerning the contents of any contract or other document referred to
are not necessarily complete. Although such statements disclose all material
provisions of such contract or other document, where such contract or other
document is an exhibit to the Registration Statement, reference is made to such
exhibit for a full statement of the provisions thereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Issuer pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this Prospectus
and prior to the termination of the offering of the Bonds hereunder shall be
deemed to be incorporated into and made a part of this Prospectus from the date
of filing of such documents.
The Issuer hereby undertakes to provide a copy of any and all information
that has been incorporated by reference into the Registration Statement (not
including exhibits to the information so incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Registration Statements incorporate) upon written or oral request of any
person, without charge to such person, provided that such request is made to
MERIT Securities Corporation, 4880 Cox Road, Glen Allen, Virginia 23060 (804)
967-5800.
REPORTS TO BONDHOLDERS
The Issuer will cause to be provided to Bondholders the monthly remittance
reports concerning the Trust Estate securing the Bonds and the annual reports
concerning the Issuer. See "The Indenture -- Reports to Bondholders" herein.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Bonds contained in the related
Prospectus Supplement and Indenture to be prepared and delivered in connection
with the offering of Bonds of such Series.
Capitalized terms used herein and not defined herein will have the
respective meanings assigned to them in the "Glossary."
<TABLE>
<S> <C>
Issuer........................ MERIT Securities Corporation, a wholly-owned, limited-purpose financing subsidiary of Resource
Mortgage Capital, Inc. ("Resource"). Resource has not guaranteed, and is not otherwise
obligated with respect to, the Bonds of any Series. See "The Issuer" and "Resource Mortgage
Capital, Inc." herein.
Title of Bonds................ Collateralized Mortgage Bonds (the "Bonds"), issuable in Series, all as more fully described in
the related Prospectus Supplement. The Bonds may be issued from time to time in Series pursuant
to an indenture (the "Original Indenture") between the Issuer and Texas Commerce Bank National
Association, as trustee (the "Trustee") (or such other Trustee as may be specified in the
related Prospectus Supplement), as supplemented by an indenture supplement for each Series (a
"Series Supplement") (the Original Indenture as so supplemented, the "Indenture").
Interest Payments............. The Bonds of each Class of a Series will bear interest on their outstanding principal amounts
at the rate specified (the "Class Interest Rate"), or determined as specified, in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement,
interest on each Class of Bonds will be paid periodically on the dates specified in the related
Prospectus Supplement (each, a "Payment Date"). Each such payment of interest will include all
interest either accrued through the Accounting Date immediately preceding the Payment Date on
which it is made or to another date indicated in the related Prospectus Supplement. See
"Description of the Bonds -- Payments of Principal and Interest" and "Certain Federal Income
Tax Consequences."
Principal Payments............ To the extent specified in the related Prospectus Supplement, payments on the Mortgage
Collateral securing a Series, together with withdrawals from various debt service and Reserve
Funds, if any, will be available to pay principal of and interest on the Bonds of a Series. The
related Prospectus Supplement may specify that the payments received on the Collateral will be
distributed (i) so as to prioritize certain Classes of Bonds of a Series, (ii)
disproportionately among the various Classes of Bonds or (iii) to secure one or more Series
sold pursuant to this Prospectus. On each Payment Date for a Series, provided funds are
available therefore, principal will be paid on the Bonds in an amount equal to the Principal
Distribution Amount or such other amount as may be specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, the Principal
Distribution Amount on any Payment Date will equal the amount by which (i) the aggregate
Collateral Value of the Mortgage Collateral securing the Series as of the preceding Payment
Date (or, with respect to the first Payment Date, as of the Cut-off Date for such Series)
exceeds (ii) the aggregate Collateral Value of the Mortgage Collateral securing the Series as
of the current Payment Date. See "Description of the Bonds -- Payments of Principal and
Interest."
Redemption at Option of
Issuer...................... To the extent specified in the related Prospectus Supplement, any Class of Bonds may be subject
to redemption at the option of the Issuer prior to its Stated Maturity Date. See "Description
of the Bonds -- Redemption." Security for the Bonds Each Series of Bonds will be secured by
Collateral consisting primarily of one or more of the following, each of which will be more
specifically described in the Prospectus Supplement for such Series:
A. Mortgage
Collateral............... The Bonds of a Series may be secured by (i) conventional fixed or adjustable rate mortgage
loans secured by mortgages or deeds of trust on properties consisting of single family (one- to
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four-family) attached or detached residential housing ("Mortgage Loans") and (ii) certain other
assets evidencing interests in loans secured by such residential property. If specified in the
related Prospectus Supplement, the Mortgage Collateral securing a Series of Bonds may include
Mortgage Loans secured by second liens on residential properties, REO Properties and Mortgage
Loans that are past due or non-performing as of the Cut-off Date.
Mortgage Loans and other similar assets are herein referred to collectively as "Mortgage
Collateral." The Mortgage Collateral securing the Bonds of a Series will have an aggregate
Collateral Value (as defined in the Glossary) initially equal to at least the original
aggregate principal amount of such Bonds. Assuming no losses, scheduled payments of principal
of and interest on the Mortgage Collateral with respect to a Series (together with payments
from the Reserve Funds for such Series) net of applicable servicing, master servicing,
administration and guarantee fees and insurance premiums, if any, all as specified in the
related Prospectus Supplement, are intended to be sufficient to make the required payments of
interest on the Bonds of such Series and to pay the principal of each Class of Bonds of such
Series not later than its Stated Maturity Date. See "Security for the Bonds."
B. Collateral Proceeds
Account.................. All distributions (net of servicing and master servicing fees and other credit enhancement and
administrative costs described herein) on the Mortgage Loans will be remitted to the Collateral
Proceeds Account for the Bonds and will be available for application to the payment of
principal of and interest on the Bonds on the related Payment Date to the extent specified in
the Prospectus Supplement. See "Security for the Bonds -- Collateral Proceeds Account" and
" -- Master Servicer Custodial Account."
C. Reserve Funds............ If specified in the Prospectus Supplement for a Series, the Issuer will deposit cash,
securities, certificates of deposit, letters of credit or other instruments or documents
acceptable to the Rating Agencies for such Series in one or more Reserve Funds that may be used
by the Trustee for such Series to make any required payments of principal or interest on
Classes of Bonds of such Series to the extent funds are not otherwise available. The amount of
any deposit to the Reserve Fund will be specified in the Prospectus Supplement for the Series.
The Issuer will have certain rights on any Payment Date to cause the Trustee to release funds
to the Issuer from the Reserve Fund provided that such funds are not needed on such Payment
Date to make a required payment of principal or interest on Classes of Bonds of that Series.
See "Security for the Bonds -- Reserve Fund or Accounts."
D. Credit
Enhancement.............. If so specified in the related Prospectus Supplement for a Series, in addition to, or in lieu
of, a Reserve Fund or Insurance Policies, the Trust Estate with respect to such Series may
include one or any combination of a letter of credit, guarantees, pledge of additional
collateral by an institution acceptable to the Rating Agencies or other form of credit
enhancement to provide full or partial coverage for certain defaults and losses relating to the
Mortgage Collateral.
E. Bond
Insurance................ To the extent specified in the related Prospectus Supplement for a Series, a financial guaranty
policy may be acquired with respect to one or more Classes of Bonds. Such policy may be
acquired for the purposes of guaranteeing timely payment of interest and timely or ultimate
payment of principal on certain Classes of Bonds.
F. Surplus Amounts.......... To the extent specified in the related Prospectus Supplement, amounts in the Collateral
Proceeds Account in excess of the amount required to pay principal of and interest on the Bonds
of a Series and certain expenses will be "Surplus." All or a portion of the Surplus may be (i)
distributed to the Issuer and released from the lien of the Indenture or (ii) applied to cover
Losses for such Series or other Series on each Payment Date.
Servicing..................... The Mortgage Loans securing a Series will be serviced by one or more servicers specified in the
related Prospectus Supplement (each, a "Servicer"). Each Servicer will be supervised by the
Master Servicer and must be approved by the Master Servicer. In addition, each Servicer
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generally must be approved or will utilize a sub-servicer that is approved by FNMA or FHLMC as
a servicer of mortgage loans. Unless otherwise specified in the related Prospectus Supplement,
each Servicer will be obligated under a Servicing Agreement (i) to perform customary servicing
functions and (ii) to make limited advances of funds (each, an "Advance") to cover certain
payments not made by a Borrower to the extent such Advance is deemed by the Master Servicer to
be recoverable out of future payments on the Mortgage Loan by the Borrower, Insurance Proceeds,
Liquidation Proceeds or as otherwise provided in the related Prospectus Supplement. Any
Servicer may delegate duties under its Servicing Agreement to a qualified sub-servicer (each, a
"Sub-Servicer"), which may be either an affiliate of such Servicer or an unrelated third party.
The Issuer will assign to the Trustee its rights under each Servicing Agreement as security for
the Bonds of the Series. See "Servicing of Mortgage Loans -- General."
Master Servicer............... Resource will act as Master Servicer (in such capacity, the "Master Servicer") with respect to
all of the Mortgage Loans pursuant to a Master Servicing Agreement between the Master Servicer
and the Issuer. The Master Servicer will administer and supervise the performance of the
Servicers under the Servicing Agreements and will be obligated to perform the servicing
obligations of a terminated servicer or appoint a successor servicer. In addition, the Master
Servicer will provide certain reports to the Trustee regarding the Mortgage Loans, provide
certain administrative functions with respect to the Bonds and, unless otherwise specified in
the related Prospectus Supplement, may make limited Advances. However, in no event will the
Master Servicer be obligated to make an Advance that is deemed by it to be a Non-Recoverable
Advance. The Issuer will assign to the Trustee its rights to enforce the obligations of the
Master Servicer under the Master Servicing Agreement as security for the Bonds of the Series.
See "Servicing of Mortgage Loans -- Master Servicing Agreement."
Special Servicer.............. If specified in the related Prospectus Supplement, the Master Servicer may appoint a special
servicer (the "Special Servicer") to service, make certain decisions and take various actions
with respect to delinquent or defaulted Mortgage Loans pledged as security for such Series. See
"Servicing of Mortgage Loans -- Special Servicing Agreement."
Certain Federal Income
Tax Consequences............ Based on the facts as they exist on the Closing Date, the Bonds, when beneficially owned by
someone other than the Participant or one of its qualified real estate investment trust
("REIT") subsidiaries (as defined in section 856(i) of the Code), will constitute debt
instruments for federal income tax purposes. See "Certain Federal Income Tax Consequences"
herein.
Yield Considerations.......... The Prospectus Supplement for a Series may specify certain yield considerations for Bondholders
of Discount Bonds or Premium Bonds. A higher rate of principal payments on the Mortgage
Collateral than was anticipated when pricing the Bonds of a particular Class is likely to have
an adverse effect on the yield of any Class of Bonds (a "Premium Class" or "Premium Bonds")
that has a purchase price greater than the price at which the yield to maturity of such Class
is equal to its coupon, after giving effect to any payment delay (its "Parity Price"), and a
lower rate of principal payments on the Mortgage Collateral than anticipated is likely to have
an adverse effect on the yield of any Class of Bonds that has a purchase price less than its
Parity Price (a "Discount Class" or "Discount Bonds"). It is possible under certain
circumstances that Bondholders of Premium Bonds not only will suffer a lower than anticipated
yield but, in extreme cases, will fail to recoup fully their initial investment.
Use of Proceeds............... The Issuer will use the net proceeds from the sale of each Series for one or more of the
following purposes: (i) to purchase the related Mortgage Collateral, (ii) to repay
indebtedness, if any, that has been incurred to obtain funds to acquire such Mortgage
Collateral, (iii) to establish any Reserve Funds described in the related Prospectus Supplement
and (iv) to pay costs of structuring and issuing such Bonds. See "Use of Proceeds."
Legal Investment.............. The Bonds of any Class offered by the related Prospectus Supplement may constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of
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1984 ("SMMEA") so long as they are secured by first liens on residential properties and are
rated in one of the two highest rating categories by at least one of the Rating Agencies
identified in such Prospectus Supplement. Any such securities would be "legal investments" for
certain types of institutional investors to the extent provided in SMMEA, subject to state laws
overriding SMMEA. Institutions whose investment activities are subject to review by federal or
state regulatory authorities should consult with their counsel or the applicable authorities to
determine whether an investment in such Class of Bonds complies with applicable guidelines,
policy statements or restrictions. See "Legal Investment."
ERISA Considerations.......... A fiduciary of an employee benefit plan and 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, annuities or arrangements are
invested, which is subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each such entity, a "Plan") should carefully review
with its legal advisors whether the purchase or holding of Bonds could give rise to a
transaction that is prohibited or is not otherwise permissible either under ERISA or under
Section 4975 of the Code. Investors are advised to consult their counsel and to review "ERISA
Considerations" herein. As specified in the related Prospectus Supplement, Plans may be
prohibited from acquiring certain Classes of Bonds.
Rating........................ Each Class of Bonds offered by means of this Prospectus and the related Prospectus Supplement
will initially be rated in one of the four highest rating categories by one or more Rating
Agencies identified in such Prospectus Supplement. Such ratings are subject to review and
possible revision from time to time.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Bonds.
Credit Considerations
General. The Issuer is expected to have no significant assets other than
the Collateral. For that reason, prospective purchasers of the Bonds of a Series
must rely primarily upon payments of principal of and interest on such
Collateral, the security therefor and sources of credit enhancement identified
in the related Prospectus Supplement to provide for payments on the Bonds. A
Mortgage Loan typically is made based upon a determination of the Borrower's
ability to make Monthly Payments on his Mortgage Loan and upon the value of the
Mortgaged Premises secured thereby. The ability of a Borrower to make Monthly
Payments will be dependent on the availability of jobs and general economic
conditions. The value of an investment in Bonds of a Series may be adversely
affected by a decline in real estate values. If the residential real estate
market in the area of one or more of the Mortgaged Premises should experience an
overall decline in property values, the actual rate of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, to the extent that the Mortgage
Loans are underwritten pursuant to underwriting guidelines that are less
stringent than the underwriting guidelines of FNMA and FHLMC with respect to the
mortgagor's creditworthiness and repayment ability, the rates of delinquencies
and foreclosures experienced on the Mortgage Loans are likely to be
substantially higher than those experienced by mortgage loans underwritten in
accordance with FNMA and FHLMC underwriting guidelines. As a result, losses on
the Mortgage Loans may be higher than those on mortgage loans originated in
accordance with such guidelines. See "Risk Factors -- Underwriting Standards and
Potential Delinquencies." To the extent that such losses are not covered by
applicable insurance policies, if any, or by any credit enhancement as described
herein, Holders of the Bonds of a Series will bear all risk of loss resulting
from default by mortgagors and will have to look primarily to the value of the
Mortgaged Premises for recovery of the outstanding principal and unpaid interest
of the defaulted Mortgage Loans. As described in the related Prospectus
Supplement, the risk of loss associated with such Mortgage Loans may be
allocated disproportionately among the Classes of Bonds that comprise a Series
to the extent that such losses are not covered by applicable Insurance Policies,
additional mortgage collateral or other credit enhancement. Such losses could
result in an Event of Default. See "The Indenture -- Events of Default."
As further described in the applicable Prospectus Supplement, Balloon
Payment Mortgage Loans include Mortgage Loans that provide for amortization of
the principal amount over a certain period (for example, 30 years), although all
remaining principal is due at the end of a shorter period (for example, 15
years). The final balloon payment on a Balloon Payment Mortgage Loan will be
treated as a prepayment of that Mortgage Loan. The ability of a Borrower to make
the final "balloon" payment may be dependent upon the Borrower's ability to
refinance the Balloon Payment Mortgage Loan or sell the related Mortgaged
Premises for an amount equal to or greater than the unpaid principal balance of
the Mortgage Loan. Under certain circumstances (for example, in a rising
interest rate environment), a Borrower may be unable to secure refinancing for
such loan or to sell the related Mortgaged Premises. Accordingly, Balloon
Payment Mortgage Loans may be subject to a higher risk of delinquency, loss, and
foreclosure than certain other types of mortgage loans.
In addition, ARM Loans and Buy-Down Mortgage Loans may be underwritten on
the basis of an assessment that the Borrower will have the ability to make
payments in higher amounts in later years and, in the case of certain ARM Loans,
after relatively short periods of time. Accordingly, defaults on ARM Loans and
Buy-Down Mortgage Loans leading to foreclosure and the ultimate liquidation of
the related Mortgaged Premises may occur with greater frequency in the early
years of such loans, although little data is available with respect to the rate
of default on such loans. Increases in the required monthly payments on such
loans may result in a default rate that is higher than that for fixed rate
Mortgage Loans. If specified in the related Prospectus Supplement, losses on
Mortgage Loans that exceed levels estimated by a Rating Agency rating the Series
in determining required levels of overcollateralization or other credit support
could result in an Event of Default. See "The Indenture -- Events of Default."
As specified in the related Prospectus Supplement, in order to maximize
recoveries on defaulted Mortgage Loans, the Master Servicer will have
considerable flexibility under the Master Servicing Agreement to extend and
modify the terms of Mortgage Loans that are in default or as to which a payment
default is reasonably foreseeable, including in particular Mortgage Loans with
balloon payments. In addition, the Master Servicer may receive a workout fee
based on receipts from or proceeds of such Mortgage Loans. While the Master
Servicer generally will be required to determine that any such extension or
modification is likely to produce a greater recovery on a present value basis
than liquidation, there can be no assurance that such flexibility with respect
to extensions or modifications or payment of a workout fee to the Master
Servicer will increase the present value of receipts from or proceeds of
Mortgage Loans that are in default or as to which a default is reasonably
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foreseeable. To the extent losses on such Mortgage Loans exceed levels of
available credit enhancement, the holders of the Bonds of a Series may
experience a loss.
Delinquent and Non-Performing Mortgage Loans. As set forth in the related
Prospectus Supplement, the Mortgage Collateral for a particular Series may
include, as of the Cut-off Date, REO Properties or Mortgage Loans that are past
due or are non-performing. If so specified in the related Prospectus Supplement,
management of such REO Properties or servicing with respect to such Mortgage
Loans may be transferred to a Special Servicer. Credit enhancement provided with
respect to a particular Series may not cover all losses related to such REO
Properties or to such delinquent or non-performing Mortgage Loans. Investors
should consider the risk that the inclusion of such REO Properties or such
Mortgage Loans in a Series may affect the rate of defaults and prepayments on
the Mortgage Collateral and the yield on the Bonds of such Series. See "Security
for the Bonds -- The Mortgage Loans."
Insurance and Credit Support Limitations. The Insurance Policies, if any,
on the Mortgage Loans or the obligation to deliver Additional Mortgage
Collateral, if any, with respect to a Series will not cover all contingencies
and will cover certain contingencies only to a limited extent. See "Security for
the Bonds -- Mortgage Insurance on the Mortgage Loans." The amount, type and
nature of insurance policies, subordination, letters of credit and other credit
support, if any, required with respect to a Series will be determined on the
basis of actuarial criteria established by each Rating Agency rating such
Series. Such actuarial analysis is the basis upon which each Rating Agency
determines required amounts and types of pool insurance, special hazard
insurance, Reserve Funds, overcollateralization or other credit support. There
can be no assurance that the historical data supporting such actuarial analysis
will accurately reflect future experience or any assurance that the data derived
from a large pool of housing loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans.
Second Lien Mortgage Loans
An overall decline in the residential real estate market could adversely
affect the values of the properties securing the Mortgage Loans with second
liens such that the outstanding principal balances, together with any senior
financing thereon, exceed the value of the Mortgaged Premises. Because Mortgage
Loans secured by second liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgagees, such a decline
would adversely affect the position of the related Trust Estate 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 prevailing
interest rates over a period of time, the general condition of a Mortgaged
Premises and other factors may also have the effect of reducing the value of the
Mortgaged Premises from the value at the time the second lien Mortgage Loan was
originated. As a result, the ratio of the amount of the Mortgage Loan to the
value of the Mortgaged Premises may exceed the ratio in effect at the time the
Mortgage Loan was originated. Such an increase may reduce the likelihood that,
in the event of a default by the Borrower, Liquidation Proceeds or other
proceeds will be sufficient to satisfy the second lien Mortgage Loan after
satisfaction of any senior liens and the payment of any Liquidation expenses.
Even assuming that the Mortgaged Premises provide adequate security for the
second lien Mortgage Loans, substantial delay could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds available for payment to Bondholders and thereby
reduce the security for the second lien Mortgage Loans. In the event that any
Mortgaged Premises fail to provide adequate security for the related second lien
Mortgage Loans and any related credit enhancement has been exhausted,
Bondholders would experience a loss.
Liquidation expenses with respect to defaulted mortgage loans generally do
not vary directly with the outstanding principal balance of the mortgage loans
at the time of default. Therefore, assuming that a Servicer or Special 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 that the average outstanding principal
balances of the Mortgage Loans in a Trust Estate are relatively small,
realizations net of Liquidation expenses may also be relatively small as a
percentage of the principal amount of the Mortgage Loans.
Limited Liquidity
There can be no assurance that a secondary market for the Bonds of any
Series will develop or, if it does develop, that it will provide Bondholders of
such Series with liquidity of investment or will remain for the term of such
Series of Bonds. In addition, if such a market does develop and continue, the
market value of Bonds of each Series may fluctuate with changes in prevailing
rates of interest and other factors. Consequently, the sale of Bonds by a
Bondholder in any secondary market that
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may develop may be at a discount from their purchase price. Except as otherwise
specified in the related Prospectus Supplement, Bondholders will have no
optional redemption rights.
Bankruptcy or Insolvency of the Issuer
The bankruptcy or insolvency of the Issuer could adversely affect payments
on the Bonds. For this reason, the Issuer was formed as a limited-purpose
financing subsidiary of Resource. See "The Issuer." Notwithstanding its limited
purpose, in the event of a bankruptcy or insolvency of the Issuer, the automatic
stay imposed by Title 11 of the United States Code (the "Bankruptcy Code") could
prevent enforcement of the obligations of the Issuer, including its obligations
under the Bonds and the Indenture, or actions against any of the Issuer's
property, including the Collateral, prior to modification of the stay. In
addition, the trustee in bankruptcy for the Issuer may be able to accelerate
payment of the Bonds and liquidate the Collateral. In the event the principal of
the Bonds is declared due and payable, the Bondholders would lose the right to
future payments of interest and might suffer reinvestment loss in a lower
interest rate environment and, (i) in the case of Premium Bonds, may fail to
fully recover their initial investments, and (ii) in the case of Discount Bonds,
may be entitled, under applicable provisions of the Bankruptcy Code, to receive
no more than an amount equal to the unpaid principal amount thereof less
unamortized original issue discount ("Accreted Value"). There is no assurance as
to how such Accreted Value would be determined if such event occurred.
Bankruptcy or Insolvency of Resource
The Issuer believes that each transfer of Mortgage Collateral from Resource
to the Issuer will constitute an absolute and unconditional sale. However, in
the event of the bankruptcy of Resource, a trustee in bankruptcy could attempt
to recharacterize the sale of the Mortgage Collateral as a borrowing secured by
a pledge of the Mortgage Collateral. Such an attempt, even if unsuccessful,
could result in delays in distributions on the Bonds. If such an attempt were
successful, the trustee in bankruptcy could elect to accelerate payment of the
Bonds and liquidate the Mortgage Collateral, with the holders of the Bonds
entitled to no more than the then outstanding principal amount of such Bonds
together with interest at the applicable Class Interest Rate to the date of
payment. There is no assurance that the proceeds of any such sale would be
sufficient to pay such amounts. In the event the principal of the Bonds is
declared due and payable, the Bondholders of the Bonds would lose the right to
future payments of interest and might suffer reinvestment loss in a lower
interest rate environment and, (i) in the case of Premium Bonds, may fail to
fully recover their initial investments, and (ii) in the case of Discount Bonds,
may be entitled, under applicable provisions of the Bankruptcy Code, to receive
no more than an amount equal to the Accreted Value. There is no assurance as to
how such Accreted Value would be determined if such event occurred.
Deficiency on Sale of Collateral
In the event of an acceleration of the payment of the Bonds following an
Event of Default for a Series, if the assets securing the Bonds of such Series
were to be sold, there can be no assurance that the proceeds of any such sale
would be sufficient to pay in full the outstanding principal amount of the
related Bonds and interest payments due thereon. The market value of the assets
generally will fluctuate with changes in prevailing rates of interest.
Consequently, the Mortgage Collateral and any Eligible Investments in which the
funds deposited in the Collateral Proceeds Account and any Reserve Funds for a
Series may be invested may be liquidated at a discount, in which case the
proceeds of liquidation might be less than the aggregate outstanding principal
amount and interest payable on the Bonds of that Series. Unless otherwise
specified in the related Prospectus Supplement, except under limited
circumstances, the Holders of Subordinated Bonds will have no independent
ability to declare a default or force the sale of the Mortgage Collateral even
if an Event of Default has occurred. See "The Indenture -- Events of Default"
herein.
Underwriting Standards and Potential Delinquencies
The Mortgage Loans will be adjustable rate and fixed rate loans. Mortgage
Loans originated under underwriting standards less stringent than the
underwriting guidelines of FNMA or FHLMC generally will bear higher rates of
interest than mortgage loans that are originated in accordance with FNMA and
FHLMC underwriting guidelines. The Mortgage Loans generally will be underwritten
in accordance with the underwriting standards described under "Origination of
the Mortgage Loans," which are intended to provide for the origination of
single-family mortgage loans for non-conforming credits. A mortgage loan made to
a "non-conforming credit" means a mortgage loan that is ineligible for purchase
by FNMA or FHLMC due to mortgagor credit characteristics that do not meet FNMA
or FHLMC underwriting guidelines, including a loan made to a Borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a Borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan,
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credit write-offs, outstanding judgments and prior bankruptcies. Accordingly,
the Mortgage Loans are likely to experience rates of delinquency and foreclosure
that are higher, and may be substantially higher, than mortgage loans originated
in accordance with FNMA or FHLMC underwriting guidelines. As a result, losses on
the Mortgage Loans may be higher than losses on mortgage loans originated in
accordance with such guidelines.
Under the underwriting standards described under "Origination of the
Mortgage Loans," the primary considerations in underwriting a Mortgage Loan are
the assessment of the creditworthiness of the Borrower, the value of the
Mortgaged Premises and the adequacy of such property as collateral in relation
to the amount of the Mortgage Loan. Because the Borrowers on the Mortgage Loans
originated under underwriting standards for non-conforming credit are less
creditworthy than Borrowers who meet FNMA or FHLMC underwriting criteria,
delinquencies and foreclosures may be more prevalent with respect to the
Mortgage Loans than with respect to mortgage loans originated in accordance with
FNMA or FHLMC underwriting guidelines. Therefore, changes in the values of the
Mortgaged Premises may have a greater effect on the loss experience of the
Mortgage Loans than on mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines. No assurance can be given that the values of the
Mortgaged Premises have remained or will remain at the levels in effect on the
dates of origination of the related Mortgage Loans. If the values of the
Mortgaged Premises decline after the dates of origination of the Mortgage Loans,
then the rate of losses on the Mortgage Loans may increase, and such increase
may be substantial.
Modification and Substitution of Mortgage Loans
If a Mortgage Loan is in material default or a payment default is imminent,
the related Servicer, with the consent of the Master Servicer, may enter into a
forbearance or modification agreement with the Borrower. The terms of any such
forbearance or modification agreement may affect the amount and timing of
principal and interest payments on the Mortgage Loan and, consequently, may
affect the amount and timing of payments on one or more Classes of the related
Series of Bonds. For example, a modification agreement that results in a lower
Note Rate would lower the Class Interest Rate of any related Class of Bonds that
accrues interest at a rate based on the weighted average Net Rate of the
Mortgage Loans. See "Servicing of the Mortgage Loans -- Defaulted Mortgage
Loans."
In addition, under certain circumstances, the Issuer may substitute a
mortgage loan (a "Substitute Mortgage Loan") for a defaulted Mortgage Loan or
REO. The terms of the Substitute Mortgage Loan may differ from those of the
Mortgage Loan for which it is substituted. In particular, the Note Rate of the
Substitute Mortgage Loan may be less than that of the Mortgage Loan for which it
is substituted and, indeed, may be less than the then current market interest
rate for mortgage loans with similar characteristics. The substitution of a
Substitute Mortgage Loan with a Note Rate less that that of the Mortgage Loan
for which it is substituted will reduce the Class Interest Rate of any related
Class of Bonds with a Class Interest Rate based on the Note Rates or Net Rates
of the Mortgage Loans. Furthermore, any Bondholder that would be entitled to
receive payments based on the Collateral Value of the defaulted Mortgage Loan or
REO upon Liquidation of such defaulted Mortgage Loan or REO may prefer that such
defaulted Mortgage Loan or REO be Liquidated rather than have it replaced with a
Substitute Mortgage Loan, particularly if the Substitute Mortgage Loan has a
Note Rate less than the then current market interest rate for mortgage loans
with similar characteristics. See "Security for the Bonds -- Substitution of
Mortgage Collateral."
As a condition to any modification or forbearance related to any Mortgage
Loan or to the substitution of a Substitute Mortgage Loan, the Master Servicer
is required to determine, in its reasonable business judgment, that such
modification, forbearance or substitution will maximize the recovery on such
Mortgage Loan on a present value basis. However, the interests of the Issuer and
the Master Servicer, which is an affiliate of the Issuer, may conflict with
those of the Bondholders in determining whether to enter into a modification or
forbearance agreement or to substitute a Substitute Mortgage Loan (or in
establishing the terms of any such modification or forbearance agreement or the
terms of such Substitute Mortgage Loan).
Pledge of Additional Collateral
Subject to certain conditions set forth herein and in the Prospectus
Supplement for a Series, the Issuer may pledge additional mortgage loans or
mortgage certificates ("Additional Mortgage Collateral") to the Trustee and
issue Additional Bonds of that Series within one year of the date of initial
issuance of the Bonds of such Series. Although the pledge of any Additional
Collateral will not result in any change in the Class Interest Rate, Stated
Maturity Date or Payment Dates of any outstanding Bonds of such Series, the
pledge of Additional Mortgage Collateral may result in a variance of
(plus/minus) 0.05 years in the weighted average life of any outstanding Class of
Bonds of such Series at the prepayment rate assumed for the pricing of the
initial issuance of such Class, and the characteristics of the Mortgage
Collateral may vary within the parameters specified
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in the Prospectus Supplement relating to the initial issuance of the Bonds of
such Series. Furthermore, no assurance can be given that any pledge of
Additional Mortgage Collateral and issuance of Additional Bonds would not affect
the timing or amount of payments received by Holders of the outstanding Bonds of
that Series. Provided that the conditions described in the Prospectus Supplement
for the outstanding Bonds are satisfied, the pledge of Additional Mortgage
Collateral and the issuance of Additional Bonds will not be subject to the prior
consent of the Holders of the outstanding Bonds of such Series. See "Security
for the Bonds -- Pledge of Additional Collateral and Issuance of Additional
Bonds" herein.
Average Life and Yield Considerations
The rate of payment of principal on the Mortgage Loans will affect the
average life of each Class of Bonds. Mortgage Loans may have provisions that
provide for the payment of a premium in connection with a voluntary or
involuntary principal prepayment thereof. In addition, the rate of payment of
principal, including prepayments, on the Mortgage Loans may be influenced by a
variety of economic, geographic, social, tax, legal and other factors, including
the difference between the interest rates on the Mortgage Loans and prevailing
mortgage interest rates. In general, if the Mortgage Loans are not subject to
prepayment penalties and if prevailing mortgage interest rates fall below the
interest rates on the Mortgage Loans, the rate of principal prepayments would be
expected to increase, especially if the Mortgage Loans carry fixed rates of
interest. Conversely, if prevailing mortgage interest rates rise above the
interest rates on the Mortgage Loans, the rate of principal prepayments would be
expected to decrease. See "Yield Considerations" herein.
Yields realized by Bondholders of Discount Bonds or Premium Bonds may be
extremely sensitive to the rate of principal payments (including for this
purpose, modifications, substitutions, scheduled principal payments, payments
resulting from refinancings, Liquidations due to defaults, casualties,
condemnations and repurchase by the seller of the Mortgage Loans securing such
Series). In general, yields on Premium Bonds will be adversely affected by
higher than anticipated rates of principal payments on the Mortgage Loans and
enhanced by lower than anticipated rates. Conversely, yields on Discount Bonds
are likely to be enhanced by higher than expected rates of principal payments
and adversely affected by lower than expected rates. In certain circumstances,
Holders of certain Classes of Bonds could fail to fully recover their initial
investment.
Limited Nature of Ratings
Each Class of Bonds of a Series offered hereby and by means of the related
Prospectus Supplement will be, when issued, rated in one of the four highest
rating categories by one or more Rating Agencies identified in such Prospectus
Supplement. Any such rating is not a recommendation to buy, sell or hold Bonds
and is subject to revision or withdrawal at any time by the Rating Agency
issuing such rating. An investor may obtain further details with respect to any
rating on the Bonds from the Rating Agency issuing such rating. In addition, any
such rating will be based, among other things, on the credit quality of the
Mortgage Loans and will represent only an assessment of the likelihood of
receipt by Bondholders of payments with respect to underlying Mortgage Loans.
Such rating will not represent any assessment of the likelihood that prepayment
experience may differ from prepayment assumptions and, accordingly, will not
represent any assessment of the possibility that Bondholders of Premium Bonds
may, under circumstances of high principal prepayments on the Mortgage Loans,
fail to fully recoup their initial investment. Credit ratings assigned to
Classes of Bonds having a disproportionate entitlement to Mortgage Loan
principal or interest payments specifically do not address the impact on the
yield to the Bondholder should the rate of principal payments be substantially
different than that assumed by the Bondholder when the Class of Bonds was
purchased. In addition, the ratings assigned to Subordinated Classes of Bonds
may be more subject to change than the ratings assigned to other kinds of
securities. A rating also will not assess the ability of the Participant or
other party to perform its obligation, if any, to repurchase Converted Mortgage
Loans.
Legal Investment Considerations
No representation or warranties are made concerning whether the Bonds of
any Series are legal investments under any federal or state law, regulation,
rule or order of any court. Any Class of a Series of Bonds secured by second
liens on the Mortgaged Premises or not rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
will not constitute "mortgage related securities" within the meaning of SMMEA.
Prospective investors are advised to consult their counsel as to qualification
of any Class of a Series of Bonds as legal investments under any such laws,
regulations, rules and orders.
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Consolidated Tax Return
If the Issuer were to fail to be treated for federal income tax purposes as
a "qualified REIT subsidiary" by reason of Resource's failure to continue to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes or for any other reason, the net income of the Issuer would be subject
to corporate income tax and the Issuer would not be permitted to be included on
a consolidated income tax return of another corporate entity. No assurance can
be given with regard to the prospective qualification of the Issuer as a
qualified REIT subsidiary or of Resource as a REIT for federal income tax
purposes. See "Certain Federal Income Tax Consequences -- General."
DESCRIPTION OF THE BONDS
General
The Bonds will be issued in Series, pursuant to an Indenture between the
Issuer and a Trustee, as specified in the Prospectus Supplement. The Bonds
within a Series will be issued by Class or Classes, pursuant to the Indenture. A
Series of Bonds will consist of one or more Classes of Bonds. The Prospectus
Supplement and the Series Supplement for a Series of Bonds will specify with
respect to each Class the types of Bonds, specific designations, Stated Maturity
Dates, aggregate principal amount, Payment Dates, interest rates (or method of
determining such rates), redemption features and other terms relating to each
Class of Bonds of that Series. The Bonds will be issued in fully-registered
certificated or book-entry form in the authorized denominations specified in the
related Prospectus Supplement.
The Bonds of each Series will be secured by the Mortgage Collateral, the
Collateral Proceeds Account, and, to the extent specified in the related
Prospectus Supplement, the Reserve Funds (and any other funds or accounts
pledged to secure such Series), if any, the Insurance Policies, if any, the
Servicing Agreements and the Master Servicing Agreement for such Series. See
"The Indenture" and "Security for the Bonds." The following summaries describe
certain provisions of the Bonds. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the Indenture and the Series Supplement relating to the applicable
Series of Bonds. When particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference. A copy of the form of Indenture (including all
supplements thereto to date) has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A copy of the Indenture
supplement for a Series (the "Series Supplement") will be filed with the
Commission as an Exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of Bonds of the related Series.
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds may be issued up to the aggregate principal
amount authorized from time to time by the Issuer. The Indenture provides that
additional Bonds may be issued for any outstanding Class of Bonds or Series up
to the aggregate principal amount authorized from time to time by the Issuer,
subject to the provisions of the related Series Supplement or supplements
thereto.
The Bonds of each Series will be issued in fully-registered certificated or
book-entry form in the authorized denominations specified in the related
Prospectus Supplement. The Bonds of each Series that are issued in certificated
form may be transferred or exchanged at the corporate trust office of the
Trustee without the payment of any service charge, other than any tax or other
governmental charge payable in connection therewith. Unless otherwise specified
in the related Prospectus Supplement, the Trustee will make payments of
principal of and interest on the Bonds of a Series that are issued in
certificated form (i) by checks mailed to registered Bondholders at their
addresses appearing on the books and records of the Issuer or (ii) by wire
transfer of immediately available funds upon timely request to the Trustee in
writing by any Bondholder of Bonds having an initial principal amount of at
least $1,000,000 or such other amount as may be specified in the related
Prospectus Supplement; except that the final payments in retirement of each
Class of Bonds of a Series issued in certificated form will be made only upon
presentation and surrender of such Bonds at the office or agency of the Issuer
maintained for that purpose. The Trustee will make such payments with respect to
Bonds in book-entry form as set forth below.
Book-Entry Procedures
The Prospectus Supplement for a Series may specify that certain Classes of
the Bonds will initially be issued in book-entry form ("Book-Entry Bonds") in
the authorized denominations specified therein. Each such Class of Bonds will be
represented by one or more certificates registered in the name of the nominee of
the depository, which is expected to be The Depository Trust Company ("DTC" and,
together with any successor or other depository selected by the Issuer, the
"Depository"). The Depository or its nominee will be registered as the record
holder of the Bonds in the Bond Register. No person acquiring a Book-Entry Bond
(a "beneficial owner") will be entitled to receive a certificate representing
such Bond.
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The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains such beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of the
Depository (either directly or through one or more Financial Intermediaries).
Therefore, the beneficial owner must rely on the foregoing procedures to
evidence its beneficial ownership of a Book-Entry Bond, and beneficial ownership
of a Book-Entry Bond may only be transferred by compliance with the procedures
of such Financial Intermediaries and Depository participants.
DTC, which is a New York-chartered limited-purpose trust company, performs
services for its participants, some of whom (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 Bonds, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Bonds will be subject to the rules, regulations and
procedures governing the Depository and Depository participants as in effect
from time to time.
Payment of principal of and interest on the Book-Entry Bonds will be made
on each Payment Date to the Depository. The Depository will be responsible for
crediting the amount of such distributions to the accounts of the applicable
Depository participants in accordance with the Depository's normal procedures.
Each Depository participant will be responsible for disbursing such payments to
the beneficial owners of the Book-Entry Bonds 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 Bonds that it represents. As a result of the foregoing
procedures, beneficial owners of the Book-Entry Bonds may experience some delay
in their receipt of payments.
Because transactions in Book-Entry Bonds can be effected only through the
Depository, participating organizations, indirect participants and certain
banks, the ability of a beneficial owner of a Book-Entry Bond to pledge such
Bond to persons or entities that do not participate in the Depository, or
otherwise to take actions in respect of such Bond, may be limited due to the
lack of a physical certificate representing such Bond. Issuance of Book-Entry
Bonds may reduce the liquidity of such Bonds in the secondary trading market
because investors may be unwilling to purchase Book-Entry Bonds for which they
cannot obtain physical certificates.
The Book-Entry Bonds will be issued in fully-registered, certificated form
to beneficial owners of Book-Entry Bonds or their nominees, rather than to the
Depository or its nominee, only if (i) the Issuer advises the Trustee in writing
that the Depository is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Book-Entry Bonds and the
Issuer is unable to locate a qualified successor within 30 days or (ii) the
Issuer, at its option, elects to terminate the book-entry system through the
Depository. Upon the occurrence of either event described in the preceding
sentence, the Trustee is required to notify the Depository, which in turn will
notify all beneficial owners of Book-Entry Bonds through Depository
participants, of the availability of certificated Bonds. Upon surrender by the
Depository of the certificates representing the Book-Entry Bonds and receipt of
instructions for re-registration, the Trustee will reissue the Book-Entry Bonds
as certificated Bonds to the beneficial owners of Book-Entry Bonds.
Neither the Issuer, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Bonds held by the
Depository, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Payments of Principal and Interest
To the extent specified in the related Prospectus Supplement, payments on
the Mortgage Collateral securing a Series, including prepayments, together with
withdrawals from various debt service and reserve funds, will be available to
pay principal of and interest on the Bonds of a Series.
On each Payment Date for a Series, principal will be paid on the Bonds in
an amount equal to the Principal Distribution Amount or such other amount as may
be specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Principal Distribution Amount on any
Payment Date will equal the amount by which (i) the aggregate Collateral Value
of the Mortgage Collateral securing the Series as of the preceding Payment Date
(or, with respect to the first Payment Date, as of the Cut-off Date for such
Series) exceeds (ii) the aggregate Collateral Value of the Mortgage Collateral
securing the Series as of the current Payment Date. Unless otherwise specified
in the related Prospectus Supplement, the Collateral Value of any Mortgage
Collateral securing a Series will generally equal (i) the Scheduled Principal
Balance of such Mortgage Collateral or (ii) as specified in the related
Prospectus Supplement, the Scheduled Principal
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Balance of such Mortgage Collateral multiplied by a fraction, the numerator of
which is the Net Rate of the Mortgage Collateral and the denominator of which is
the Collateral Value Discount Rate (the "Interest Method").
The Prospectus Supplement will specify (i) the order in which payments of
principal (including prepayments) on the Mortgage Collateral will be applied to
pay principal of different Classes of Bonds of a Series and (ii) the percentage
interest in payments of principal (including prepayments) on the Mortgage
Collateral or pools of Mortgage Collateral for each Class of Bonds within a
Series if such payments are unequally allocated among the Classes of Bonds
within a Series. Unless otherwise specified in the related Prospectus
Supplement, all payments of principal of a particular Class of Bonds will be
applied on a pro rata basis.
The Stated Maturity Date for the Bonds of each Class will be the date by
which all Bonds of the Class are scheduled to be fully paid. The Stated Maturity
Date of a Class of Bonds may be determined by reference to the maturity date of
the Mortgage Collateral pledged to a Series with the latest stated final Due
Date or on the basis of the assumptions set forth in the related Prospectus
Supplement. All or a portion of the payments on the Mortgage Collateral securing
a Series will be used to amortize Bonds of the Series, as described in the
related Prospectus Supplement. It is expected that each Class of Bonds will be
fully paid in advance of its Stated Maturity Date from payments, including
prepayments, on the Mortgage Collateral. The rate of principal payments on the
Mortgage Collateral securing a Series will depend on the characteristics of the
Mortgage Collateral, as well as on the level of interest rates prevailing from
time to time and other economic factors. No assurance can be given as to the
actual prepayment experience of the Mortgage Collateral. See "Maturity and
Prepayment Considerations" and "Yield Considerations."
Each Class of Bonds will bear interest from the date and at the rate per
annum (the "Class Interest Rate") specified, or determined as specified, in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, interest will be computed on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest on a Class of Bonds consisting
of Current Interest Bonds will be payable on the Payment Dates specified in the
related Prospectus Supplement. Each such payment of interest will include all
interest either accrued to the Accounting Date immediately preceding the Payment
Date on which it is made or to another date specified in such Prospectus
Supplement. Unless interest is accrued to the Payment Date, the effective yield
to the Bondholder will be reduced to a level below the yield that would apply if
interest were paid to the respective Payment Dates. If specified in the related
Prospectus Supplement, any Class of Bonds may bear interest at a variable rate.
For any variable rate Class of Bonds, the related Prospectus Supplement will set
forth the manner for determining the variable interest rate and the interest
rate change interval. The variable interest rate for a Class of Bonds will not
exceed a maximum rate specified in the related Prospectus Supplement, and the
payments due on the Mortgage Collateral securing the related Series or Class of
Bonds will be in amounts (taking into account reserve and other funds and any
redemption rights and obligations) determined to be adequate to pay interest on
such Class of Bonds at the specified maximum interest rate.
If specified in the related Prospectus Supplement, a Class of Bonds may be
a Principal-Only Class comprised solely of Principal-Only Bonds, which will not
bear interest. If specified in the related Prospectus Supplement, a Class of
Bonds may be an Accretion Class comprised solely of Accretion Bonds on which
interest will accrue on the Compound Value of such Class but not be paid until
each Class of Bonds of such Series with an earlier Stated Maturity Date, if any,
has been paid in full, or as otherwise specified in the related Prospectus
Supplement ("Deferred Interest"). Deferred Interest will be added to the
principal of each Class of Accretion Bonds on each Accounting Date until all
other Classes of Bonds having an earlier priority of payment are paid in full,
and, thereafter, interest will be paid on the Class of Accretion Bonds on their
unpaid Compound Value. The Compound Value of a Class of Accretion Bonds will
equal the original principal amount of such Class of Bonds plus accrued and
unpaid interest through the Accounting Date preceding the determination date,
less any principal payments made on such Class of Bonds.
Unless otherwise specified in the related Prospectus Supplement, payments
on the Collateral pledged to a particular Series and not used to pay principal
or interest on the Bonds will be treated as Surplus. To the extent specified in
the related Prospectus Supplement for a Series, all or a portion of the Surplus
on any Payment Date may be applied to cover Losses or interest shortfalls
associated with a Series or any Series sold pursuant to this Prospectus or such
Surplus may be distributed to the Issuer. Any Surplus distributed to the Issuer
will not be available for payment of principal or interest on the Bonds.
Redemption
To the extent provided in the related Prospectus Supplement, the Bonds of
any Class may be subject to redemption at the option of the Issuer prior to
their Stated Maturity Date. Notice of such redemption must be given by the
Issuer or by the Trustee as provided in the related Prospectus Supplement. The
redemption price for any Bond (or portion thereof) so
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redeemed will be the percentage of the unpaid principal amount of such Bonds
specified in the related Prospectus Supplement, together with accrued interest
thereon to the date specified in the related Prospectus Supplement, or such
other price as may be specified in the related Prospectus Supplement.
MATURITY AND PREPAYMENT CONSIDERATIONS
The actual maturity date and average life of a Class of Bonds will be
determined by, among other things, (i) the prepayment experience on the Mortgage
Collateral, (ii) the frequency and scope of any forbearance or modification
relating to defaulted Mortgage Loans and (iii) the optional redemption
provisions of a Series of Bonds.
The rate of principal payments on Mortgage Loans will be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose payments resulting from
refinancings, liquidations due to defaults, casualties and condemnations). No
assurance can be given as to the rate of principal payments or prepayments on
the Mortgage Loans. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans and the Mortgage
Loans may be voluntarily prepaid in accordance with their terms, such Mortgage
Loans would be likely to be subject to a higher rate of principal prepayments
than if prevailing rates remain at or above the rates borne by such Mortgage
Loans.
The Servicer, with the approval of the Master Servicer in most cases, is
authorized pursuant to the Servicing Agreement to modify the payment terms of a
defaulted Mortgage Loan. If the Master Servicer appoints a Special Servicer, the
Special Servicer would be authorized to make such modifications or
substitutions. Any such modification or substitution would likely provide for a
slower principal amortization schedule than under the original terms of the
Mortgage Loan (including an extension of the final Due Date) and therefore would
have the opposite effect on the average life of a Class of Bonds that a
prepayment of a Mortgage Loan would have. To the extent one or more of such
Mortgage Loans is in default on its revised final Due Date and the respective
Servicer is unable to liquidate timely the defaulted Mortgage Loan, the Issuer
may fail to pay one or more Classes of the Bonds in full by their Stated
Maturity Date. See "Servicing of the Mortgage Loans -- Master Servicing
Agreement" and " -- Special Servicing Agreement."
The Prospectus Supplement for a Series of Bonds may contain a table setting
forth percentages of the original principal amount of each Class of Bonds of
such Series anticipated to be outstanding after each of the dates shown in the
table. It is unlikely that the prepayment experience of the Mortgage Loans
pledged as Collateral for any Series will conform to any of the percentages of
the prepayment assumption model described in any table set forth in the related
Prospectus Supplement.
YIELD CONSIDERATIONS
Payments of interest on the Bonds generally will include interest accrued
through the Accounting Date for the applicable Payment Date. Because payments to
the Bondholders generally will not be made until the Payment Date following the
Accounting Date, the effective yield to the Bondholders of the Bonds will be
lower than the yield otherwise produced by the applicable Class Interest Rate
and purchase price for the Bond.
The yield to maturity of any Bond will be affected by the rate and timing
of payment of principal of the Mortgage Loans and, to a lesser extent, the
frequency and scope of any modifications or substitutions of the Mortgage Loans.
If the purchaser of a Bond offered at a discount from its Parity Price
calculates the anticipated yield to maturity of such Bond based on an assumed
rate of payment of principal that is faster than that actually received on the
Mortgage Loans, the actual yield to maturity will be lower than that so
calculated. If the purchaser of a Bond offered at a premium over its Parity
Price calculates the anticipated yield to maturity of such Bond based on an
assumed rate of payment of principal that is slower than that actually received
on the Mortgage Loans, the actual yield to maturity will be lower than that so
calculated.
The timing of changes in the rate of payment of principal on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. In general, the earlier a payment of principal on the
Mortgage Loans, the greater will be the effect on the investor's yield to
maturity. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Bonds would not be
fully offset by a subsequent commensurate reduction (or increase) in the rate of
principal payments at a later date. Because the rate of principal payments
(including prepayments) on the Mortgage Loans may significantly affect the
weighted average life and other characteristics of any Class of Bonds,
prospective investors are urged to consider their own estimates as to the
anticipated rate of future payments of principal on the Mortgage Loans and the
suitability of the Class of Bonds to their
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investment objectives. For factors affecting principal payments on the Mortgage
Loans, including the impact of modifications and substitutions of Mortgage
Loans, see "Maturity and Prepayment Considerations" above.
Investors should consider the risk that rapid rates of prepayment on the
related Mortgage Loans, and therefore of principal payments on the Bonds, may
coincide with periods of low prevailing interest rates. During such periods, the
effective interest rates on securities in which an investor may choose to
reinvest amounts received as principal payments on such investor's Bond may be
lower than the applicable Class Interest Rate. Conversely, slow rates of
prepayments on the Mortgage Loans, and therefore of principal payments on the
various Classes of Bonds, may coincide with periods of high prevailing interest
rates. During such periods, the amount of principal payments available to an
investor for reinvestment at such high prevailing interest rates may be
relatively low.
SECURITY FOR THE BONDS
General
Unless otherwise specified in the related Prospectus Supplement, each
Series will be secured by the pledge to the Trustee of Collateral consisting of
(i) Mortgage Collateral, together with the payments thereon, having an aggregate
initial Collateral Value at least equal to 100% of the original principal amount
of the Bonds of such Series and any REO acquired in respect of such Mortgage
Collateral through Foreclosure, (ii) the Collateral Proceeds Account for such
Series, (iii) to the extent applicable, Reserve Funds and other funds and
accounts for such Series, (iv) to the extent applicable, the Issuer's rights to
Additional Mortgage Collateral, (v) all payments that may become due under
Insurance Policies, if any, (vi) the Issuer's rights under the Servicing
Agreements and the Master Servicing Agreement with respect to such Series and
(vii) to the extent applicable, a rate cap agreement with a third party.
Scheduled payments of principal of and interest on the Mortgage Collateral
securing a Series of Bonds (including payments from the Reserve Fund, if
applicable), net of applicable servicing fees, master servicing fees, trustee
fees, guarantee fees and insurance premiums, if any, for such Series, are
intended to be sufficient to make the required payments of interest on the Bonds
of such Series and to pay the entire principal amount of each Class of Bonds of
such Series not later than the Stated Maturity Date of such Class of Bonds.
Except as otherwise specified in the related Prospectus Supplement, the
Collateral (other than certain credit enhancement items) will secure only one
Series of Bonds.
The Mortgage Collateral
The Prospectus Supplement for a Series will describe in general the type of
Mortgage Collateral that will secure the Series. The Mortgage Collateral may be
composed of Mortgage Loans or certain other assets evidencing interests in loans
secured by residential property.
The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans securing a Series generally will be secured by first liens on
one-family or two- to four-family residential property. If specified in the
related Prospectus Supplement, the Mortgage Collateral securing a Series of
Bonds may include Mortgage Loans secured by second liens on residential
properties, REO Properties and Mortgage Loans that are past due or
non-performing. Because Mortgage Loans secured by second liens are subordinate
to the rights of the senior lienholders, the position of the related Trust
Estate, and in turn, the Bondholders, could be more adversely affected by a
reduction in value of the Mortgaged Premises than would the position of a senior
lienholder. In addition, in the event of a default by the related Borrower,
liquidation or other proceeds may be insufficient to satisfy the second lien
Mortgage Loan after satisfaction of the senior lien and the payment of any
liquidation expenses. In addition, if REO Properties or non-performing Mortgage
Loans are included in the Trust Estate for a Series of Bonds, the inclusion of
such Mortgage Collateral may increase the rate of defaults and prepayments on
the Mortgage Collateral and, in turn, affect the yield on the Bonds of the
related Series. Regular monthly installments of principal of and interest on
each Mortgage Loan ("Monthly Payments") paid by the Borrower will be collected
by the Servicer or Master Servicer and ultimately remitted to the Trustee.
Except as provided in the related Prospectus Supplement, each Mortgage Loan
securing a Series will have been originated by a savings and loan association,
savings bank, commercial bank, credit union, insurance company, or similar
institution that is supervised and examined by a federal or state authority or
by a mortgagee approved by HUD (each, an "Originator"). The Mortgaged Premises
securing such Mortgage Loans may consist of (i) detached homes, (ii) attached
homes (units having a common wall), (iii) units located in condominiums and (iv)
other types of homes or units set forth in
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the related Prospectus Supplement. The Mortgage Loans securing a Series of Bonds
may be secured by Mortgaged Premises that (i) are owner-occupied, (ii) are owned
by investors or (iii) serve as second residences or vacation homes.
The Mortgage Loans securing a Series may provide for the payment of
interest and full repayment of principal in level Monthly Payments with a fixed
rate of interest computed on the declining principal balance of the Mortgage
Loan ("Level Payment Mortgage Loans"); may provide for periodic adjustments to
the rate of interest on such Mortgage Loans ("ARM Loans") to equal the sum
(which may be rounded) of a fixed margin ("Gross Margin") and an index
("Index"), all as described in the related Prospectus Supplement; may consist of
Mortgage Loans for which funds have been provided to reduce the Borrower's
Monthly Payments during the early period of such Mortgage Loans ("Buy-Down
Mortgage Loans"); may include Mortgage Loans on which only interest is payable
until maturity as well as Mortgage Loans that provide for the amortization of
principal over a certain period, although all remaining principal is due at the
end of a shorter period ("Balloon Payment Mortgage Loans"); may include ARM
Loans that provide for negative amortization or accelerated amortization
resulting from delays in or limitations on the payment adjustments necessary to
amortize fully the outstanding principal balance of the loan at its then
applicable Note Rate over its remaining term; and may include such other types
of mortgage loans as are described in the related Prospectus Supplement. Balloon
Payment Mortgage Loans also may be ARM Loans. A Series may also be secured by
other Mortgage Collateral consisting of conventional mortgage pass-through
certificates or collateralized mortgage obligations as more fully described in
the related Prospectus Supplement. Such other Mortgage Collateral must be in
form and substance satisfactory to each Rating Agency rating that Series of
Bonds.
As further described in the applicable Prospectus Supplement, Balloon
Payment Mortgage Loans include Mortgage Loans that provide for amortization of
the principal amount over a certain period (for example, 30 years), although all
remaining principal is due at the end of a shorter period (for example, 15
years). The final balloon payment on a Balloon Payment Mortgage Loan will be
treated as a prepayment of that Mortgage Loan. The ability of a Borrower to make
the final "balloon" payment may be dependent upon the Borrower's ability to
refinance the Balloon Payment Mortgage Loan or sell the related Mortgaged
Premises for an amount equal to or greater than the unpaid principal balance of
the Mortgage Loan. Under certain circumstances (for example, in a rising
interest rate environment), a Borrower may be unable to secure refinancing for
such loan or to sell the related Mortgaged Premises. Accordingly, Balloon
Payment Mortgage Loans may be subject to a higher risk of delinquency, loss, and
foreclosure than certain other types of mortgage loans.
In addition, ARM Loans and Buy-Down Mortgage Loans may be underwritten on
the basis of an assessment that the Borrower will have the ability to make
payments in higher amounts in later years and, in the case of certain ARM Loans,
after relatively short periods of time. Accordingly, defaults on ARM Loans and
Buy-Down Mortgage Loans leading to foreclosure and the ultimate liquidation of
the related Mortgaged Premises may occur with greater frequency in the early
years of such loans, although little data is available with respect to the rate
of default on such loans. Increases in the required monthly payments on such
loans may result in a default rate that is higher than that for fixed rate
Mortgage Loans.
As specified in the related Prospectus Supplement, a Security Instrument
may contain a "due-on-sale" clause permitting acceleration of the maturity of
the related Mortgage Loan if the Borrower transfers its interest in the
Mortgaged Premises. Unless otherwise specified in the related Prospectus
Supplement, the Servicing Agreement will require the Servicers to enforce
"due-on-sale" clauses. See "Certain Legal Aspects of the Mortgage
Loans -- Due-on-Sale Provisions."
The Prospectus Supplement applicable to a Series of Bonds will include
among other things information, as of the applicable Cut-off Date, as to (i) the
aggregate principal balance of the Mortgage Loans, (ii) the range of remaining
terms to stated maturity or weighted average remaining term to stated maturity
of the Mortgage Loans, (iii) the current Scheduled Principal Balance of the
largest Mortgage Loan and the average outstanding Scheduled Principal Balance of
the Mortgage Loans, (iv) the weighted average Note Rate or range of Note Rates
borne by the Mortgage Loans, (v) the range of original loan-to-value ratios or
the weighted average loan-to-value ratio of the Mortgage Loans and (vi) the
geographic distribution of the Mortgaged Premises.
Second Liens
Certain of the Mortgage Loans may be secured by second liens, and the
related first liens ("First Liens") may not be included in the Mortgage Pool.
The primary risk to holders of Mortgage Loans secured by second liens is the
possibility that adequate funds will not be received in connection with a
Foreclosure of the related First Lien to satisfy fully both the First Lien and
the Mortgage Loan. In the event that a holder of the First Lien forecloses on a
Mortgaged Premises, the proceeds of the Foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
Foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and fourth
any other sums due and owing to the holder of the First Lien. The claims of the
holder of the First Lien will be
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satisfied in full out of proceeds of the Liquidation of the Mortgage Loan, if
such proceeds are sufficient, before the Trust Estate as holder of the second
lien receives any payments in respect of the Mortgage Loan. If the Servicer were
to foreclose on any Mortgage Loan, it would do so subject to any related First
Lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the Foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
First Lien or purchase the Mortgaged Premises subject to the First Lien. In the
event that such proceeds from a Foreclosure or similar sale of the related
Mortgaged Premises are insufficient to satisfy both mortgage loans in the
aggregate, the Trust Estate, as the holder of the second lien, and, accordingly,
holders of the Bonds bear (i) the risk of delay in distributions while a
deficiency judgment against the Borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions. In addition, a second mortgagee
may not foreclose on the property securing a second mortgage unless it
forecloses subject to the first mortgage.
Even assuming that the Mortgaged Premises provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
Liquidation of defaulted Mortgage Loans, and corresponding delays in the receipt
of related proceeds by Bondholders could occur. An action to foreclose on a
Mortgaged Premises securing a Mortgage Loan is regulated by state statutes and
rules and is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed, sometimes requiring several years to
complete. Furthermore, in some states an action to obtain a deficiency judgment
is not permitted following a nonjudicial sale of a Mortgaged Premises. In the
event of a default by a Borrower, these restrictions, among other things, may
impede the ability of the Servicer to foreclose on or sell the Mortgaged
Premises or to obtain Liquidation Proceeds sufficient to repay all amounts due
on the related Mortgage Loan. In addition, the Servicer generally will be
entitled to deduct from related Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Mortgage Loans and
not yet repaid, including payments to senior lienholders, legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted second mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a Servicer took the same steps in realizing
upon a defaulted second mortgage loan having a small remaining principal balance
as it would in the case of a defaulted second mortgage loan having a large
remaining principal balance, the amount realized after expenses of Liquidation
would be smaller as a percentage of the outstanding principal balance of the
defaulted second mortgage loan having a small remaining principal balance than
would be the case with the defaulted second mortgage loan having a large
remaining principal balance. Because the average outstanding principal balance
of the second lien Mortgage Loans generally are smaller relative to the size of
the average outstanding principal balance of the loans in a typical pool of
conventional first priority mortgage loans, Liquidation Proceeds may also be
smaller as a percentage of the principal balance of a Mortgage Loan than would
be the case in a typical pool of conventional first priority mortgage loans.
Repurchase of Converted Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by ARM Loans the Note Rate of which is convertible from an
adjustable rate to a fixed rate at the option of the Borrower upon the
fulfillment of certain conditions. Except as otherwise specified in the related
Prospectus Supplement, the Participant will be obligated to repurchase any such
ARM Loan as to which the conversion option has been exercised at a purchase
price equal to the Unpaid Principal Balance of such Mortgage Loan, plus 30 days
of interest thereon at the applicable Note Rate. The purchase price will be
treated as a prepayment of the related Mortgage Loan. In the event of a default
on the obligation of the Participant to purchase any Converted Mortgage Loan,
the Master Servicer will attempt to sell the Converted Mortgage Loan. Until a
Converted Mortgage Loan is purchased or sold as described above, it will remain
in the Trust Estate with a fixed Note Rate. An obligation of the Participant to
repurchase Converted Mortgage Loans generally will not be supported by cash,
letters of credit, third party guarantees or other similar arrangements.
Substitution of Mortgage Collateral
Unless otherwise provided in the Prospectus Supplement and subject to the
limitations set forth below, the Issuer at any time may deliver to the Trustee
other items of Mortgage Collateral in substitution for any one or more items of
Mortgage Collateral pledged as security for such Series. The Issuer will have
the option to pledge to the Trustee, in substitution for a defaulted Mortgage
Loan or REO, a new mortgage loan (a "Substitute Mortgage Loan"), to the extent
that the Master Servicer has determined, in its reasonable business judgment,
that the present value of any potential Loss on such defaulted Mortgage Loan or
REO will be reduced through the substitution of a Substitute Mortgage Loan for
such defaulted Mortgage Loan or REO, and provided that such Substitute Mortgage
Loan (i) is secured by the Mortgaged Premises that secures the
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defaulted Mortgage Loan or by such REO, (ii) has either (A) an initial principal
balance equal to or less than the Scheduled Principal Balance of the defaulted
Mortgage Loan for which it is substituted or (B) a loan-to-value ratio of not
more than 100%, based upon a current appraisal of the Mortgaged Premises, and
(iii) has a maturity date that is not later than the Stated Maturity Date of the
related Series of Bonds. The amount, if any, by which the Collateral Value of
the defaulted Mortgage Loan or REO exceeds the Collateral Value of the
Substitute Mortgage Loan would constitute a Loss on such Mortgage Loan or REO.
Upon the pledge of a Substitute Mortgage Loan, the Trustee will release the
defaulted Mortgage Loan or the REO from the lien of the Indenture.
In addition, unless otherwise provided in the Prospectus Supplement, the
Issuer may pledge to the Trustee items of Mortgage Collateral in substitution
for an item of Mortgage Collateral initially pledged ("Original Mortgage
Collateral") as security for a Series of Bonds in the event of a breach of a
representation or warranty by the seller of such item of Original Mortgage
Collateral or in the case of defective or incomplete documentation with respect
to such item of Original Mortgage Collateral. Any such substitute Mortgage
Collateral will have an interest rate within one percentage point in excess of
that with respect to the item of Original Mortgage Collateral for which it is
substituted, a principal balance or value at least equal to the principal
balance or value of the item of Original Mortgage Collateral for which it was
substituted and a maturity within 180 days of the item of Original Mortgage
Collateral for which it is substituted. As more particularly set forth in the
Indenture, substitute Mortgage Collateral must have characteristics
substantially similar to those of the Original Mortgage Collateral for which
they are substituted.
Pledge of Additional Collateral and Issuance of Additional Bonds
To the extent specified in the Prospectus Supplement for a Series, the
Issuer may pledge additional mortgage loans or mortgage certificates
("Additional Mortgage Collateral") to the Trustee and issue additional Bonds
("Additional Bonds") of that Series within one year of the date of initial
issuance of the Bonds of such Series. Such Additional Bonds may represent
additional Bonds of one or more outstanding Classes of Bonds or may represent
one or more new Classes of Bonds of such Series. Any such Additional Bonds will
be issued pursuant to a Prospectus Supplement, which will describe the
characteristics of the Additional Mortgage Collateral and the material terms of
the Additional Bonds. Any pledge of Additional Mortgage Collateral and issuance
of Additional Bonds will be subject to satisfaction of the following conditions:
(a) each Rating Agency rating any outstanding Class of Bonds of the related
Series will confirm that the pledge of Additional Mortgage Collateral and other
additional Collateral, if any, and the corresponding issuance of Additional
Bonds will not result in the downgrading of the credit rating of any outstanding
Class of Bonds of such Series, (b) the pledge of Additional Mortgage Collateral
will not affect the Class Interest Rate, Stated Maturity Date or Payment Dates
of any outstanding Bonds of such Series, (c) the weighted average life of each
outstanding Class of Bonds calculated at the prepayment rate assumed for the
pricing of the initial issuance of such Class of Bonds will not vary by more
than (plus/minus) 0.05 years in the weighted average life disclosed in the
Prospectus Supplement for the initial issuance of the Bonds of such Series, and
(d) the characteristics of the Additional Mortgage Collateral and the Mortgage
Collateral as augmented by the Additional Mortgage Collateral will conform to
the parameters for Additional Mortgage Collateral disclosed in the Prospectus
Supplement for the initial issuance of Bonds of such Series. However, there can
be no assurance that any pledge of Additional Mortgage Collateral and issuance
of Additional Bonds would not affect the timing or amount of payments received
by Holders of the outstanding Bonds of that Series. Provided that the conditions
described in the Prospectus Supplement for the outstanding Bonds are satisfied,
the pledge of Additional Mortgage Collateral and the issuance of Additional
Bonds will not be subject to the prior consent of the Holders of the outstanding
Bonds of such Series.
Master Servicer Custodial Account
Unless otherwise specified in the Prospectus Supplement for a Series, each
Servicing Agreement will require an amount representing the Servicer Remittance
to be remitted by each Servicer on the Remittance Date to the Master Servicer
Custodial Account established by the Master Servicer at a depository institution
whose senior debt obligations are then rated in the security rating category
required to support the then applicable rating assigned to that Series. See
"Servicing of the Mortgage Loans -- Payments on Mortgage Loans" herein.
Collateral Proceeds Account
The Collateral Proceeds Account will be an account established by the
Trustee for the benefit of Bondholders. The Collateral Proceeds Account will be
an account or accounts that are either (i) maintained with a depository
institution whose senior debt obligations are then rated in the security rating
category required to support the then applicable rating assigned to that Series,
or (ii) trust accounts.
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On or before each Master Servicer Remittance Date, the Master Servicer will
transfer from the Master Servicer Custodial Account the proceeds of the Mortgage
Collateral that are distributable to the Bondholders to the Collateral Proceeds
Account. The proceeds of the Mortgage Loans deposited into the Collateral
Proceeds Account generally will consist of the sum of (i) the aggregate Servicer
Remittance relating to the Mortgage Loans securing a Series, less the master
servicing fee, and (ii) any Advances to be made by the Master Servicer or
Special Servicer, if any. On each Payment Date, the Trustee will withdraw from
the Collateral Proceeds Account and pay to the Bondholders, to the extent of the
available funds on deposit therein, all amounts required to be paid on the Bonds
of such Series on such date. The interposition of the Master Servicer between
the Servicers and the Trustee provides for the accumulation of collections from
the various Servicers outside of a trust account, thereby avoiding the
likelihood that multiple Servicers will make demands on the Trustee for the
payment of servicing fees or the reimbursement of Advances from amounts on
deposit in the Collateral Proceeds Account. The master servicing fee is payable
to the Master Servicer in part due to its performance as an intermediary between
the various Servicers and the Trustee.
Funds in the Collateral Proceeds Account may be invested and, if invested,
shall be invested in the name of the Trustee (in its capacity as such) in
Eligible Investments that mature not later than the Business Day preceding each
Payment Date (except that, if such Eligible Investment is an obligation of the
Trustee, then such Eligible Investment may mature not later than such Payment
Date) and will not be sold or disposed of prior to its maturity. All income
realized from any such investments will accrue to the benefit of the Master
Servicer as additional compensation and may be withdrawn by the Master Servicer
from time to time. However, no withdrawals from the Collateral Proceeds Account
will be permitted if such withdrawals would cause a deficiency in amounts
payable to Bondholders.
Reserve Fund or Accounts
If stated in the Prospectus Supplement for a Series, the Issuer will
deposit cash, certificates of deposit or letters of credit in one or more
Reserve Funds or accounts, which may be used by the Trustee to make any required
payments of principal or interest on the Bonds of the Series to the extent that
funds are not otherwise available. The Series Supplement may limit the pledge of
any Reserve Fund to certain Classes of Bonds. The Issuer may have certain rights
on any Payment Date to cause the Trustee to make withdrawals from the Reserve
Fund for a Series and to pay such amounts in accordance with the instructions of
the Issuer as specified in the related Prospectus Supplement to the extent that
such funds are no longer required to be maintained for the Bondholders.
Other Funds or Accounts
The Bonds of a Series may also be secured by certain other funds and
accounts for the purpose of, among other things, (i) making required payments of
principal or interest on the Bonds of the Series to the extent funds are not
otherwise available, (ii) paying certain administrative, insurance and similar
costs and (iii) accumulating funds that are credited to the Issuer's account
pending their distribution to the Issuer. To the extent such funds and accounts
are material, they will be described in the related Prospectus Supplement.
Investment of Funds
Funds deposited in or remitted to the Collateral Proceeds Account, any
Reserve Fund and any other funds and accounts held under the Indenture for a
Series will be invested by the Trustee, and amounts in the Master Servicer
Custodial Account will be invested by the Master Servicer, in certain eligible
investments ("Eligible Investments") as specified in the Indenture or Indenture
Supplement for the related Series.
Mortgage Insurance on the Mortgage Loans
Mortgage Loans securing a Series generally will be covered by special
hazard insurance, title insurance, and, if so specified in the related
Prospectus Supplement, primary mortgage insurance policies (each, a "Primary
Mortgage Insurance Policy," and together with any special hazard insurance
policies and title insurance policies, the "Insurance Policies"). To the extent
provided in the related Prospectus Supplement, in lieu of certain Insurance
Policies, Additional Mortgage Collateral (or instruments secured by additional
Mortgage Loans) may be pledged to the Trustee to secure the timely payment of
principal of and interest on the Mortgage Loans and/or the Bonds.
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Pool Insurance
The Issuer may obtain a Pool Insurance Policy to cover losses (subject to
the limitations described below) incurred by reason of default by the Borrowers
of the Mortgage Loans securing such Series that are not covered by any Primary
Mortgage Insurance Policy or exceed the coverage provided any applicable Primary
Mortgage Insurance Policy. The terms of the Master Servicing Agreement with
respect to a Series will require the Master Servicer to maintain the Pool
Insurance Policies, if any, for such Series and to present or cause the
Servicers to present claims thereunder to the related insurer on behalf of the
Issuer, the Trustee and the holders of Bonds of such Series.
The amount of the Pool Insurance Policy (or Policies) for a Series, if any,
will be specified in the related Prospectus Supplement. A Pool Insurance Policy
for a Series, however, will not be a blanket policy against loss, because claims
thereunder may only be made for particular defaulted Mortgage Loans and only
upon satisfaction of certain conditions precedent as described below.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy for a Series will provide that as a condition precedent to the
payment of any claim the insured will be required (a) to advance hazard
insurance premiums on the Mortgaged Premises securing the defaulted Mortgage
Loan; (b) to advance, as necessary and approved in advance by the related
insurer, (1) real estate property taxes, (2) all expenses required to preserve
and repair the Mortgaged Premises, to protect the Mortgaged Premises from waste,
so that the Mortgaged Premises is in at least as good a condition as existed on
the date upon which coverage under the Pool Insurance Policy with respect to
such Mortgaged Premises first became effective, ordinary wear and tear excepted,
(3) property sales expenses, (4) any outstanding liens on the Mortgaged
Premises, and (5) foreclosure costs including court costs and reasonable
attorneys' fees; and (c) if there has been physical loss or damage to the
Mortgaged Premises, to restore the Mortgaged Premises to its condition (ordinary
wear and tear excepted) as of the issue date of the Pool Insurance Policy. It
also will be a condition precedent to the payment of any claim under the Pool
Insurance Policy that the insured maintain a Primary Mortgage Insurance Policy
that is acceptable to the Pool Insurer on all Mortgage Loans that have
loan-to-value ratios at the time of origination in excess of 80%. Assuming
satisfaction of these conditions, the Pool Insurer will pay to the insured the
amount of the loss which will be: (a) the amount of the unpaid principal balance
of the Mortgage Loan immediately prior to the Approved Sale of the Mortgaged
Premises; (b) the amount of the accumulated unpaid interest on such Mortgage
Loan to the date of claim settlement at the contractual rate of interest; and
(c) reimbursable amounts advanced by the insured as described above, less
certain payments (including the proceeds of any prior Approved Sale and any
Primary Insurance Policies). The Pool Insurance Policy may not reimburse the
insured for attorneys' fees on a foreclosed Mortgage Loan in excess of 3% of the
unpaid balance of principal and interest of that Mortgage Loan. As a result,
legal expenses in excess of such reimbursement limitation may be charged as a
loss on the related Bonds. An Approved Sale is (1) a sale of the Mortgaged
Premises acquired by the insured because of a default by the Borrower to which
sale the Pool Insurer has given prior approval, (2) a pre-foreclosure,
foreclosure or trustee's sale of the Mortgaged Premises at a price exceeding the
minimum amount specified by the Pool Insurer, (3) the acquisition of the
Mortgaged Premises under the Primary Mortgage Insurance Policy by the related
Mortgage Insurer, or (4) the acquisition of the Mortgaged Premises by the Pool
Insurer. If the Pool Insurer elects to take title to the Mortgaged Premises, the
insured must, as a condition precedent to the payment of any such Loss, provide
the Pool Insurer with good and merchantable title to the Mortgaged Premises. If
any property securing a defaulted Mortgage Loan is damaged and the proceeds, if
any, from the related Standard Hazard Insurance Policy or the applicable Special
Hazard Insurance Policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under the Pool Insurance Policy, the
Servicer or the Master Servicer of the related Mortgage Loan will not be
required to expend its own funds to restore the damaged Mortgaged Premises
unless it determines and the Master Servicer agrees (A) that such restoration
will increase the proceeds to the Trust Estate on liquidation of the Mortgage
Loan after reimbursement of the Servicer or the Master Servicer for its expenses
and (B) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
The Pool Insurance Policies will generally not insure (and many Primary
Insurance Policies 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 Borrower or the
Originator, (ii) failure to construct Mortgaged Premises in accordance with
plans and specifications, and (iii) a claim in respect of a defaulted Mortgage
Loan occurring when the Servicer of such Mortgage Loan, at the time of default
or thereafter, was not approved by the Mortgage Insurer. A failure of coverage
atributabe to one of the foregoing events might result in a breach of the
Participant's representations and warranties described under "Origination of
Mortgage Loans -- Representations and Warranties" and in such event, subject to
the limitations described therein, might give rise to an obligation on the part
of the Participant to purchase the defaulted Mortgage Loan if the breach cannot
be cured. See "Origination of Mortgage Loans -- Representations and Warranties."
In addition, if a terminated Servicer has failed to comply with its obligation
under the Servicing Agreement to purchase a Mortgage Loan
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upon which coverage under a Pool Insurance Policy has been denied on the grounds
of fraud, dishonesty or misrepresentation (or if the Servicer has no such
obligation), the Participant may be obligated to purchase the Mortgage Loan. See
"Servicing of the Mortgage Loans -- Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted Mortgage Loans."
The original amount of coverage under any Pool Insurance Policy securing a
Series will be reduced over the life of the Bonds of such Series by the
aggregate dollar amount of claims paid less the aggregate of the net amount
realized by the Pool Insurer upon disposition of all foreclosed Mortgaged
Premises covered thereby. The amount of claims paid includes certain expenses
incurred by the Servicer or the Master Servicer of the defaulted Mortgage Loan,
as well as accrued interest on delinquent Mortgage Loans to the date of payment
of the claim. See "Certain Legal Aspects of Mortgage Loans -- Foreclosure." The
net amounts realized by the Pool Insurer will depend primarily on the market
value of the Mortgaged Premises securing the defaulted Mortgage Loan. The market
value of the Mortgaged Premises will be determined by a variety of economic,
geographic, social, environmental and other factors and may be affected by
matters that were unknown and could not reasonably be anticipated at the time
the original loan was made.
If aggregate net claims paid under a Pool Insurance Policy reach the
original policy limit, coverage under the Pool Insurance Policy will lapse and
any further losses may affect adversely distributions to holders of Bonds of
such Series. In addition, unless the Servicer or Master Servicer could determine
that an advance in respect of a delinquent Mortgage Loan would be recoverable to
it from the proceeds of the liquidation of such Mortgage Loan or otherwise,
neither the Servicer nor the Master Servicer would be obligated to make an
advance respecting any such delinquency since the advance would not be
ultimately recoverable to it from either the Pool Insurance Policy or from any
other related source. See "Servicing of the Mortgage Loans -- Advances." The
original amount of coverage under the Pool Insurance Policy securing a Series
may also be reduced or cancelled to the extent each Rating Agency rating the
Series confirms that such reduction will not result in the lowering of the
rating of the Bonds of such Series.
Unless otherwise specified in the related Prospectus Supplement, a Pool
Insurance Policy may insure against losses on the Mortgage Loans securing other
Series of Securities or that secure other mortgage-backed securities or
collateralized mortgage obligations issued by the Issuer or one of its
affiliates, provided, however, that, at the time of the extension, such
extension of coverage (and corresponding assignment of the Pool Insurance
Policy) to any other Series or such other Bonds does not result in the lowering
by any Rating Agency rating a Series offered hereby of the rating of any Bonds
of such Series.
Credit Enhancement for the Mortgage Loans
Credit enhancements acceptable to each Rating Agency may be used to provide
for coverage of certain risks of default or losses on the Mortgage Loans. Any
such credit enhancement will be described in detail in the related Prospectus
Supplement. Such credit enhancements may be limited to one or more Classes of
Bonds and may include, but will not necessarily be limited to, any of the
following:
(i) Subordination in right of payment of one or more Classes to the
right of other Classes to receive payments, subject to such conditions and
limitations as may be described in the related Prospectus Supplement;
(ii) Pledge of additional collateral and any cash flow thereon by any
institution acceptable to each Rating Agency, which the Trustee may sell or
draw upon in the event amounts received as payments on the Mortgage Loans
are insufficient to make required payments on one or more Classes of Bonds.
Such pledge of additional collateral may be limited in amount and subject
to conditions, as described in the related Prospectus Supplement;
(iii) Limited guarantees against losses arising from defaults on the
Mortgage Loans, or against failure to make payments of principal of and
interest on the Bonds. Such guarantees may be limited to a specified
maximum dollar amount or may be subject to limitations having similar
effect;
(iv) Letters of credit issued by banks acceptable to each Rating
Agency, under which the Trustee may draw funds in the event amounts
received as payments on the Mortgage Loans are insufficient to make
required payments on a Class or Classes of Bonds. Such letters of credit
may be limited in amount and subject to conditions, as described in the
related Prospectus Supplement;
(v) Reserve Funds created by the deposit of assets at the time of the
issuance of the Bonds or by the accumulation of funds generated by the
Mortgage Loans, upon which the Trustee may draw in the event amounts
received as payments on the Mortgage Loans are insufficient to make
required payments on a Class or Classes of Bonds or by a combination of the
foregoing. The amounts held in such Reserve Funds will be invested in
Eligible Investments;
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(vi) Insurance policies issued by insurers acceptable to each Rating
Agency that provide for payment to the Trustee or the Servicer upon the
occurrence of certain casualty events at the Mortgaged Premises. Such
insurance policies may be limited in amount and subject to conditions, as
described above; and
(vii) Combinations of the foregoing.
Except as otherwise provided in the related Prospectus Supplement, each
Series of Bonds will be secured by the Mortgage Loans for that Series and
related property. The related Prospectus Supplement may specify that payments
received on such Mortgage Loans be paid (i) so as to prioritize, with respect to
right of payment, certain Classes of Bonds within a Series or (ii)
disproportionately among the various Classes of Bonds.
Unless otherwise specified in the related Prospectus Supplement, in the
event of delinquencies in payments of principal or interest on the Mortgage
Loans, the applicable Servicer and the Master Servicer (or the Special Servicer,
if any) will advance cash in the amounts described herein. Neither any Servicer,
the Master Servicer nor any Special Servicer will be obligated to make an
Advance that it (or in the case of the Servicer, the Master Servicer) reasonably
believes to be a Non-Recoverable Advance. See "Servicing of the Mortgage
Loans -- Advances."
There can be no assurance that real estate values will remain at present
levels in the areas in which the Mortgaged Premises will be located. If the real
estate market relating to Mortgage Loans in a particular pool should experience
an overall decline in property values, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. To the extent that such
delinquencies, foreclosures and losses are not covered by applicable credit
enhancements described in the related Prospectus Supplement, the Losses
resulting therefrom will be borne by Bondholders of the Series secured by such
pool as specified in the related Prospectus Supplement.
With respect to any Series as to which any Mortgage Loans have an
adjustable rate of interest, there may be a higher likelihood of defaults and
losses on the Mortgage Loans during periods of higher prevailing interest rates.
With respect to any Series as to which any Subordinated Class of Bonds will have
been issued, such losses, generally, first will be borne by the Issuer, to the
extent of any Surplus, and then by the Bondholders of any Subordinated Classes
of Bonds as a result and to the extent of the subordination in right of payment
of any Subordinated Classes of Bonds to any Senior Classes of Bonds, as
specified in the related Prospectus Supplement.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a Series of Bonds,
deficiencies in amounts otherwise payable on such Bonds or certain Classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more Classes of Bonds of the related Series, timely payments
of interest and/or full payments of principal on the basis of a schedule of
principal payments set forth in or determined in the manner specified in the
related Prospectus Supplement. A copy of any such instrument for a Series will
be filed with the Commission as an exhibit to a Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Bonds of the related
Series.
ORIGINATION OF THE MORTGAGE LOANS
General
Each Mortgage Loan included in a Mortgage Pool securing a Series of Bonds
will be originated by a savings and loan association, savings bank, commercial
bank, credit union, or similar institution that is supervised and examined by a
federal or state authority, or by a mortgagee approved by HUD. In originating a
Mortgage Loan, the loan originator (the "Originator") will follow either (a) its
own credit approval process, to the extent that such process conforms to
underwriting standards generally acceptable to FNMA or FHLMC, or (b) the
Participant's various credit, appraisal and underwriting standards and
guidelines. The Prospectus Supplement will disclose the percentage of Mortgage
Loans in a Mortgage Pool securing a Series of Bonds that are originated using
the Participant's underwriting guidelines, and those originated using the
Originator's stricter underwriting guidelines. As discussed further in the
related Prospectus Supplement, the Participant's underwriting guidelines are
less stringent than those of FNMA or FHLMC, primarily in that they generally
permit the Borrower to have a higher debt-to-income ratio and a larger number of
derogatory credit items than do the guidelines of FNMA or FHLMC. However, the
Participant's underwriting guidelines require that the property appraisals
conform to FNMA or FHLMC appraisal standards then in effect.
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Both sets of underwriting standards are applied in a manner intended to
comply with applicable federal and state laws and regulations. The purpose of
applying these standards is to evaluate each prospective Borrower's credit
standing and repayment ability and the value and adequacy of the related
Mortgaged Premises as collateral.
The mortgage loans originated under the Participant's underwriting
standards generally are based on loan application packages submitted by mortgage
brokerage companies for underwriting review, approval and funding by the
Participant or an affiliate of the Participant. Originators who apply their own,
stricter underwriting standards review a similar loan application package in
their decision whether to approve and fund the mortgage loans. In general, a
prospective Borrower is required to complete a detailed application designed to
provide pertinent credit information. The prospective Borrower generally is
required to provide a current list of assets as well as an authorization for a
credit report which summarizes the Borrower's credit history with merchants and
lenders as well as any suits, judgments or bankruptcies that are of public
record. The Borrower may also be required to authorize verification of deposits
at financial institutions where the Borrower has demand or savings accounts.
In determining the adequacy of the Mortgaged Premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser approved by FNMA, FHLMC, the Participant or an affiliate
of the Participant. The appraiser is required to inspect the property and verify
that it is in good repair and that construction, if new, has been completed. The
appraisal is based on the market value of comparable homes and, if considered
applicable by the appraiser, the estimated rental income of the property and a
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to FNMA or FHLMC appraisal
standards then in effect.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
Borrower has sufficient monthly income available (i) to meet the Borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the Mortgaged Premises (such as property tax and hazard insurance),
and (ii) to meet monthly housing expenses and other financial obligations and
monthly living expenses. The underwriting standards applied, particularly with
respect to the level of income and debt disclosure on the application and
verification, may be varied in appropriate cases where factors such as low
loan-to-value ratios or other favorable compensating factors exist.
A prospective Borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities (existing or prior). An employment
verification is obtained from an independent source (typically the prospective
Borrower's employer), which verification generally reports the length of
employment with that organization, the prospective Borrower's current salary and
whether it is expected that the prospective Borrower will continue such
employment in the future. If a prospective Borrower is self-employed, the
Borrower may be required to submit copies of signed tax returns. For other than
self-employed Borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program, greater emphasis is placed on the
value and adequacy of the Mortgaged Premises as collateral rather than on credit
underwriting, and certain credit underwriting documentation concerning income
and employment verification is therefore waived. Accordingly, the maximum
permitted loan-to-value ratios for loans originated under such program are
generally lower than those permitted for other similar loans originated pursuant
to the full documentation program.
Representations and Warranties
The Issuer generally will acquire Mortgage Loans from the Participant. The
Participant or an affiliate may act as a Servicer of Mortgage Loans securing the
Series or an unrelated entity may act as Servicer. The Participant will make
certain representations and warranties with respect to such Mortgage Loans in
the agreement by which the Participant transfers its interest in the Mortgage
Loans. Except as otherwise noted in the Prospectus Supplement for a Series, the
Participant will represent and warrant, among other things, as follows: (i) that
each Mortgage Loan has been originated in compliance with all applicable laws,
rules and regulations; (ii) that no Mortgage Loan is more than 60 days
delinquent as of the applicable Cut-off Date; (iii) that each Insurance Policy
is the valid and binding obligation of the Insurer; (iv) that each Security
Instrument constitutes a good and valid first or, if applicable, second lien on
the Mortgaged Premises; and (v) that the Borrower holds good and marketable
title to the Mortgaged Premises. Except as otherwise noted in the Prospectus
Supplement for a Series, the Participant is required to submit to the Trustee
with each Mortgage Loan a mortgagee title insurance policy, title insurance
binder, preliminary title report, or satisfactory evidence of title insurance.
If a preliminary title report is delivered initially, the Participant is
required to deliver a final title insurance policy or satisfactory evidence of
the existence of such a policy.
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In the event the Participant breaches a representation or warranty with
respect to a Mortgage Loan or if any principal document executed by the Borrower
relating to a Mortgage Loan is found to be defective in any material respect and
the breaching party cannot cure such breach of defect within the number of days
specified in the applicable agreement, the Trustee may require such breaching
party to purchase such Mortgage Loan upon deposit with the Trustee of funds
equal to the then Unpaid Principal Balance of such Mortgage Loan plus accrued
interest thereon at the Note Rate through the end of the month in which the
purchase occurs. In the event of a breach by the Participant of a representation
or warranty with respect to a Mortgage Loan or the delivery by the Participant
to the Trustee of a materially defective document with respect to a Mortgage
Loan, the Participant may under certain circumstances, in lieu of repurchasing
such Mortgage Loan, substitute a Mortgage Loan having characteristics
substantially similar to those of the defective Mortgage Loan. See "Security for
the Bonds -- Substitution of Mortgage Collateral." The Participant's obligation
to purchase a Mortgage Loan will not be guaranteed by the Issuer or any other
party, unless otherwise specified in the related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS
General
For each Series secured by Mortgage Loans, various Servicers, which may
include Resource or an affiliate, will provide certain customary servicing
functions with respect to the Mortgage Loans securing such Series pursuant to
servicing agreements ("Servicing Agreements"), which will be pledged to the
Trustee to secure the Bonds. The Servicers will be entitled to withhold their
servicing fees and certain other fees and charges from payments on such Mortgage
Loans serviced by them. If so specified in the related Prospectus Supplement, a
Special Servicer may be appointed. The related Prospectus Supplement will
describe the duties and obligations of the Special Servicer, if any. A Special
Servicer will be entitled to a special servicing fee.
Each Servicer of one- to four-family Mortgage Loans generally will be
approved or will utilize a Sub-Servicer that is approved by FNMA or FHLMC as a
servicer of mortgage loans and must be approved by the Master Servicer. In
determining whether to approve a Servicer, the Master Servicer will review the
credit of the Servicer and, if necessary for the approval of the Servicer, the
Sub-Servicer, including capitalization ratios, liquidity, profitability and
other similar items that indicate financial ability to perform its obligations.
In addition, the Master Servicer's mortgage servicing personnel will review the
Servicer's and, if necessary, the Sub-Servicer's servicing record and evaluate
the ability of the Servicer (and Sub-Servicer) to conform with required
servicing procedures. Generally, the Master Servicer will not approve a Servicer
unless either the Servicer or Sub-Servicer, if any, (i) has serviced
conventional mortgage loans for a minimum of two years, (ii) maintains a loan
servicing portfolio of at least $300,000,000 and (iii) has GAAP tangible net
worth of at least $3,000,000. The Master Servicer will continue to monitor on a
regular basis the financial position and servicing performance of the Servicer
and, to the extent the Servicer does not meet the foregoing requirements, the
Sub-Servicer, if any.
The duties to be performed by the Servicers with respect to Mortgage Loans
securing a Series will include calculation, collection and remittance of
principal and interest payments, administration of mortgage escrow accounts, as
applicable, collection of insurance claims, foreclosure procedures and, if
necessary, the advance of funds to the extent certain payments are not made by
the Borrowers and are recoverable from late payments by the Borrower,
Liquidations Proceeds or Insurance Proceeds. Each Servicer also will provide
such accounting and reporting services as are necessary to enable the Master
Servicer to provide required information to the Issuer and the Trustee with
respect to the Mortgage Loans securing such Series. Each Servicer is entitled to
(i) a periodic servicing fee equal to a specified percentage of the outstanding
principal balance of each Mortgage Loan serviced by such Servicer and (ii)
certain other fees, including but not limited to, late payments, conversion or
modification fees and assumption fees. With the consent of the Master Servicer,
certain servicing obligations of a Servicer may be delegated to a Sub-Servicer
approved by the Master Servicer, provided, however, that the Servicer remains
fully responsible and liable for all of its obligations under the Servicing
Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will (i) administer and supervise the performance of the Servicers of
the Mortgage Loans for such Series of their duties and responsibilities under
the Servicing Agreements; (ii) maintain any insurance policies (other than
property specific Insurance Policies) providing coverage for losses on the
Mortgage Loans for such Series; (iii) calculate amounts payable to Bondholders
on each Payment Date; (iv) prepare periodic reports to the Trustee or the
Bondholders with respect to the foregoing matters; (v) prepare federal and state
tax and information returns; and (vi) prepare reports, if any, required under
the Securities Exchange Act of 1934, as amended. In addition, the Master
Servicer will receive, review and evaluate all reports, information and other
data provided by each Servicer to enforce the provisions of the Servicing
Agreements, to monitor each Servicer's servicing activities, to
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reconcile the results of such monitoring with information provided by the
Servicer and to make corrective adjustments to records of the Servicer and
Master Servicer, as appropriate.
The Master Servicer will be entitled to receive a portion of the interest
payments on the Mortgage Loans securing the Series remitted to cover its fees as
Master Servicer. The Master Servicer or the Trustee may terminate a Servicer who
has failed to comply with its covenants or breached one of its representations
contained in the Servicing Agreement. Upon termination of a Servicer by the
Master Servicer, the Master Servicer will assume certain servicing obligations
of the terminated Servicer or, at its option, may appoint a substitute Servicer
acceptable to the Trustee to assume the servicing obligations of the terminated
Servicer.
Forms of Servicing Agreements have been filed as exhibits to, or
incorporated by reference into, the Registration Statement of which this
Prospectus forms a part. The Issuer's rights under each Servicing Agreement with
respect to a Series will be assigned to the Trustee as security for such Series.
The descriptions contained herein do not purport to be complete and are
qualified in their entirety by reference to the form of Servicing Agreement.
Payments on Mortgage Loans
Pursuant to the Servicing Agreements with respect to a Series, each
Servicer will be required to establish and maintain one or more separate,
insured (to the available limits) custodial accounts (collectively, the
"Custodial P&I Account") into which the Servicer will be required to deposit on
a daily basis payments of principal and interest received with respect to
Mortgage Loans serviced by such Servicer that secure Bonds of such Series. To
the extent deposits in each Custodial P&I Account are required to be insured by
the FDIC, if at any time the sums in any Custodial P&I Account exceed the limits
of insurance on such account, the Servicer will be required within one business
day to withdraw such excess funds from such account and remit such amounts (i)
to a "Servicer Custodial Account," which shall be a custodial account maintained
at a separate institution designated by the Master Servicer or (ii) to the
Master Servicer for deposit in either the Collateral Proceeds Account for such
Series or the Master Servicer Custodial Account. The amounts so deposited
pursuant to (i) and (ii) above will be invested in Eligible Investments.
The Servicing Agreements will require each Servicer, not later than the
Remittance Date, to remit to the Master Servicer Custodial Account amounts
representing scheduled installments of principal and interest on the Mortgage
Loans securing such Series received or advanced by the Servicer that were due
during the related Due Period, principal prepayments, Insurance Proceeds and
Liquidation Proceeds received during the applicable Prepayment Period (as
specified in the Indenture for such Series), with interest to the last day of
the calendar month occurring in such Prepayment Period (subject to certain
limitations), and proceeds from the repurchase of Converted Mortgage Loans, less
applicable servicing fees and amounts representing reimbursement of Advances
made by the Servicer. On or before the related Master Servicer Remittance Date,
the Master Servicer will withdraw its master servicing fees from the Master
Servicer Custodial Account and remit to the Collateral Proceeds Account those
amounts allocable to the Bonds for such Payment Date. In addition, there will be
deposited in the Collateral Proceeds Account for such Series of Bonds any
Advances of principal and interest made by the Master Servicer or the Trustee
pursuant to the terms of the Master Servicing Agreement or Indenture to the
extent such amounts were not deposited in the Master Servicer Custodial Account
or received and applied by the Servicer.
Prior to each Payment Date for a Series, the Master Servicer will furnish
to the Trustee and to the Issuer a statement setting forth certain information
with respect to the Mortgage Loans securing such Series.
Advances
Unless otherwise provided in the related Prospectus Supplement, the
Servicing Agreements with respect to a Series will require each Servicer to
advance funds to cover, to the extent that such amounts are deemed to be
recoverable from any subsequent payments on the Mortgage Loans securing such
Series, (i) delinquent payments of principal of and interest on such Mortgage
Loans and (ii) delinquent payments of taxes, insurance premiums and other
escrowed items. If a Servicer defaults, the Master Servicer or the Trustee may,
if so provided in the Master Servicing Agreement or Indenture, respectively, be
required to make Advances to the extent necessary to make required payments on
certain Bonds, provided that such party deems such amounts to be recoverable.
As specified in the related Prospectus Supplement, the Advance obligation
of the Trustee, the Servicers and the Master Servicer may be further limited to
an amount specified (i) in the Indenture, the Servicing Agreement or the Master
Servicing Agreement or (ii) by a Rating Agency rating the Bonds. Any required
Advances by the Servicers, the Master Servicer or the Trustee, as the case may
be, must be deposited into the applicable Custodial P&I Account or Master
Servicer Custodial
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Account or into the Collateral Proceeds Account and will be due not later than
the Payment Date to which such delinquent payment relates. Amounts to be
advanced by the Servicers, the Master Servicer or the Trustee, as the case may
be, will be reimbursable out of future payments on the Mortgage Loans, Insurance
Proceeds or Liquidation Proceeds of the Mortgage Loans for which such amounts
were advanced. If an Advance made by a Servicer, the Master Servicer or the
Trustee later proves to be unrecoverable, such Servicer, the Master Servicer or
the Trustee, as the case may be, will be entitled to reimbursement from funds in
the Collateral Proceeds Account prior to the distribution of payments to the
Bondholders.
Any Advances made by the Servicers, the Master Servicer or the Trustee with
respect to Mortgage Loans securing any Series will be intended to enable the
Issuer to make timely payment of the scheduled principal and interest payments
on the Bonds of such Series and will be due not later than the Payment Date on
which such payments are scheduled to be made. However, none of the Trustee, the
Master Servicer nor any Servicer will insure or guarantee any Series or any
Mortgage Loan securing any Series, and their obligations to advance for
delinquent payments will be limited to the extent that such Advances, in the
judgment of the Master Servicer or the Trustee, will be recoverable out of
future payments on the Mortgage Loans, Insurance Proceeds or Liquidation
Proceeds of the Mortgage Loans from which such amounts were advanced.
Collection and Other Servicing Procedures
The Servicing Agreements with respect to a Series will require each
Servicer to make reasonable efforts to collect all payments called for under the
Mortgage Loans securing such Series and under the applicable Insurance Policies
with respect to each such Mortgage Loan and, consistent with the Servicing
Agreement, to follow such collection procedures as it normally would follow with
respect to mortgage loans serviced for FNMA.
The Security Instrument used in originating a conventional Mortgage Loan
may, at the lender's option, contain a "due-on-sale" clause. See "Certain Legal
Aspects of the Mortgage Loans -- Due-On-Sale Provisions." The Servicing
Agreements will require the Servicers to use reasonable efforts to enforce
"due-on-sale" clauses with respect to any Security Instrument containing such a
clause provided that the coverage of any applicable Insurance Policy will not be
adversely affected thereby. In any case in which Mortgaged Premises have been or
are about to be conveyed by the Borrower and the "due-on-sale" clause has not
been enforced or the related note is by its terms assumable, the Servicer will
be authorized to take or enter into an assumption agreement from or with the
person to whom such property has been or is about to be conveyed, if such person
meets certain loan underwriting criteria, including the criteria necessary to
maintain the coverage provided by the applicable Insurance Policies or if
otherwise required by law. In the event that the Servicer enters into an
assumption agreement in connection with the conveyance of any such Mortgaged
Premises, the Servicer will release the original Borrower from liability upon
the Mortgage Loan and substitute the new Borrower as obligor thereon. In no
event can the assumption agreement permit a decrease in the mortgage interest or
an increase in the term of the Mortgage Loan. Fees collected for entering into
an assumption agreement will be retained by the Servicer of the Mortgage Loan.
Defaulted Mortgage Loans
With respect to any Mortgage Loan on which a material default has occurred
or a payment default is imminent, the Servicer may, with the approval of the
Master Servicer in most cases, negotiate a forbearance or modification agreement
with the Borrower. A "forbearance" consists of a temporary reduction in the
Scheduled Payment that a Borrower is required to make with respect to a Mortgage
Loan, provided that the payment of principal and interest is only deferred and
not forgiven. A "modification" consists of a permanent reduction in the
Scheduled Payment that a Borrower is required to make with respect to a Mortgage
Loan, and may result in a Realized Loss on the Mortgage Loan. A modification may
involve the reduction in the Note Rate, the Unpaid Principal Balance of the
Mortgage Loan, or both. A forbearance or modification of a Mortgage Loan only
will be permitted if the Servicer and, if required, the Master Servicer have
determined that in their good faith business judgment that granting such
forbearance or modification will maximize the recovery on such Mortgage Loan to
the Trust Estate on a present value basis. In determining whether to grant a
forbearance or a modification, the Servicer, and if required, the Master
Servicer will take into account the willingness of the Borrower to perform on
the Mortgage Loan, the general condition of the Mortgaged Premises and the
likely proceeds from the foreclosure and liquidation of the Mortgaged Premises.
Except as otherwise specified in the Prospectus Supplement, the Issuer will
be entitled to purchase any Mortgage Loan that has a payment that is 90 days
past due upon payment to the Trustee of the Unpaid Principal Balance of such
Mortgage Loan plus accrued and unpaid interest thereon through the Payment Date
following the date of purchase.
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The Servicers will not exercise any discretion with respect to changes in
any of the terms of any Mortgage Loan (including but not limited to the Note
Rate and whether the term of the Mortgage Loan is extended for a further period
and the specific provisions applicable to such extension) or the disposition of
REO without the consent of the Master Servicer.
Maintenance of Insurance Policies; Claims Thereunder and Other Realization Upon
Defaulted Mortgage Loans
The Servicing Agreements require each Servicer to maintain, in full force
and effect as long as coverage is required under the Servicing Agreement,
standard hazard insurance, flood insurance and any primary mortgage insurance
policies relating to each Mortgage Loan that it services.
If any Mortgaged Premises securing a defaulted Mortgage Loan securing a
Series is damaged and the proceeds, if any, from the related Standard Hazard
Insurance Policy are insufficient to restore the damaged property to the
condition to permit recovery under the related Insurance Policy, the Servicer
will not be required to expend its own funds to restore the damaged property
unless it determines that such expenses will be recoverable by it through
Liquidation Proceeds or through Insurance Proceeds. Each Servicing Agreement and
the Master Servicing Agreement with respect to a Series will require the
Servicer or the Master Servicer, as the case may be, to present claims to the
insurer under any Insurance Policy applicable to the Mortgage Loans securing
such Series and to take such reasonable steps as are necessary to permit
recovery under such Insurance Policy with respect to defaulted Mortgage Loans or
losses on the Mortgaged Premises securing such Mortgage Loans.
If recovery under the applicable Insurance Policy is not available, the
Servicer or the Master Servicer nevertheless will be obligated to follow
standard practice and procedures to realize upon the defaulted Mortgage Loan.
See "Certain Legal Aspects of the Mortgage Loans -- Environmental
Considerations." In this regard, the Servicer or Master Servicer will sell the
Mortgaged Premises pursuant to foreclosure, trustee's sale or, in the event a
deficiency judgment is available against the mortgagor or other person and
proceed to seek recovery of the deficiency against the appropriate person. To
the extent that the proceeds of any such Liquidation proceedings are less than
the Collateral Value of the defaulted Mortgage Loan, there will be a reduction
in the value of the Collateral for the Series secured by such Mortgage Loan such
that the holders of Bonds of such Series may not receive full principal of and
interest on such Bonds.
The Master Servicer with respect to a Series may be required to maintain
any Special Hazard Insurance Policy and any Pool Insurance Policy for such
Series in full force and effect throughout the term of the Master Servicing
Agreement, subject to payment of the applicable premiums by the Trustee. The
Master Servicer will be required to notify the Trustee to pay the premiums for
any such Special Hazard Insurance Policy and any such Pool Insurance Policy for
such Series on a timely basis. Any such premiums may be payable on a monthly
basis in advance, or pursuant to any other payment schedule acceptable to the
applicable insurer. In the event that such Special Hazard Insurance Policy or
such Pool Insurance Policy for such Series is cancelled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
will be obligated to obtain from another insurer a comparable replacement policy
with a total coverage which is equal to the then existing coverage (or such
lesser amount if the Master Servicer confirms in writing with the Rating
Agencies rating the Bonds that such lesser amount will not impair the rating on
the Bonds) of such Special Hazard Insurance Policy or such Pool Insurance Policy
or other form of substitute credit enhancement as the Rating Agencies rating the
Bonds confirm in writing will not impair the ratings on the Bonds. However, if
the cost of any such replacement policy or bond is greater than the cost of the
policy or bond which has been terminated, then the amount of the coverage either
will be reduced to a level such that the applicable premium will not exceed the
cost of the premium for the policy or bond that was terminated or the Master
Servicer may secure such replacement policy or other credit enhancement at such
increased cost, so long as such increase in cost will not adversely affect
amounts available to make payments of principal or interest on the Bonds.
Evidence as to Servicing Compliance
Within 120 days of the end of each of its fiscal years the Servicer must
provide the Master Servicer with a copy of its audited financial statements for
the year and a statement from the firm of independent public accountants that
prepared the financial statements to the effect that, in preparing such
statements, it reviewed the results of the Servicer's servicing operations in
accordance with the Uniform Single-Audit procedures for mortgage banks developed
by the Mortgage Bankers Association. In addition, the Servicer will be required
to deliver an officer's certificate to the effect that it has fulfilled its
obligations under the Servicing Agreement during the preceding fiscal year or
identifying any ways in which it has failed to fulfill its obligations during
the fiscal year and the steps that have been taken to correct such failure. The
Master Servicer will be required to promptly make available to the Trustee any
compliance reporting that it receives from a Servicer.
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Each year the Master Servicer will review each Servicer's performance under
its Servicing Agreement and the status of any fidelity bond and errors and
omissions policy required to be maintained by the Servicer under the Servicing
Agreement.
Events of Default and Remedies
Events of default under the Servicing Agreement in respect of a Series of
Bonds will consist of (i) any failure by the Servicer to remit to the Master
Servicer Custodial Account any payment required to be made by a Servicer under
the terms of the Servicing Agreement that is not remedied within at least one
Business Day; (ii) any failure on the part of a Servicer to observe or perform
in any material respect any other of its covenants or agreements contained in
the Servicing Agreement that continues unremedied for a specified period after
the giving of written notice to the Servicer by the Master Servicer; (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding a Servicer; or (iv) certain actions
by or on behalf of the Servicer indicating its insolvency or inability to pay
its obligations.
The Master Servicer will have the right pursuant to the Servicing Agreement
to terminate a Servicer upon the occurrence of an event of default by the
Servicer of any of its obligations under the Servicing Agreement. In the event
of such termination, the Master Servicer will appoint a substitute Servicer
(which may be the Master Servicer) acceptable to the Master Servicer and
approved by the Trustee (which shall be given upon receipt of written
confirmation by each Rating Agency that such appointment will not adversely
effect the ratings then in effect on the Bonds). Any successor servicer,
including the Master Servicer or the Trustee, will be entitled to compensation
arrangements similar to those provided to the Servicer.
Master Servicing Agreement
Except as otherwise specified in the related Prospectus Supplement,
Resource will act as the master servicer (in such capacity, the "Master
Servicer") of the Mortgage Loans pursuant to the terms of the Master Servicing
Agreement between Resource and the Issuer. Pursuant to the Master Servicing
Agreement, the Master Servicer (i) will supervise the servicing of the Mortgage
Loans by the Servicers, (ii) will instruct, among other things, each Servicer as
to the proper actions to be taken with respect to a defaulted Mortgage Loan,
(iii) will be responsible for providing general administrative services with
respect to the Bonds, and (iv) will make Advances to the limited extent
described herein. The Master Servicer may engage various independent contractors
to perform certain of its responsibilities, provided, however, that the Master
Servicer remains fully responsible and liable for all of its obligations under
the Master Servicing Agreement (other than those specifically undertaken by a
Special Servicer). The Master Servicer will be entitled to a monthly master
servicing fee applicable to each Mortgage Loan expressed as a fixed percentage
of the remaining Scheduled Principal Balance of such Mortgage Loan as of the
first day of the immediately preceding Due Period. It is anticipated that the
master servicing fee will range between 0.020%-0.050% per annum of the Scheduled
Principal Balance of the Mortgage Loans, depending upon the structure of the
related transaction. The related Prospectus Supplement will specify the actual
amount of the master servicing fee. The Issuer will assign its rights to enforce
the obligations of the Master Servicer under that agreement to the Trustee as
security for the Bonds.
The form of Master Servicing Agreement pursuant to which the Master
Servicer will master service the Mortgage Loans will be filed or incorporated by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part. The summaries of the obligations of the Master Servicer contained
herein do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the Master Servicing Agreement.
Special Servicing Agreement
The Master Servicer may appoint a Special Servicer to undertake certain
responsibilities of the Servicer with respect to certain defaulted Mortgage
Loans securing a Series. The Special Servicer may engage various independent
contractors to perform certain of its responsibilities, provided, however, the
Special Servicer remains fully responsible and liable for all of its
requirements under the special servicing agreement (the "Special Servicing
Agreement"). As may be further specified in the related Prospectus Supplement,
the Special Servicer, if any, may be entitled to various fees, including, but
not limited to, (i) a monthly engagement fee applicable to each Mortgage Loan or
related REO, expressed as a fixed percentage of the Scheduled Principal Balance
of such Mortgage Loan or REO as of the first day of the immediately preceding
Due Period, (ii) a special servicing fee expressed as a fixed percentage of the
remaining Scheduled Principal Balance of each specially serviced Mortgage Loan
or related REO, or (iii) a performance fee applicable to each liquidated
Mortgage Loan based upon the Liquidation Proceeds.
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THE INDENTURE
The following summaries describe certain provisions of the Indenture. When
particular provisions or terms used in the Indenture are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries.
General
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds of any Series may be issued thereunder up to
the aggregate principal amount that may be authorized from time to time by the
Issuer. The Indenture provides that additional Bonds may be issued for any
outstanding Class or Series up to the aggregate principal amount authorized from
time to time by the Issuer, subject to the provisions of the related Series
Supplement or supplements thereto.
The Bonds of each Series will be issued in fully-registered certificated or
book-entry form in the authorized denominations for each Class of Bonds
specified in the related Prospectus Supplement. The Bonds of each Series in
certificated form may be transferred or exchanged at the corporate trust office
of the Trustee without the payment of any service charge, other than any tax or
other governmental charge payable in connection therewith. Unless otherwise
specified in the related Prospectus Supplement, the Trustee will make payments
of principal of and interest on the Bonds of a Series in certificated form by
checks mailed to registered Bondholders of the Bonds at their addresses
appearing on the books and records of the Issuer, except that the final payments
in retirement of each Class of Bonds of a Series in certificated form will be
made only upon presentation and surrender of such Bonds at the office or agency
of the Issuer maintained for that purpose. If provided in the related Prospectus
Supplement, upon receipt of written instructions and the payment of any required
charge or fee, payments on certain Bonds of a Series may be made to certain
Bondholders of such Bonds by the Trustee by wire transfer of immediately
available funds. Payment and transfer procedures for Bonds in book-entry form
will be as specified herein in "Description of the Bonds -- Book-Entry
Procedures" and in the related Prospectus Supplement.
Modification of Indenture
With the consent of the Holders of not less than a majority in principal
balance of the outstanding Bonds of each Series to be affected or, if fewer than
all Classes of a Series would be affected, of each Class to be affected, the
Trustee and the Issuer may execute a supplemental indenture to add provisions
to, or change in any manner or eliminate provisions of, the Indenture relating
to such Series, or to such Class or Classes, or modify in any manner the rights
of the Holders of the Bonds of such Series, or of such Class or Classes. If any
such supplemental indenture would adversely affect the Holders of any Senior
Bonds or of any Subordinated Bonds, then approval of Holders of a majority in
principal balance of such outstanding Senior Bonds or of such outstanding
Subordinated Bonds, as the case may be, would also be required.
Without the consent of the Bondholders of each outstanding Bond affected,
however, no supplemental indenture may (i) change the Stated Maturity Date of
the principal of, or timing of any installment of principal or interest on, any
Bond, reduce the principal amount thereof or the interest thereon or the
redemption price thereof or the time for redemption with respect thereto, change
the provisions relating to the application of proceeds of the Trust Estate to
the payment of principal on the Bonds, change any place where, or the currency
in which, any Bond or interest thereon is payable, or impair the right to
institute suit for payment on or after the maturity thereof or, in the case of
redemption, on or after the redemption date, (ii) reduce the percentage in
principal amount of Bonds of the affected Series whose Holders must consent to
any supplemental indenture or to any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or adversely affect the Collateral securing a Series,
(iv) permit the creation of any lien ranking prior to or on a par with the lien
of the Indenture with respect to any part of the Trust Estate or terminate the
lien of the Indenture on any part of the Trust Estate or terminate the lien of
the Indenture on any property at any time subject to the Indenture or deprive
the Holder of the security afforded by the lien of the Indenture, (v) change the
definition of default under the Indenture, or reduce the percentage of
Bondholders of Bonds of any Series whose consent is required to direct the
Trustee to liquidate the Collateral for such Series (vi) change any condition
precedent for the redemption of any Series of Bonds or (vii) modify any of the
provisions of the Indenture with respect to supplemental indentures except to
increase the percentage of outstanding Bonds whose consent is required for any
such action or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Bondholders of each outstanding
Bond of a Class affected thereby. The issuance of additional Bonds in accordance
with the provisions and limitations contained in a Series Supplement relating to
outstanding Bonds will be deemed not to have changed the timing of any
installment of principal of or interest on
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any outstanding Class of Bonds issued under such Series Supplement for purposes
of requiring Bondholder consent pursuant to clause (i) above.
The Issuer and the Trustee, upon advice of counsel, also may enter into
supplemental indentures, without obtaining the consent of Bondholders, for the
purpose of, among other things, (i) setting forth the terms of and security for
any previously unissued Series, (ii) adding to the covenants of the Issuer or
the Trustee for the benefit of the Bondholders, and (iii) curing ambiguities, or
correcting or supplementing any defective, ineffective or inconsistent provision
or amending any other provision with respect to matters or questions relating to
the Indenture, provided the interests of the Bondholders would not be materially
adversely affected. For purposes of clause (iii) above, among other things, a
supplemental indenture will be conclusively deemed not to adversely affect a
particular Series if (i) the Trustee receives a letter or other writing from
each Rating Agency rating the Class or Series to the effect that execution of
the supplemental indenture will not result in any change in the current rating
assigned by that Rating Agency to the Class or Series and (ii) the supplemental
indenture effects no change in principal priority schedules, interest rates,
redemption prices, substitution of Mortgage Loans, Payment Dates, record dates,
Accounting Dates, terms of optional or mandatory redemption, application of
Surplus to the payment of a Series or other payment terms established by the
Series Supplement for the Series.
Events of Default
An event of default ("Event of Default") with respect to a Series or Class
of Bonds will be described in the related Prospectus Supplement. Generally, an
Event of Default with respect to the Senior Bonds of a Series (and, so long as
91 days have passed during which no Senior Bond has been outstanding, the
Subordinated Bonds of a Series) is (i) failure to pay required interest and
principal when any related available credit enhancement amount has been reduced
to zero, (ii) failure to pay principal in full prior to the Stated Maturity Date
for such Bonds and (iii) default in the performance of certain covenants in the
Indenture and the continuation of such default for 60 days after notice to the
Issuer by the Trustee or to the Trustee and the Issuer by the Bondholders of at
least 25% in principal amount of such Bonds. Certain events of bankruptcy,
insolvency, reorganization or receivership of the Issuer constitute an Event of
Default for all Bonds of a Series.
Unless otherwise specified in the related Prospectus Supplement, (i) a
breach of a representation, warranty or covenant in the Servicing Agreement or
Master Servicing Agreement will not constitute an Event of Default under the
Indenture and (ii) an Event of Default with respect to one Series will not
constitute an Event of Default with respect to any other Series.
Within 90 days after the occurrence of any default that is, or with notice
or the lapse of time or both would become, an Event of Default with respect to
the Bonds, the Trustee is required under the Indenture to transmit notice of
such default, if known to the Trustee, to all Bondholders, unless such default
shall have been cured or waived, or the Trustee determines in good faith that
the withholding of such notice is in the interest of the Bondholders.
If an Event of Default with respect to the Senior Bonds of a Series occurs
and is continuing, the Bondholders of not less than 25% in principal balance of
the outstanding Senior Bonds of such Series may declare the principal of all of
the Bonds of such Series to be immediately due and payable, by a notice in
writing to the Issuer and to the Trustee. If an Event of Default with respect to
the Subordinated Bonds of a Series occurs and is continuing, the Bondholders of
not less than 25% in principal balance of the outstanding Subordinated Bonds
(and of the outstanding Senior Bonds, if any) of such Series may declare the
principal of all of the Bonds of such Series to be immediately due and payable,
by a notice in writing to the Issuer and to the Trustee. Any such declaration
may be rescinded by the Bondholders of not less than a majority in principal
balance of the outstanding Bonds that were entitled to vote on the declaration.
Following any such declaration that is not rescinded, the Trustee shall sell the
Collateral as described in the Indenture. If an Event of Default has occurred
and is continuing and no Bonds of the Series have been declared due and payable,
or any such declaration and its consequences has been rescinded, the Trustee
may, and on the direction of a majority in principal balance of the outstanding
Senior Bonds (or, if no Senior Bonds are outstanding, Subordinated Bonds) shall
give notice to the Issuer of its election to preserve the Trust Estate, collect
the proceeds thereof and make and apply all payments in respect of the Bonds in
accordance with the Indenture.
Proceeds from the liquidation of the Collateral for a Series of Bonds will
be applied, after all required payments and reimbursements to the Trustee,
Servicer, Master Servicer and Special Servicer in the order set forth in the
Series Supplement and related Prospectus Supplement for such Series of Bonds.
Declaration of acceleration and liquidation of the Collateral pursuant to the
foregoing procedures shall be the sole remedy for the Bondholders upon an Event
of Default. In the event that a Series of Bonds is declared due and payable, as
described above, and the Collateral securing the Bonds is sold, the net proceeds
from such sale may be insufficient to pay the full unpaid amount of principal of
and interest due on each outstanding Class of Bonds of such Series. Furthermore,
in the event that the principal of the Bonds of a Series is declared due and
payable, as described above, and the Collateral securing such Series is sold,
the Bondholders of any Discount Bonds may be
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entitled to receive no more than an amount equal to the unpaid principal amount
thereof less the unamortized original issue discount. No assurance can be given
about how the amount of the original issue discount that has not been amortized
will be determined.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default will occur and be continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any Bondholders of the Bonds of a
Series, unless such Bondholders will have offered to the Trustee reasonable
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, Holders of a majority in
principal amount of the outstanding Senior Bonds (or the most senior of any
Subordinated Bonds if no Senior Bonds are outstanding) of a Series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Bonds of such Series; and the Bondholders of the
majority in principal amount of the outstanding Senior Bonds (or the
Subordinated Bonds if no Senior Bonds are outstanding) of a Series may, in
certain cases, waive any default with respect to such Series.
No Bondholder of any of the Bonds of a Series will have the right to
institute any proceeding with respect to the Indenture, unless (i) such
Bondholder previously has given to the Trustee written notice of an Event of
Default, (ii) the Bondholders of not less than 25% in principal amount of the
outstanding Senior Bonds (or the Subordinate Bonds if no Senior Bonds are
outstanding) of the same Series have made written request upon the Trustee to
institute such proceedings in its own name as Trustee and have offered the
Trustee reasonable indemnity, (iii) the Trustee has for 60 days failed to
institute any such proceeding, and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding Senior Bonds (or
the Subordinated Bonds if no Senior Bonds are outstanding) of a Series.
Except as otherwise provided in the related Prospectus Supplement, at such
time as an Event of Default for a Series is declared and so long as Senior Bonds
of such Series remain outstanding, the Trustee will cease to act on behalf of
the Holders of Subordinated Bonds and will thereafter act only on behalf of the
Holders of the Senior Classes of Bonds. The Issuer is required in such
circumstances to appoint a separate trustee for the Holders of the Subordinated
Bonds. Such trustee may seek to act in a manner adverse to the Holders of the
Senior Bonds, and such action may result in a delay in disposition of the Trust
Estate or the exercise of other remedies and, consequently, a delay in payment
to the Holders of the Senior Bonds. Should the Issuer fail to appoint a separate
trustee within 60 days after such Event of Default, the Trustee will petition a
court of competent jurisdiction to appoint a separate trustee.
Authentication and Delivery of Bonds
The Issuer may from time to time deliver Bonds executed by it to the
Trustee and request that the Trustee authenticate such Bonds. Upon the receipt
of such Bonds and such request, and subject to the Issuer's compliance with
certain conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Issuer may direct.
List of Bondholders
Three or more Bondholders of the Bonds of a Series, each of whom has owned
a Bond of such Series for at least six months, may, by written request to the
Trustee, obtain access to the list of all Bondholders of Bonds of the same
Series or of all Bonds, as specified in the request, maintained by the Trustee
for the purpose of communicating with other Bondholders with respect to their
rights under the Indenture. The Trustee may elect not to afford the requesting
Bondholders access to the list of Bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Bondholders, to all such
Bondholders.
Annual Compliance Statement
The Issuer will be required to file annually with the Trustee a written
statement as to fulfillment of its obligations under the Indenture.
Reports to Bondholders
On or before each Payment Date for a Series, the Trustee will transmit by
mail to each Bondholder of such Series a report with respect to the principal
balance of the Bonds of such Series held by such Bondholder as of the
immediately preceding Payment Date and the amount of principal, interest and
premium, if any, paid with respect to the Bonds of such Series held by such
Bondholder since the immediately preceding Payment Date. Such report also will
include information
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regarding the levels of delinquencies and Losses on the Mortgage Loans in the
related Mortgage Pool, losses with respect to each related Class of Bonds, and
the amount of servicing and master servicing fees paid with respect to the
Mortgage Loans in the related Mortgage Pool for the applicable Payment Date.
Trustee's Annual Report
The Trustee under present law is required to mail each year to all
registered Bondholders of Bonds of a Series a brief report with respect to any
of the following events that may have occurred within the previous year (but if
no such event has occurred, no report is required): any change in its
eligibility and qualifications to continue as the Trustee under the Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness owing by the Issuer to it in the Trustee's
individual capacity, any change in the property and funds relating to such
Series physically held by the Trustee as such, any additional issue of Bonds of
such Series not previously reported, any change in the release or release and
substitution of any property relating to such Series subject to the lien of the
Indenture, and any action taken by it that materially affects the Bonds or the
Trust Estate for such Series and that has not been previously reported. In any
event, the Trustee will make such information available to all Bondholders on an
annual basis.
Trustee
The Trustee for each Series of Bonds will be specified in the respective
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Issuer or any of its affiliates.
The Trustee may resign at any time, in which event the Issuer will be
obligated to appoint a successor Trustee. The Issuer may remove the Trustee and
appoint a successor Trustee if the Trustee ceases to be eligible to act as
Trustee under the Indenture or if the Trustee becomes insolvent or otherwise
incapable of acting with respect to any Series of Bonds. The Issuer may also
remove the Trustee and appoint a successor Trustee for any Series of Bonds at
any time provided that the Issuer receives confirmation that the appointment of
the successor Trustee will not result in the lowering of the rating of that
Series of Bonds. The Trustee with respect to a Series of Bonds may also be
removed at any time by the holders of a majority in principal amount of the
Bonds of such Series then outstanding.
Any resignation and removal of the Trustee, and the appointment of a
successor Trustee, will not become effective until acceptance of such
appointment by the successor Trustee. The Trustee, and any successor Trustee,
each will have a combined capital and surplus of at least $50,000,000, or will
be a member of a bank holding system, the aggregate combined capital and surplus
of which is at least $50,000,000, provided that the Trustee's and any such
successor Trustee's separate capital and surplus shall at all times be at least
the amount specified in Section 310(a)(2) of the Trust Indenture Act of 1939 and
that the Trustee and such successor Trustee will be subject to supervision or
examination by federal or state authorities and will have an office in the
United States.
Satisfaction and Discharge of the Indenture
The Indenture will be discharged as to a Series upon the cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Trustee of funds sufficient for the payment or redemption thereof.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed 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, or to encompass the laws of all states in which the Mortgage
Premises are situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
Mortgages
The Mortgage Loans will be secured by Security Instruments consisting of
either mortgages or deeds of trust or deeds to secure debt, depending upon the
prevailing practice in the state in which the Mortgaged Premises is located. The
filing of a mortgage, deed of trust or deed to secure debt creates a lien or
title interest upon the real property covered by such instrument and represents
the security for the repayment of an obligation that is customarily evidenced by
a promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers. Priority
with respect to such instruments depends on their terms, on the knowledge of the
parties to the mortgage and generally on the
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order of recording with the applicable state, county or municipal office. There
are two parties to a mortgage, the mortgagor, who is the borrower/owner 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. In the case of a land trust, there are three parties because
title to the property is held by a land trustee under a land trust agreement of
which the borrower/owner is the beneficiary. At origination of a mortgage loan,
the borrower executes a separate undertaking to make payments on the mortgage
note. A deed of trust transaction normally has three parties, the trustor, who
is the borrower/owner, the beneficiary, who is the lender, and the trustee, a
third-party grantee. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The mortgagee's authority under
a mortgage and the trustee's authority under a deed of trust are governed by the
law of the state in which the real property is located, the express provisions
of the mortgage or deed of trust, and, in some cases in deed of trust
transactions, the directions of the beneficiary.
Foreclosure
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 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 and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any second lienholders. The
trustor, borrower or any 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, that may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage generally is accomplished by judicial
action to recover the mortgage debt by enforcing the mortgagee's rights under
the mortgage. It is regulated by statutes and rules and subject throughout to
the court's equitable powers. Generally, a mortgagor is bound by the terms of
the mortgage note and the mortgage as made and cannot be relieved from his
default if the mortgagee has exercised his rights in a commercially reasonable
manner. However, because a foreclosure action historically was equitable in
nature, the court may exercise equitable powers to relieve a mortgagor of a
default and deny the mortgage foreclosure on proof that either the mortgagor's
default was neither willful nor in bad faith or the mortgagee's action
established a waiver, fraud, bad faith, or oppressive or unconscionable conduct
such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a noncollusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly a suit against the debtor on the mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
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 potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount which may be equal to the principal amount of the mortgage
or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment is
available. Thereafter, the lender will assume the burdens of ownership,
including obtaining casualty insurance, paying taxes 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 insurance proceeds.
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Second Mortgages
Some of the Mortgage Loans may be secured by second mortgages or deeds of
trust, which are junior to first mortgages or deeds of trust held by other
lenders. The rights of the holders of a junior deed of trust or a junior
mortgage are subordinate in lien and in payment to those of the holder of the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive and apply hazard insurance and condemnation
proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the second
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings.
Furthermore, the terms of the second mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust. In the event of
a conflict between the terms of the first mortgage or deed of trust and the
second mortgage or deed of trust, the terms of the first mortgage or deed of
trust will govern. Upon a failure of the mortgagor or trustor to perform any of
its obligations, the senior mortgagee or beneficiary, subject to the terms of
the senior mortgage or deed of trust, may have the right to perform the
obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the second mortgage.
Equity Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property that is subordinate to the foreclosing mortgagee, from their
"equity of redemption."
The doctrine of equity of redemption provides that, until the property
covered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having an interest that is subordinate
to that of the foreclosing mortgagee have an equity of redemption and may redeem
the property by paying the entire debt with interest. In addition, in some
states, when a foreclosure action has been commenced, the redeeming party must
pay certain costs of such action. Those having an equity of redemption must be
made parties and duly summoned to the foreclosure action in order for their
equity of redemption to be barred.
Statutory Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed second lienor are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a nonstatutory right that must be exercised prior to the foreclosure sale. 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 right 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
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
Due-on-Sale Provisions
The Mortgage Loans may contain due-on-sale clauses, which permit the lender
to accelerate the maturity of the Mortgage Loan if the Borrower sells, transfers
or conveys the related Mortgaged Premises in violation of the restrictions with
respect thereto set forth in the applicable Security Instrument. The
enforceability of these clauses has been the subject of legislation or
litigation in many states. Some jurisdictions automatically enforce such
clauses, while others require a showing of reasonableness and hold, on a
case-by-case basis, that a "due-on-sale" clause may be invoked only where a sale
threatens the legitimate security interest of the lender.
The Garn-St Germain Depository Institutions Act of 1982 purports to preempt
state laws that prohibit the enforcement of "due-on-sale" provisions in certain
loans made after October 15, 1982. The Servicer may thus be able to accelerate
the Mortgage Loans that contain a "due-on-sale" provision, upon transfer of an
interest in the related Mortgaged Premises, regardless of its ability to
demonstrate that a sale threatens its legitimate security interest.
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Subordinate Financing
When the mortgagor encumbers mortgaged property with one or more second
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Environmental Considerations
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, a secured party that takes a deed in lieu of
foreclosure, purchases Mortgaged Premises at a foreclosure sale or operates
Mortgaged Premises may become liable in certain circumstances for the costs of
remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the Mortgaged Premises. Such Cleanup Costs
may be substantial. It is possible that such Cleanup Costs could subject the
Collateral to a lien and reduce the amounts otherwise available to pay to the
holders of the Bonds if Mortgaged Premises securing a Mortgage Loan were
acquired by the Trustee through foreclosure or deed in lieu of foreclosure and
if such Cleanup Costs were incurred. Moreover, some states impose a lien for any
Cleanup Costs incurred by that State on the Mortgaged Premises that are subject
of such Cleanup Costs (a "Superlien"). All subsequent liens on such Mortgaged
Premises (but not prior recorded liens) are subordinated to such Superlien. The
security interest of the Trustee in Mortgaged Premises subject to such a
Superlien could be adversely affected.
No representations or warranties are made by the Participant or Issuer as
to the absence or effect of hazardous wastes or hazardous substances on any of
the Mortgaged Premises. In addition, the Servicers have not made any
representations or warranties or assumed any liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any Mortgaged
Premises or any casualty resulting from the presence or effect of hazardous
wastes or hazardous substances and any loss or liability resulting from the
presence or effect of such hazardous wastes or hazardous substances will reduce
the amounts otherwise available to pay to the holders of the Bonds.
The Servicers are not permitted to foreclose on any Mortgaged Premises
without the approval of the Master Servicer. The Master Servicer is not
permitted to approve foreclosure on any property that it knows or has reason to
know is contaminated with or affected by hazardous wastes or hazardous
substances. The Master Servicer is required to inquire of any Servicer
requesting approval of foreclosure whether the property proposed to be
foreclosed upon is so contaminated. If a Servicer does not foreclose on Mortgage
Premises, the amounts otherwise available to pay to the holders of the Bonds may
be reduced. A Servicer will not be liable to the holders of the Bonds if it
fails to foreclose on Mortgaged Premises that it reasonably believes may be so
contaminated or affected, even if such Mortgaged Premises are, in fact, not so
contaminated or affected. Similarly, a Servicer will not be liable to the
Bondholders if, based on its reasonable belief that no such contamination or
effect exists, the Servicer forecloses on Mortgaged Premises and takes title to
such Mortgaged Premises, and thereafter such Mortgaged Premises are determined
to be so contaminated or affected.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The 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 judicial 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 experiencing temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing 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 security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have
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upheld the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions 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 is a personal judgment against the former
Borrower equal in most cases to the difference between the amounts due to the
lender and the greater of the net amount realized upon the foreclosure sale and
the market value of the Mortgaged Premises.
Statutory provisions may limit any deficiency judgment against the former
Borrower following a foreclosure sale to the excess of the outstanding debt over
the fair market value of the Mortgaged Premises at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former Borrower as a result of
receiving low or no bids at the foreclosure sale.
Some state statutes may 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.
In other states, the lender has the option of bringing a personal action against
the Borrower on the debt without first exhausting such security; however, in
some of these states, the lender, following judgment in such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
Borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the Borrower, for example, in the event of waste of the
Mortgaged Premises.
In addition to anti-deficiency and related legislation, numerous federal
and state statutory provisions, including the federal bankruptcy laws, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to realize upon its security. For example, in a Chapter 13
proceeding under the federal Bankruptcy Code, when a court determines that the
value of a home is less than the principal balance of the loan, the court may
prevent a lender from foreclosing on the home and, as part of the rehabilitation
plan, reduce the amount of the secured indebtedness to the value of the home as
its exists at the time of the proceeding, leaving the lender as a general
unsecured creditor for the difference between that value and the amount of
outstanding indebtedness. A bankruptcy court may grant the debtor a reasonable
time to cure a payment default and, in the case of a mortgage loan not secured
by the debtor's principal residence, also may reduce the periodic payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. Certain court decisions have applied such relief to
claims secured by the debtor's principal residence. If a court relieves a
Borrower's obligation to repay amounts otherwise due on a Mortgage Loan, the
Servicer will not be required to advance such amounts, and any loss in respect
thereof may reduce the amounts available to be paid to the holders of the Bonds.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. Other federal and
state laws provide priority to certain tax and other liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. 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 and regulations. These federal laws and state laws
impose specific statutory liabilities upon lenders who originate or service
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.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults
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on such obligations entered into prior to military service and (iii) may have
the maturity of such obligations incurred prior to military service extended,
the payments lowered and the payment schedule readjusted for a period of time
after the completion of military service. However, the benefits of (i), (ii), or
(iii) above are subject to challenge by creditors and if, in the opinion of the
court, the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a Borrower's obligation to repay amounts otherwise due on a
Mortgage Loan securing the Bonds of a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, neither the Servicer, the
Master Servicer nor the Trustee will be required to advance such amounts, and
any loss in respect thereof may reduce the amounts available to be paid to the
holders of the Bonds of such Series. Unless otherwise provided in the Prospectus
Supplement for a Series, any shortfalls in interest collections on Mortgage
Loans securing the Bonds of a Series resulting from application of the Soldiers'
and Sailors' Civil Relief Act of 1940 will be allocated to each Class of Bonds
of such Series that is entitled to receive interest in respect of such Mortgage
in proportion to the interest that each such Class of Bonds would have otherwise
been entitled to receive in respect of such Mortgage Loans had such interest
shortfall not occurred.
THE ISSUER
The Issuer was incorporated in Virginia on August 19, 1994, as a
wholly-owned, limited-purpose financing subsidiary of Resource. The Issuer's
principal office is located at 4880 Cox Road, Glen Allen, Virginia 23060,
telephone (804) 967-5800. The Issuer was formed solely for the purpose of
facilitating the financing and sale of mortgage loans such as the Mortgage
Loans. It does not intend to engage in any business or investment activities
other than issuing and selling securities secured primarily by mortgage loans
and taking certain action with respect thereto. Resource has agreed not to file
a petition in bankruptcy with respect to the Issuer. The Issuer's Articles of
Incorporation, which have been filed as an Exhibit to the Registration Statement
of which this Prospectus forms a part, limit the Issuer's business to the
foregoing and place certain other restrictions on the Issuer's activities.
Under the Indenture, the Issuer is responsible for certain administrative
and accounting matters relating to the outstanding Bonds. It is intended that
Resource will perform these services on behalf of the Issuer and will be paid a
fee for its services relating to the administration of a Series.
RESOURCE MORTGAGE CAPITAL, INC.
Resource is a self-managed real estate investment trust that purchases and
securitizes residential mortgage loans and invests in mortgage-backed
securities. Resource was incorporated in Virginia in December 1987. Resource's
principal office is located at 4880 Cox Road, Glen Allen, Virginia 23060,
telephone (804) 967-5800.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the Bonds is based on
the advice of Hunton & Williams, counsel to the Issuer. See "Certain Federal
Income Tax Consequences" in the related Prospectus Supplement. The summary is
based upon the provisions of the Code, the regulations promulgated thereunder,
and the judicial and administrative rulings and decisions now in effect or (with
respect to regulations) proposed, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this summary is based are subject to change, and such a
change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain categories of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily upon
investors who will hold Bonds as "capital assets," (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. The summary does not
purport to address the anticipated state income tax consequences to investors of
owning and disposing of the Bonds. Consequently, potential purchasers of Bonds
are advised to consult their own tax advisors concerning the federal, state or
local tax consequences to them of the purchase, holding, and disposition of the
Bonds.
No election will be made to treat any Series of Bonds as a real estate
mortgage investment conduit ("REMIC"). There are no regulations, published
rulings or judicial decisions involving the characterization for federal income
tax purposes of securities with terms substantially the same as the Bonds.
However, with respect to each series of Bonds, counsel to the
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Issuer will advise the Issuer that, based upon the facts as they exist at the
time the opinion is issued (which may precede the issuance of certain classes of
Bonds for federal income tax purposes), in the firm's opinion the Bonds will be
treated for federal income tax purposes as indebtedness of the Issuer, and not
as an ownership interest in the Collateral, or an equity interest in the Issuer
or in a separate association taxable as a corporation. That opinion will be
based on existing law, but there can be no assurance that the law will not
change or that contrary positions will not be taken by the Internal Revenue
Service (the "Service").
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform Act
of 1986 (the "1986 Act") treat certain arrangements that securitize real estate
mortgages as taxable corporations. An entity will be characterized as a TMP if
(i) substantially all of its assets are debt obligations and more than 50
percent of such debt obligations consist of real estate mortgages or interests
therein, (ii) the entity is the obligor under debt obligations with two or more
maturities, and (iii) payments on the debt obligations referred to in (ii) bear
a relationship to payments on the debt obligations referred to in (i).
Furthermore, a group of assets held by an entity can be treated as a separate
TMP if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligation.
It is likely that the Issuer or the portion of the Issuer relating to the
ownership of the Mortgage Collateral and the issuance of the Bonds will satisfy
the foregoing requirements and will be treated as a TMP. Such characterization
would require that the Issuer be treated as a "separate" corporation and not
includible with any other corporation, therefore subjecting the Issuer to
corporate income tax. However, because the Issuer is also a "qualified REIT
subsidiary" (as defined in Section 856(i)(2) of the Code) of Resource, which
itself is a REIT, characterization of the Issuer as a TMP will result only in
the shareholders of Resource being required to include in income, as "excess
inclusion" income, some or all of their allocable share of the Issuer's net
income that would be excess inclusion income, if any, if the Issuer were treated
as a REMIC. Such characterization will not result in entity-level, corporate
income taxation with respect to the Issuer. If the Issuer were to fail to
continue to be treated as a qualified REIT subsidiary by reason of Resource's
failure to continue to qualify as a REIT for federal income tax purposes or for
any other reason, the net income of the Issuer would be subject to corporate
income tax and the Issuer would not be permitted to be included on a
consolidated income tax return of another corporate entity. No assurance can be
given with regard to the prospective qualification of the Issuer as a qualified
REIT subsidiary or of Resource as a REIT for federal income tax purposes.
In addition, if the Service were to make and prevail upon the contention
that a Class of Bonds did not constitute indebtedness for federal income tax
purposes, such Bonds could be treated as equity interests in an association
taxable as a corporation, which would result in the imposition of a federal
income tax at the entity level. The imposition of such a tax could result in a
delay or shortfall in payments on the Bonds. The Issuer may redeem a Class or
Classes of Bonds at any time upon a determination by the Issuer, based upon an
opinion of counsel, that a substantial risk exists that the Bonds of the Class
to be redeemed will not be treated for federal income tax purposes as evidences
of indebtedness. Such redemption could occur when a Bondholder could not
reinvest the proceeds at an interest rate at least equal to the applicable Class
Interest Rate.
Because, in Counsel's opinion, the Bonds will be treated as evidences of
indebtedness for federal income tax purposes and not as ownership interests in
the Collateral, Bondholders should be aware that (i) Bonds held by a mutual
savings bank or domestic building and loan association will not represent
interests in "qualifying real property loans" within the meaning of Code Section
593(d)(1); (ii) Bonds held by a domestic building and loan association will not
constitute "loans secured by an interest in real property," within the meaning
of Code Section 7701(a)(19)(C)(v); (iii) Bonds held by a REIT will not
constitute "real estate assets" or "government securities" within the meaning of
Code Section 856(c)(5)(A); and (iv) income derived from the Bonds will not be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B).
Bonds held by a regulated investment company (a "RIC") will not constitute
"government securities" within the meaning of section 851 (b)(4)(A)(i) of the
Code.
Payments received by Bondholders on the Bonds generally should be accorded
the same tax treatment under the Code as payments received on other taxable
corporate bonds. Except as described below for Bonds issued with original issue
discount, market discount, or premium, interest paid or accrued on a Bond will
be treated as ordinary income to the Bondholder and a principal payment on a
Bond will be treated as a return of capital to the extent that the Bondholder's
basis in the Bond is allocable to that payment. In general, interest paid to
Bondholders who report their income on the cash receipts and disbursements
method should be taxable to them when received. Interest earned by Bondholders
who report their income on the accrual method will be taxable when accrued,
regardless of when it is actually received. The Trustee will report annually to
the Internal Revenue Service and to Bondholders of record with respect to
interest paid or accrued, market discount, and original issue discount, if any,
accrued on the Bonds.
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One or more Classes of Bonds may be subordinated to one or more other
Classes of Bonds of the same Series. In general, such subordination should not
affect the federal income tax treatment of either the Subordinated or the Senior
Bonds. Employee benefit plans subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consult their tax advisors before
purchasing any Subordinated Bond. See "ERISA Considerations" herein and in the
Prospectus Supplement.
Original Issue Discount
General
Discount Bonds, Accretion Bonds, and certain other Classes of Bonds will be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. In general such original issue discount will equal the difference
between the "stated redemption price at maturity" of the Bond (generally, its
principal amount) and its issue price. Original issue discount is treated as
ordinary interest income, and Holders of Bonds with original issue discount
generally must include the amount of original issue discount in income in
advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in a
Bondholder's income in any taxable year will be computed in accordance with
Section 1272(a)(6) of the Code, which provides rules for the accrual of original
issue discount under a constant yield method for certain debt instruments, such
as the Bonds, that are subject to prepayment by reason of prepayments of
underlying obligations. Under Section 1272(a)(6), the amount and rate of accrual
of original issue discount on a Bond generally is to be calculated based on (i)
a single constant yield to maturity and (ii) the Mortgage Collateral prepayment
rate and the reinvestment rate on amounts held pending distribution that were
assumed in pricing the Bond (the "Pricing Prepayment Assumptions"). No
regulatory guidance currently exists under Code Section 1272(a)(6). Accordingly,
until the Treasury issues guidance to the contrary, the Master Servicer or other
person responsible for computing the amount of original issue discount to be
reported to a Bondholder each taxable year (the "Tax Administrator"), except as
otherwise provided herein, expects to base its computations on Code Section
1272(a)(6) and final regulations governing the accrual of original issue
discount on debt instruments that were issued by the Treasury on January 27,
1994, but do not address directly the treatment of instruments that are subject
to Code Section 1272(a)(6) (the "OID Regulations"). However, there can be no
assurance that such methodology, which is described below, represents the
correct manner of calculating original issue discount on the Bonds. The Tax
Administrator intends to account for income on certain Bonds that provide for
one or more contingent payments as described in " -- Interest Weighted Bonds and
Non-VRDI Bonds" herein.
The amount of original issue discount on a Bond equals the excess, if any,
of the Bond's "stated redemption price at maturity" over its "issue price."
Under the OID Regulations, a debt instrument's stated redemption price at
maturity is the sum of all payments provided by the instrument other than
"qualified stated interest" ( "Deemed Principal Payments"). Qualified stated
interest, in general, is stated interest that is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually at (i)
a single fixed rate or (ii) a variable rate that meets certain requirements set
out in the OID Regulations. See " -- Variable Rate Bonds." Thus, in the case of
any Bond providing for such stated interest other than an Accretion Bond, the
stated redemption price at maturity generally will equal the total amount of all
Deemed Principal Payments due on that Bond. Because an Accretion Bond generally
does not require unconditional payments of interest at least annually, the
stated redemption price at maturity of such a Bond will equal the aggregate of
all payments due, whether designed as principal, accrued interest, or current
interest. The issue price of a Bond generally will equal the initial price at
which a substantial amount of such Bonds is sold to the public.
Under a de minimis rule, a Bond will be considered to have no original
issue discount if the amount of original issue discount is less than 0.25% of
the Bond 's stated redemption price at maturity multiplied by the weighted
average maturity ("WAM") of the Bond. For that purpose, the WAM of a Bond is the
sum of the amounts obtained by multiplying the amount of each Deemed Principal
Payment by a fraction, the numerator of which is the number of complete years
from the Bond 's issue date until the payment is made, and the denominator of
which is the Bond's stated redemption price at maturity. Although no Treasury
regulations have been issued under the relevant provisions of the 1986 Act, it
is expected that the WAM of a Bond will be computed using the Pricing Prepayment
Assumptions. A Bondholder will include de minimis original issue discount in
income on a pro rata basis as stated principal payments on the Bond are received
or, if earlier, upon disposition of the Bond, unless the Bondholder makes an
"All OID Election" (as defined below).
Bonds of certain Series may bear interest under terms that provide for a
teaser rate period, interest holiday, or other period during which the rate of
interest payable on the Bonds is lower than the rate payable during the
remainder of the life of the Bonds ("Teaser Bonds"). The OID Regulations provide
a more expansive test under which a Teaser Bond may be considered to have a de
minimis amount of original issue discount even though the amount of the original
issue discount on the
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Bond would be more than de minimis as determined under the regular test. The
expanded test applies to a Teaser Bond only if the stated interest on such Bond
would be qualified stated interest but for the fact that during one or more
accrual periods its interest rate is below the rate applicable for the remainder
of its term. Under the expanded test, the amount of original issue discount on a
Teaser Bond that is measured against the de minimis amount of original issue
discount allowable on the Bond is the greater of (i) the excess of the stated
principal amount of the Bond over its issue price ("True Discount") and (ii) the
amount of interest that would be necessary to be payable on the Bond in order
for all stated interest to be qualified stated interest (the "Additional
Interest Amount").
The holder of a Bond generally must include in gross income the sum, for
all days during his taxable year on which he holds the Bond, of the "daily
portions" of the original issue discount on such Bond. In the case of an
original holder of a Bond, the daily portions of original issue discount with
respect to such Bond generally will be determined by allocating to each day in
any accrual period the Bond's ratable portion of the excess, if any, of (i) the
sum of (a) the present value of all payments under the Bond yet to be received
as of the close of such period and (b) the amount of any Deemed Principal
Payments received on the Bond during such period over (ii) the Bond's "adjusted
issue price" at the beginning of such period. The present value of payments yet
to be received on a Bond is computed by using the Pricing Prepayment Assumptions
and the Bond's original yield to maturity (adjusted to take into account the
length of the particular accrual period), and taking into account Deemed
Principal Payments actually received on the Bond prior to the close of the
accrual period. The adjusted issue price of a Bond at the beginning of the first
accrual period is its issue price. The adjusted issue price at the beginning of
each subsequent period is the adjusted issue price of the Bond at the beginning
of the preceding period increased by the amount of original issue discount
allocable to that period and decreased by the amount of any Deemed Principal
Payments received during that period. Thus, an increased (or decreased) rate of
prepayments received with respect to a Bond will be accompanied by a
correspondingly increased (or decreased) rate of recognition of original issue
discount by the holder of such Bond.
The yield to maturity of a Bond is calculated based on (i) the Pricing
Prepayment Assumptions and (ii) any contingencies not already taken into account
under the Pricing Prepayment Assumptions that, considering all the facts and
circumstances as of the issue date, are more likely than not to occur.
Contingencies, such as the exercise of "mandatory redemptions," that are taken
into account by the parties in pricing the Bond typically will be subsumed in
the Pricing Prepayment Assumptions and thus will be reflected in the Bond's
yield to maturity. The Tax Administrator's determination of whether a
contingency relating to a Class of Bonds is more likely than not to occur is
binding on each holder of a Bond of such Class unless the holder explicitly
discloses on its federal income tax return that its determination of the yield
and maturity of the Bond is different from that of the Tax Administrator.
In many cases, Bonds will be subject to optional redemption before their
stated maturity dates. Under the OID Regulations, the Issuer will be presumed to
exercise its option to redeem for purposes of computing the accrual of original
issue discount if, and only if, by using the optional redemption date as the
maturity date and the optional redemption price as the stated redemption price
at maturity, the yield to maturity of the Bonds is lower than it would be if the
Bonds were not redeemed early. If the Issuer is presumed to exercise its option
to redeem the Bonds, original issue discount on such Bonds will be calculated as
if the redemption date were the maturity date and the optional redemption price
were the stated redemption price at maturity. In cases in which all of the Bonds
of a particular Series are issued at par or at a discount, the Issuer will not
be presumed to exercise its option to redeem the Bonds because a redemption by
the Issuer would not lower the yield to maturity of the Bonds. If, however, some
Bonds of a particular Series are issued at a premium, the Issuer may be able to
lower the yield to maturity of the Bonds by exercising its redemption option. In
determining whether the Issuer will be presumed to exercise its option to redeem
Bonds when one or more Classes of the Bonds is issued at a premium, the Tax
Administrator will take into account all Classes of Bonds that are subject to
the optional redemption to the extent that they are expected to remain
outstanding as of the optional redemption date, based on the Pricing Prepayment
Assumptions. If, determined on a combined weighted average basis, the Bonds of
such Classes were issued at a premium, the Tax Administrator will presume that
the Issuer will exercise its option. However, the OID Regulations are unclear as
to how the redemption presumption rules should apply to instruments such as the
Bonds, and there can be no assurance that the Service will agree with the Tax
Administrator's position.
The OID Regulations provide that a Bondholder generally may make an
election (an "All OID Election") to include in gross income all stated interest,
original issue discount, de minimis original issue discount, market discount (as
described below under " -- Market Discount"), and de minimis market discount
that accrues on the Bond (as reduced by any amortizable premium, as described
below under "Amortizable Premium," or acquisition premium, as described below)
under the constant yield method used to account for original issue discount. To
make an All OID Election, the holder of the Bond must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the Bond. The
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statement must identify the instruments to which the election applies. An All
OID Election is irrevocable unless the holder obtains the consent of the
Service. If an All OID Election is made for a debt instrument with market
discount, the holder is deemed to have made an election to include in income
currently the market discount on all of the holder's other debt instruments with
market discount, as described in " -- Market Discount" below. In addition, if an
All OID Election is made for a debt instrument with amortizable premium, the
holder is deemed to have made an election to amortize the premium on all of the
holder's other debt instruments with amortizable premium under the constant
yield method. See " -- Amortizable Premium." Bondholders should be aware that
the law is unclear as to whether an All OID Election is effective for a Bond
that is subject to the contingent payment rules. See " -- Interest Weighted
Bonds and Non-VRDI Bonds."
A Bond having original issue discount may be acquired in a transaction
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a Bond, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Bond after the acquisition date, the Bond will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
recognized on the Bond by the amount of amortizable premium. See "Amortizable
Premium." If the subsequent holder's adjusted basis in the Bond immediately
after the acquisition exceeds the adjusted issue price of the Bond, but is less
than or equal to the sum of the Deemed Principal Payments to be received under
the Bond after the acquisition date, the amount of original issue discount on
the Bond will be reduced by a fraction, the numerator of which is the excess of
the Bond's adjusted basis immediately after its acquisition over the adjusted
issue price of the Bond and the denominator of which is the excess of the sum of
all Deemed Principal Payments to be received on the Bond after the acquisition
date over the adjusted issue price of the Bond. For that purpose, the adjusted
basis of a Bond generally is reduced by the amount of any qualified stated
interest that is accrued but unpaid as of the acquisition date. Alternately, the
subsequent purchaser of a Bond having original issue discount may make an All
OID Election with respect to the Bond.
If the interval between the issue date of a Current Interest Bond and the
first Distribution Date (the "First Distribution Period") contains more days
than the number of days of stated interest that are payable on the first
Distribution Date, the effective interest rate received by the Bondholder during
the first Distribution Period will be less than the Bond's stated interest rate
making such Bond a Teaser Bond. If the amount of original issue discount on the
Bond measured under the expanded de minimis test exceeds the de minimis amount
of original issue discount allowable on the Bond, the amount by which the stated
interest on the Bond exceeds the interest that would be payable on the Bond at
the effective rate of interest for the First Distribution Period (the
"Nonqualified Interest Amount") would be treated as part of the Bond's stated
redemption price at maturity. Accordingly, the holder of a Teaser Bond may be
required to recognize ordinary income arising from original issue discount
attributable to the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval
between subsequent Distribution Dates, the effective rate of interest payable on
a Bond during the First Distribution Period will be higher than the stated rate
of interest if a Bondholder receives interest on the first Distribution Date
based on a full accrual period. Unless the "Pre-Issuance Accrued Interest Rule"
described below applies, such Bond (a "Rate Bubble Bond") would be issued with
original issue discount unless the amount of original issue discount is de
minimis. The amount of original issue discount on a Rate Bubble Bond
attributable to the First Distribution Period would be the amount by which the
interest payment due on the first Distribution Date exceeds the amount that
would have been payable had the effective rate for that Period been equal to the
stated interest rate. However, under the Pre-Issuance Accrued Interest Rule, if
(i) a portion of the initial purchase price of a Rate Bubble Bond is allocable
to interest that has accrued under the terms of the Bond prior to its issue date
("Pre-Issuance Accrued Interest") and (ii) the Bond provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of the Pre-Issuance Accrued Interest, the Bond's
issue price may be computed by subtracting from the issue price the amount of
Pre-Issuance Accrued Interest. If the Bondholder opts to apply the Pre-Issuance
Accrued Interest Rule, the portion of the interest received on the first
Distribution Date equal to the Pre-Issuance Accrued Interest would be treated as
a return of such interest and would not be treated as a payment on the Bond.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Bond
will not have original issue discount attributable to the First Distribution
Period, provided that the increased effective interest rate for that Period is
attributable solely to Pre-Issuance Accrued Interest, as typically will be the
case. The Tax Administrator intends to apply the Pre-Issuance Accrued Interest
Rule to each Rate Bubble Bond for which it is available if the Bond 's stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of Rate Bubble Bond is longer than subsequent Distribution
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Bond's stated interest because its
effective interest rate during the First Distribution Period typically will be
less than its stated interest rate. Thus, a Bond with a long First Distribution
Period typically will be a Teaser Bond, as discussed above. The Pre-Issuance
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Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Bond that is normally allocable to interest accrued under the terms of
such Bond before its issue date. All amounts paid for such a Teaser Bond at
issuance, regardless of how designated, will be included in the issue price of
such Bond for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect to
Bonds, the payments on which consist entirely or primarily of a specified
nonvarying portion of the interest payable on one or more Mortgage Loans
("Interest Weighted Bonds"). Unless and until the Service provides contrary
administrative guidance on the income tax treatment of an Interest Weighted
Bond, the Tax Administrator will take the position that an Interest Weighted
Bond does not bear qualified stated interest, and will account for the income
thereon as described in " -- Interest Weighted Bonds and Non-VRDI Bonds" herein.
Some Interest Weighted Bonds may provide for a relatively small amount of
principal and for interest that can be expressed as qualified stated interest at
a very high fixed rate with respect to that principal ("Superpremium Bonds").
Superpremium Bonds technically are issued with amortizable premium. However,
because of their close similarity to other Interest Weighted Bonds it appears
more appropriate to account for Superpremium Bonds in the same manner as for
other Interest Weighted Bonds. Consequently, in the absence of further
administrative guidance, the Tax Administrator intends to account for
Superpremium Bonds in the same manner as other Interest Weighted Bonds. However,
there can be no assurance that the Service will not assert a position contrary
to that taken by the Tax Administrator, and, therefore, holders of Superpremium
Bonds should consider making a protective election to amortize premium on such
Bonds.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the Bonds, each investor
should consult his own tax advisor to determine the appropriate amount and
method of inclusion in income of original issue discount on the Bonds for
federal income tax purposes.
Variable Rate Bonds
A Bond may pay interest at a variable rate (a "Variable Rate Bond"). A
Variable Rate Bond that qualifies as a "variable rate debt instrument" as that
term is defined in the OID Regulations (a "VRDI") will be governed by the rules
applicable to VRDIs in the OID Regulations, which are described below. A
Variable Rate Bond qualifies as a VRDI under the OID Regulations if (i) the Bond
is not issued at a premium to its noncontingent principal amount in excess of
the lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Bond or (b) 15 percent of such noncontingent principal
amount (an "Excess Premium"); (ii) stated interest on the Bond compounds or is
payable unconditionally at least annually at (a) one or more qualified floating
rates, (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate", and (iii) the qualified floating
rate or the objective rate in effect during an accrual period is set at a
current value of that rate (i.e. , the value of the rate on any day occurring
during the interval that begins three months prior to the first day on which
that value is in effect under the Bond and ends one year following that day).
On December 16, 1994, the Treasury issued proposed regulations that both
address the federal income tax treatment of debt obligations that provide for
one or more contingent payments and would make certain changes to rules
applicable to VRDIs in the OID Regulations (the "1994 Proposed Regulations").
Pursuant to certain of the amendments to the OID Regulations that are set forth
in the 1994 Proposed Regulations, (i) a Variable Rate Bond would qualify as a
VRDI only if, in addition to satisfying the three conditions set forth in the
current OID Regulations (and described above), such Bond does not provide for
any principal payments that are contingent and (ii) a Variable Rate Bond that
does not qualify as a VRDI would be treated as a debt obligation that provides
for one or more contingent payments. Those proposed amendments to the OID
Regulations would apply retroactively to debt instruments issued on or after
April 4, 1994, which is the effective date of the OID Regulations. Consequently,
unless and until the Service provides contrary administrative guidance on the
income tax treatment of Variable Rate Bonds that do not qualify as VRDIs, the
Tax Administrator intends to treat such Bonds as debt obligations that provide
for one or more contingent payments and intends to account for the income
thereon as described in " -- Interest Weighted Bonds and Non-VRDI Bonds" herein.
Under the OID Regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than zero but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate. If a Bond provides for two or more qualified floating
rates that reasonably can be
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expected to have approximately the same values throughout the term of the Bond,
the qualified floating rates together will constitute a single qualified
floating rate. Two or more qualified floating rates conclusively will be
presumed to have approximately the same values throughout the term of a Bond, if
the values of all such rates on the issue date of the Bond are within 25 basis
points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate (a
"Cap"), a restriction or restrictions on the minimum stated interest rate (a
"Floor"), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (a "Governor"), or other similar restriction only if:
(a) the Cap, Floor, or Governor is fixed throughout the term of the related Bond
or (b) the Cap, Floor, Governor, or similar restriction is not reasonably
expected, as of the issue date, to cause the yield on the Bond to be
significantly less or significantly more than the expected yield on the Bond
determined without such Cap, Floor, Governor, or similar restriction, as the
case may be. Although the OID Regulations are unclear, it appears that a VRDI,
the principal rate on which is subject to a Cap, Floor, or Governor that itself
is a qualified floating rate, bears interest at an objective rate.
Under the OID Regulations, an objective rate is a rate (other than a
qualified floating rate) that is determined using a single fixed formula and is
based on (i) one or more qualified floating rates (e.g., a rate equal to a
multiple greater than 1.35 times a qualified floating rate), (ii) one or more
rates where each rate would be a qualified floating rate for a debt instrument
denominated in a currency other than the currency in which the debt instrument
is denominated, (iii) the yield or changes in the price of actively traded
personal property (other than stock or debt of the issuer or certain related
parties), or (iv) any combination of objective rates. Notwithstanding the
foregoing, a variable rate will not be considered an objective rate if the
average value of the rate during the first half of the Bond's term reasonably is
expected to be either significantly less than or significantly greater than the
average value of the rate during the final half of the instrument's term (i.e. ,
if the rate will result in a significant frontloading or backloading of
interest). Additional objective rates subsequently may be designated by the
Service in revenue rulings or revenue procedures. An objective rate also
includes a "qualified inverse floating rate" if the rate is equal to a fixed
rate minus a qualified floating rate and variations in the rate reasonably can
be expected to inversely reflect contemporaneous variations in the cost of newly
borrowed funds (disregarding any Caps, Floors, Governors, or similar
restrictions on the rate).
Under the 1994 Proposed Regulations, an objective rate would be redefined
as a rate (other than a qualified floating rate) that (i) is determined using a
single fixed formula, (ii) is based on objective financial or economic
information, and (iii) is not based on information that either is within the
control of the issuer (or a related party) or is unique to the circumstances of
the issuer (or related party), such as dividends, profits, or the value of the
issuer's (or related party's) stock. That definition is broader than the
definition of objective rate set forth in the OID Regulations and would include,
in addition to a rate that is based on one or more qualified floating rates or
on the yield of actively traded personal property, a rate that is based on
changes in a general inflation index. In addition, a rate would not fail to be
an objective rate under the 1994 Proposed Regulations merely because it is based
on the credit quality of the issuer. The revised definition of an objective rate
in the 1994 Proposed Regulations is proposed to be effective for debt
instruments issued on or after the date that is 60 days after the date on which
such regulations are published as final regulations in the Federal Register.
Under the OID Regulations if interest on a Variable Rate Bond is stated at
a fixed rate for an initial period of less than one year followed by a variable
rate that is either a qualified floating rate or an objective rate for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate Bond
that qualifies as a VRDI and provides for stated interest unconditionally
payable in cash or property at least annually at a single qualified floating
rate or a single objective rate (a "Single Rate VRDI Bond") is treated as
qualified stated interest. The amount and accrual of OID on a Single Rate VRDI
Bond is determined, in general, by converting such Bond into a hypothetical
fixed rate bond and applying the rules applicable to fixed rate bonds described
under "Original Issue Discount" above to such hypothetical fixed rate bond.
Except as provided below, the amount and accrual of OID on a Variable Rate
Bond that qualifies as a VRDI but is not a Single Rate VRDI Bond (a "Multiple
Rate VRDI Bond") is determined by converting such Bond into a hypothetical
equivalent fixed rate bond that has terms that are identical to those provided
under the Multiple Rate VRDI Bond, except that such hypothetical equivalent
fixed rate bond will provide for fixed rate substitutes in lieu of the qualified
floating rates or objective rates provided for under the Multiple Rate VRDI
Bond. A Multiple Rate VRDI Bond that provides for a qualified floating rate or
rates or a qualified inverse floating rate is converted to a hypothetical
equivalent fixed rate bond by assuming
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that each qualified floating rate or the qualified inverse floating rate will
remain at its value as of the issue date. A Multiple Rate VRDI Bond that
provides for an objective rate or rates is converted to a hypothetical
equivalent fixed rate bond by assuming that each objective rate will equal a
fixed rate that reflects the yield that reasonably is expected for the Multiple
Rate VRDI Bond. Qualified stated interest or original issue discount allocable
to an accrual period with respect to a Multiple Rate VRDI Bond must be increased
(or decreased) if the interest actually accrued or paid during such accrual
period exceeds (or is less than) the interest assumed to be accrued or paid
during such accrual period under the hypothetical equivalent fixed rate bond.
The 1994 Proposed Regulations would amend the OID Regulations to clarify
that qualified stated interest or original issue discount allocable to an
accrual period with respect to a Single Rate VRDI Bond also must be increased
(or decreased) if the interest actually accrued or paid during such accrual
period exceeds (or is less than) the interest assumed to be accrued or paid
during such accrual period under the related hypothetical fixed rate bond.
Because that amendment is intended to clarify the OID Regulations, it is
proposed to be effective for debt instruments issued on or after April 4, 1994,
which is the effective date of the OID Regulations.
Under the OID Regulations, the amount and accrual of OID on a Multiple Rate
VRDI Bond that provides for stated interest at either one or more qualified
floating rates or at a qualified inverse floating rate and in addition provides
for stated interest at a single fixed rate (other than an initial fixed rate
that is intended to approximate the subsequent variable rate) is determined
using the method described above for all other Multiple Rate VRDI Bonds except
that prior to its conversion to a hypothetical equivalent fixed rate bond, such
Multiple Rate VRDI Bond is treated as if it provided for a qualified floating
rate (or a qualified inverse floating rate), rather than the fixed rate. The
qualified floating rate (or qualified inverse floating rate) replacing the fixed
rate must be such that the fair market value of the Multiple Rate VRDI Bond as
of its issue date would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified floating
rate (or qualified inverse floating rate), rather than the fixed rate.
Bonds of certain Series may provide for interest based on a weighted
average of the interest rates on some or all of the Mortgage Loans securing such
Bonds ("Weighted Average Bonds"). Under the OID Regulations, it appears that
Weighted Average Bonds secured by Mortgage Loans that are exclusively ARM Loans
bear interest at an "objective rate" provided the ARM Loans themselves bear
interest at qualified floating rates. However, under the OID Regulations,
weighted Average Bonds secured by Mortgage Loans that do not bear interest at
qualified floating rates ("Non-Objective Weighted Average Bonds" or NOWA Bonds")
do not bear interest at an objective or a qualified floating rate and,
consequently, do not qualify as VRDIs. Accordingly, unless and until the Service
provides contrary administrative guidance on the income tax treatment of NOWA
Bonds, the Tax Administrator intends to treat such Bonds as debt obligations
that provide for one or more contingent payments, and will account for the
income thereon as described in " -- Interest Weighted Bonds and Non-VRDI Bonds"
herein.
Bonds of certain Series may provide for the payment of interest at a rate
determined as the difference between two interest rate parameters, one of which
is a variable rate and the other of which is a fixed rate or a different
variable rate ("Inverse Floater Bonds"). Under the OID Regulations, Inverse
Floater Bonds generally bear interest at objective rates because their rates
either constitute "qualified inverse floating rates" under those Regulations or,
although not qualified floating rates themselves, are based on one or more
qualified floating rates. Consequently, if such Bonds are not issued at an
Excess Premium and their interest rates otherwise meet the test for qualified
stated interest, the income on such Bonds will be accounted for under the rules
applicable to VRDIs described above. However, an Inverse Floater Bond may have
an interest rate parameter equal to the weighted average of the interest rates
on some or all of the underlying Mortgage Loans in a case where one or more of
those rates is a fixed rate or otherwise may not qualify as a VRDI. Unless and
until the Service provides contrary administrative guidance on the income tax
treatment of such Inverse Floater Bonds, the Tax Administrator intends to treat
such Bonds as debt obligations that provide for one or more contingent payments,
and will account for the income thereon as described in " -- Interest Weighted
Bonds and Non-VRDI Bonds" herein.
Anti-Abuse Rule
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
Regulations in a way that produces unreasonable tax results, the Treasury issued
proposed and temporary regulations containing an anti-abuse rule on the same
date as the issuance of the OID Regulations. The proposed and temporary
regulations provide that if a principal purpose in structuring a debt
instrument, engaging in a transaction, or applying the OID Regulations is to
achieve a result that is unreasonable in light of the purposes of the applicable
statutes, the Service can apply or depart from the OID Regulations as necessary
or appropriate to achieve a reasonable result. A result is
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not considered unreasonable under the proposed and temporary regulations,
however, in the absence of a substantial effect on the present value of a
taxpayer's tax liability.
Interest Weighted Bonds and Non-VRDI Bonds
The treatment of a NOWA Bond, a Variable Rate Bond that is issued at an
Excess Premium, or any other Variable Rate Bond that does not qualify as a VRDI
(each a "Non-VRDI Bond") or an Interest Weighted Bond is unclear under current
law. The OID Regulations are ambiguous as to whether interest payments (other
than qualified stated interest) on a Non-VRDI Bond or an Interest Weighted Bond
are considered to be contingent payments subject to special original issue
discount rules described in the next paragraph or whether such payments should
be treated as Deemed Principal Payments subject to the regular original issue
discount rules described in "Original Issue Discount" above. Moreover, to the
extent that the contingent payment rules are applicable, their impact on
instruments that are subject to Section 1272(a)(6) of the Code is unclear.
The 1994 Proposed Regulations contain provisions (the "Proposed Contingent
Payment Regulations") that address the federal income tax treatment of debt
obligations with one or more contingent payments ("Contingent Payment
Obligations"). The Proposed Contingent Payment Regulations supersede prior
proposed regulations addressing the tax treatment of Contingent Payment
Obligations that were issued by the Service in 1986 and 1992. Under the Proposed
Contingent Payment Regulations, any variable rate debt instrument that is not a
VRDI is classified as a Contingent Payment Obligation. However, the Proposed
Contingent Payment Regulations, by their terms, do not apply to debt instruments
that are subject to Section 1272(a)(6) of the Code. Furthermore, they are
proposed to be effective only for debt instruments issued 60 days or more after
such Regulations are finalized. In the absence of further guidance, the Tax
Administrator will account for Non-VRDI Bonds, Interest Weighted Bonds, and any
other Bonds that are Contingent Payment Obligations in accordance with Code
Section 1272(a)(6). Income will be accrued on such Bonds based on a constant
yield that is derived from a projected payment schedule as of the Closing Date.
The project payment schedule will take into account the Pricing Payment
Assumptions and the interest payments that are expected to be made based on the
value of any relevant indices on the issue date. To the extent that actual
payments differ from projected payments for a particular taxable year,
appropriate adjustments to interest income and expense accruals will be made for
that year. In the case of a Weighted Average Bond, the projected payment
schedule will be derived based on the assumption that the principal balances of
the Mortgage Loans that collateralize the Bond pay down pro rata.
The method described in the foregoing paragraph for accounting for Interest
Weighted Bonds, Non-VRDI Bonds, and any other Bonds that are Contingent Payment
Obligations is consistent with Code section 1272(a)(6) and the legislative
history thereto. Because of the uncertainty with respect to the treatment of
such Bonds under the OID Regulations and Proposed Contingent Payment
Regulations, however, there can be no assurance that the Service will not assert
successfully that a method less favorable to Bondholders will apply. In view of
the complexities and the current uncertainties as to income inclusions with
respect to Non-VRDI Bonds, Interest Weighted Bonds and other Bonds that are
Contingent Payment Obligations, each investor should consult his own tax advisor
to determine the appropriate amount and method of income inclusion on such Bonds
for federal income tax purposes.
Market Discount
A subsequent purchaser of a Bond at a discount from its outstanding
principal amount (or, in the case of a Bond having original issue discount, its
"adjustable issue price") will acquire such Bond with market discount. The
purchaser generally will be required to recognize the market discount (in
addition to any original issue discount remaining with respect to the Bond) as
ordinary income. A person who purchases a Bond at a price lower than the Bond's
outstanding principal amount but higher than its adjusted issue price does not
acquire the Bond with market discount, but will be required to report original
issue discount, appropriately adjusted to reflect the excess of the price paid
over the adjusted issue price. See "Original Issue Discount." A Bond will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Bond having original issue discount, the adjusted
issue price of such Bond), multiplied by (ii) the WAM of the Bond (determined as
for original issue discount) remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a Bond with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Bond having original issue discount any Deemed Principal Payments) are
received, in an amount equal to the lesser of (i) the amount of the principal
payment received or (ii) the amount of market discount that has "accrued" (as
described below), but that has not yet been included in income. The purchaser
may make a special election, which generally applies to all market discount
instruments held or acquired by the purchaser in the taxable year of election or
thereafter, to recognize market discount currently on an uncapped accrual basis
(the "Current Recognition
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Election"). In addition, the purchaser may make an All OID Election with respect
to a Bond purchased with market discount. See " -- Original Issue Discount."
Until the Treasury promulgates applicable regulations, the purchaser of a
Bond with market discount generally may elect to accrue the market discount
either: (i) on the basis of a constant interest rate; (ii) in the case of a Bond
not issued with original issue discount, in the ratio of stated interest payable
in the relevant period to the total stated interest remaining to be paid from
the beginning of such period; or (iii) in the case of a Bond issued with
original issue discount, in the ratio of original issue discount accrued for the
relevant period to the total remaining original issue discount at the beginning
of such period. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Bondholder who has acquired any Bond with market discount generally will
be required to treat a portion of any gain on a sale or exchange of the Bond as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial principal payments were
received. Moreover, such Bondholder generally must defer interest deductions
attributable to any indebtedness incurred or continued to purchase or carry the
Bond to the extent they exceed income on the Bond. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If a Bondholder makes a
Current Recognition Election or an All OID Election, the interest deferral rule
will not apply. Under the Proposed Contingent Payment Regulations, a secondary
market purchaser of a Non-VRDI Bond or an Interest Weighted Bond at discount
generally would continue to accrue interest and determine adjustments on such
Bond based on the original projected payment schedule devised by the issuer of
such Bond. See " -- Original Issue Discount -- Interest Weighted Bonds and
Non-VRDI Bonds" herein. The holder of such a Bond would be required, however, to
allocate the difference between the adjusted issue price of the Bond and its
basis in the Bond as positive adjustments to the accruals or projected payments
on the Bond over the remaining term of the Bond in a manner that is reasonable
(e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
For example, the treatment of a Bond subject to redemption at the option of the
Issuer that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in such a case would be
similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Bonds. Prospective investors should consult their
own tax advisors regarding the application of the market discount rules to the
Bonds.
Amortizable Premium
A purchaser of a Bond who purchases the Bond at a premium over the total of
its Deemed Principal Payments may elect to amortize such premium under a
constant yield method that reflects compounding based on the interval between
payments on the Bonds. The legislative history of the 1986 Act indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a Bond will be calculated using the
Pricing Prepayment Assumptions. Under the Code, except as otherwise provided in
Treasury regulations yet to be issued, amortized premium would be treated as an
offset to interest income on a Bond and not as a separate deduction item. If a
holder makes an election to amortize premium on a Bond, such election will apply
to all taxable debt instruments (including all Bonds) held by the holder at the
beginning of the taxable year in which the election is made, and to all taxable
debt instruments acquired thereafter by such holder, and will be irrevocable
without the consent of the Service. Purchasers who pay a premium for the Bonds
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Amortizable premium on a Bond that is subject to redemption at the option
of the Seller generally must be amortized as if the optional redemption price
and date were the Bond's principal amount and maturity date if doing so would
result in a smaller amount of premium amortization during the period ending with
the optional redemption date. Thus, a Bondholder would not be able to amortize
any premium on a Bond that is subject to optional redemption at a price equal to
or greater than the Bondholder's acquisition price unless and until the
redemption option expires. In cases where premium must be amortized on the basis
of the price and date of an optional redemption, the Bond will be treated as
having matured on the redemption date for the redemption price and then having
been reissued on that date for that price. Any premium remaining on the Bond at
the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above.
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Under the Proposed Contingent Payment Regulations, a secondary market
purchaser of a Non-VRDI Bond on an Interest Weighted Bond at a premium generally
would continue to accrue interest and determine adjustments on such Bond based
on the original projected payment schedule devised by the issuer of such Bond.
See " -- Original Issue Discount -- Interest Weighted Bonds and Non-VRDI Bonds"
herein. The holder of such a Bond would allocate the difference between its
basis in the Bond and the adjusted issue price of the Bond as negative
adjustments to the accruals or projected payments on the Bond over the remaining
term of the Bond in a manner that is reasonable (e.g., based on a constant yield
to maturity).
Gain or Loss on Disposition
If a Bond is sold, the Bondholder will recognize gain or loss equal to the
difference between the amount realized on the sale and his adjusted basis in the
Bond. The adjusted basis of a Bond generally will equal the cost of the Bond to
the Bondholder, increased by any original issue discount or market discount
previously includible in the Bondholder's gross income with respect to the Bond
and reduced by the portion of the basis of the Bond allocable to payments on the
Bond (other than qualified stated interest) previously received by the
Bondholder and by any amortized premium. Similarly, a Bondholder who receives a
scheduled or prepaid principal payment with respect to a Bond will recognize
gain or loss equal to the difference between the amount of the payment and the
allocable portion of his adjusted basis in the Bond. Except to the extent that
the market discount rules apply and except as provided below, any gain or loss
on the sale or other disposition of a Bond generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Bond is held as a
capital asset for more than 12 months.
If the holder of a Bond is a bank, thrift, or similar institution described
in Section 582 of the Code, any gain or loss on the sale or exchange of the Bond
will be treated as ordinary income or loss. In the case of other types of
holders, gain from the disposition of a Bond that otherwise would be capital
gain will be treated as ordinary income to the extent that the amount actually
includible in income with respect to the Bond by the Bondholder during his
holding period is less than the amount that would have been includible in income
if the yield on that Bond during the holding period had been 110% of a specified
U.S. Treasury borrowing rate as of the date that the Bondholder acquired the
Bond. Although the legislative history to the 1986 Act indicates that the
portion of the gain from disposition of a Bond that will be recharacterized as
ordinary income is limited to the amount of original issue discount (if any) on
the Bond that was not previously includible in income, the applicable Code
provision contains no such limitation.
A portion of any gain from the sale of a Bond that might otherwise be
capital gain may be treated as ordinary income to the extent that such Bond is
held as part of a "conversion transaction" within the meaning of Selection 1258
of the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in Bonds or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable federal rate" (which rate is computed and published
monthly by the Service) at the time the taxpayer entered into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income from the transaction.
Miscellaneous Tax Aspects
Backup Withholding. A Bond may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to "reportable payments,"
which include interest payments and principal payments to the extent accrued
original issue discount as well as distributions of proceeds from a sale of
Bonds. This withholding generally applies if the Bondholder of a Bond (i) fails
to furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee or the Issuer an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Trustee or the
Issuer or such Bondholder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN is its correct number and that the
Bondholder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Bondholders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below) complying with requisite certification
procedures. Bondholders of the Bonds should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Bondholders and to the Internal Revenue
Service each calendar year the amount of any "reportable payments" during such
year and the amount of tax withheld, if any, with respect to payments on the
Bonds within a reasonable time after the end of each calendar year.
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Foreign Bondholders. Under the Code, interest and original issue discount
income (including accrued interest or original issue discount recognized on sale
or exchange) paid or accrued with respect to Bonds held by Bondholders who are
nonresident alien individuals, foreign corporations, foreign partnerships or
certain foreign estates and trusts ("Nonresidents") or Bondholders holding on
behalf of a Nonresident generally will be treated as "portfolio interest" and
therefore will not be subject to any United States tax provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Bondholder and (ii) the Issuer (or other person who would
otherwise be required to withhold tax from such payments) is provided with an
appropriate statement that the beneficial owner of a Bond is a Nonresident.
Interest (including original issue discount) paid on Bonds to Bondholders who
are foreign persons will not be subject to withholding if such interest is
effectively connected with a United States business conducted by the Bondholder.
Such interest (including original issue discount) will, however, generally be
subject to the regular United States income tax.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
BONDHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY
ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE BONDS.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Bonds. State income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of the
income tax laws of any state. Therefore, potential investors should consult
their own tax advisors with respect to the various state tax consequences of an
investment in the Bonds.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those pension, profit sharing, and other
employee benefit plans to which it applies ("Plans") and on those persons who
are fiduciaries or parties in "interest" with respect to such Plans. In
considering an investment of the assets of a Plan in Bond, a fiduciary should
consider, among other things, (i) the purposes, requirements, and liquidity
needs of such Plan; (ii) the definition of Plan assets under ERISA and the
applicable U.S. Department of Labor ("DOL") regulations; (iii) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(C) of
ERISA; (iv) whether such an investment is appropriate for the Plan and prudent,
considering the nature of the investment and the fact that no market in which
such fiduciary can sell or otherwise dispose of Offered Bonds is expected to
arise. The prudence of a particular investment must be determined by the
responsible fiduciary (usually the trustee or investment manager) with respect
to each Plan taking into account all of the facts and circumstances of the
investment.
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit certain
transactions that involve (i) a Plan and any party in interest under ERISA or
"disqualified person" under the Code with respect to the Plan and (ii) Plan
assets. A violation of those prohibited transaction rules may generate other
disqualified persons. Consequently, a Plan contemplating an investment in the
Bonds should consider whether the Issuer, any other person associated with the
issuance and administration of the Bonds, or any affiliate of the foregoing is
or might become a party in interest or a disqualified person with respect to the
Plan. In addition, a Plan should consider whether other persons who are parties
in interest or disqualified persons might acquire ownership rights in the Issuer
or its assets by virtue of the "Look-Through Rule" described below, or
otherwise. In either case, the acquisition or holding of Bonds by or on behalf
of the Plan could be considered to give rise to an indirect prohibited
transaction under ERISA and the Code in the nature of an extension of credit by
the Plan. Conversely, if a party in interest or disqualified person with respect
to a Plan acquires or holds Bonds while the Plan is deemed to own ownership
rights in the Issuer or its assets by virtue of the "Look-Through Rule"
described below, an indirect prohibited transaction also could arise. However,
certain exemptions to the prohibited transaction rules could be applicable to
the situations described in this paragraph, depending on the type and
circumstances of the Plan fiduciary making the decision to acquire the Bond
(including a Bond recharacterized as an ownership interest in the Issuer or its
assets). Those exemptions potentially include Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts, PTCE 91-38, regarding investments by bank collective
investment funds, and PTCE 84-14, regarding transactions effected by a
"qualified professional asset manager."
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If a Plan were deemed to have acquired indirectly ownership rights in the
Issuer or its assets, certain transactions involving the operations of the
Issuer might be deemed to be prohibited transactions under ERISA and the Code.
Regulations of the DOL set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations") define "plan assets" to include not only securities held by a Plan
but also the underlying assets of the Issuer of any equity securities (the
"Look-Through Rule") unless one or more exceptions specified in the regulations
are satisfied. The Plan Asset Regulations define an equity security as a
security other than a security that is treated as debt for state law purposes
and that has no substantial equity features. Consequently, to the extent a Class
of Bonds is treated as debt for purposes of the Plan Asset Regulations, the
Look-through Rule should not apply to a Plan's purchase or holding of Bonds of
that Class. If a Class of Bonds is treated as equity for those purposes (a
"Recharacterized Class"), however, the Look-Through Rule would apply unless one
or more exceptions specified in the Plan Asset Regulations is satisfied.
Under the Plan Asset Regulations, two exceptions might be available to a
Recharacterized Class of Bonds. The first (the "Publicly Offered Exception") is
available to a Recharacterized Class of Bonds that is registered under the
Securities Exchange Act of 1934, as amended, freely transferable, and held by
more than 100 unrelated investors. The second is available if, immediately after
the most recent acquisition of a Bond of a Recharacterized Class, benefit plan
investors (which include government plans and individual retirement accounts) do
not own 25% or more of the value of any Class of Recharacterized Bonds (the
"Insignificant Participation Exception"). Prospective Plan investors should be
aware that even if the Look-Through Rule does not apply to a Recharacterized
Class as a result of the applicability of the Publicly Offered Exception or the
Insignificant Participation Exception, the purchase of Bonds of such Class
nonetheless could constitute a prohibited transaction if the Underwriter and
certain of its affiliates were considered parties in interest or disqualified
persons, such as where the Underwriter is a fiduciary or other service provider
for a Plan. PTCE 75-1 generally exempts purchases by a Plan from an underwriter
who is a party in interest or disqualified person, if, among other things, the
underwriter is not acting as a fiduciary for the Plan in such circumstances.
Such a Plan considering the purchase of Bonds should exercise caution with
respect to such purchase and consult with its counsel regarding the availability
of relief under PTCE 75-1.
Due to the complexity of the rules and penalties under ERISA and the Code
applicable to Plans, potential Plan investors should consult their advisors and
counsel regarding (i) the characterization of each Class of Bonds as debt or
equity for ERISA purposes and (ii) the application of the Publicly Offered
Exception, the Insignificant Participation Exception or other available
exemptions from the prohibited transaction rules of ERISA and the Code.
Potential investors also should be aware that ERISA requires that the assets of
a Plan be valued at their fair market value as of the close of the plan year and
that the Issuer does not plan to provide any valuations to Bondholders.
LEGAL INVESTMENT
As set forth in the related Prospectus Supplement, one or more Classes of
Offered Bonds of any Series may constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are secured by first liens on residential properties and are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization and, as such, will 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, savings 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 of 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. Bonds of a Series that
are secured by second liens on residential properties will not be treated as
"mortgage related securities" under SMMEA, regardless of the rating assigned
such Bonds.
Under SMMEA, if a State enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Bonds will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Several states have enacted legislation overriding SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in any securities, or require the sale or other disposition of any
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
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SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitations as to the percentage of their assets
represented thereby; federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority may
prescribe. Bonds that do not constitute "mortgage related securities" under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws and may not be "legal investments" to the same extent as
"mortgage related securities" under SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase certain types of the Bonds or to
purchase Bonds representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Bonds constitute legal investments for such investors.
USE OF PROCEEDS
The Issuer will apply all or substantially all of the net proceeds from the
sale of each Series offered hereby and by the related Prospectus Supplement to
purchase the Mortgage Loans, to repay indebtedness that has been incurred to
obtain funds to acquire the Mortgage Loans, to establish the Reserve Fund, if
any, for the Series and to pay costs of structuring and issuing the Bonds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or through one
or more underwriters or underwriting syndicates or through designated agents.
The Issuer also may sell the Bonds initially to an affiliate, and such affiliate
may sell the Bonds, from time to time, either directly or through one or more
underwriters, underwriting syndicates or through designated agents. The Bonds of
a Series may be acquired by underwriters for their own account and may be resold
from time to time in one or more transactions, at a fixed public offering price
or prices, which may change, or at varying prices determined at the time of
sale. The Issuer also may authorize, from time to time, underwriters acting as
agents to offer and sell the Bonds upon the terms and conditions set forth in
the related Prospectus Supplement.
The related Prospectus Supplement or Supplements for each Series will set
forth the terms of the offering of such Series and of each Class of Bonds within
such Series, including the name or names of the underwriters, the proceeds to
and their use by the Issuer, and either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers, or the method by which the price at
which the underwriters will sell the Bonds will be determined. If Bonds of a
Series are offered other than through underwriters, the related Prospectus
Supplement will contain information regarding the nature of such offering and
any agreements to be entered into between the Issuer and purchasers of Bonds of
such Series.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Issuer, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act of 1933.
Certain of the underwriters and their affiliates may engage in transactions
with, and perform services for, the Issuer or its affiliates.
The place and time of delivery for the Bonds of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Bonds offered hereby will be
passed upon for the Issuer by Hunton & Williams, Richmond, Virginia, and for the
underwriters by the firm specified in the related Prospectus Supplement.
FINANCIAL INFORMATION
Resource is not obligated with respect to the Bonds. Accordingly, the
Issuer has determined that financial statements of Resource are not material to
the offering made hereby. Any prospective purchaser who desires to review
financial information concerning the Issuer, however, will be provided with a
copy of the most recent financial statements of the Issuer upon request.
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GLOSSARY
There follows an abbreviated definition of certain capitalized terms used
in this Prospectus. The Indenture, the Master Servicing Agreement, the
Prospectus Supplement or the Servicing Agreement may contain a more complete
definition of certain of the terms defined herein and reference should be made
to the Indenture, the Master Servicing Agreement, the Prospectus Supplement and
the Servicing Agreement for a more complete definition of all such terms.
"Accounting Date" means with respect to each Payment Date the last day of
the month preceding the month in which such Payment Date occurs on such other
date as may be specified in the related Prospectus Supplement.
"Accretion Class" or "Accretion Bonds" means a Class of Bonds comprised of
Accretion Bonds upon which interest is accrued and is compounded and added to
the principal thereof periodically, but which is not entitled to payments of
principal or interest until a specified date or specified Classes of the same
Series have been paid in full.
"Additional Mortgage Collateral" means any Mortgage Loans or other Mortgage
Collateral added to the Trust Estate for a Series of Bonds (other than a
substitute Mortgage Loan) after the initial closing for the Series of Bonds.
"Advance" means as to any Mortgage Loan, any P&I Advance, T&I Advance or
Property Protection Advance made by a Servicer or a Special Servicer or, upon
the default by a Servicer on its obligation to make such an Advance, by the
Master Servicer or such other party as may be specified in the related
Prospectus Supplement.
"Affiliate" means any person or entity controlling, controlled by or under
common control with a specified entity. "Control" means the power to direct the
management and policies of a person or entity, directly or indirectly, whether
through ownership of voting securities, by contract or otherwise. "Controlling"
and "Controlled" will have meanings correlative to the foregoing.
"Bonds" means the Issuer's Collateralized Mortgage Bonds issued pursuant to
the Indenture.
"Bondholder" or "Holder" means the person in whose name a Bond is
registered in the Bond Register for the related Series.
"Book-Entry Bonds" means a Class or Classes of Bonds that are initially
issued in book-entry form through a depository.
"Borrower" means the individual or individuals obligated to repay a
Mortgage Loan. (The Borrower may be the beneficiary or beneficiaries of an
Illinois land trust when the Mortgaged Premises are located in Illinois.)
"Business Day" means any day that is not a Saturday, Sunday or other day on
which commercial banking institutions in the city in which the corporate trust
office of the Trustee is then located, or in the city or cities in which the
offices of the Master Servicer are then located, are authorized or obligated by
law or executive order to be closed.
"Class" means, collectively, all of the Bonds bearing the same designation.
"Class Interest Rate" means with respect to any Class of Bonds the annual
rate, which may be a variable rate, at which interest accrues on the Bonds of
such Class, as specified in the related Prospectus Supplement.
"Closing Date" means the date on which a Series of Bonds is issued as set
forth in the Prospectus Supplement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Mortgage Loans, other mortgage collateral, and any
funds and Insurance Policies pledged to secure a Series.
"Collateral Proceeds Account" means the account created and maintained by
the Trustee for each Series of Bonds.
"Collateral Value" means, unless otherwise specified in the related
Prospectus Supplement, with respect to a Mortgage Loan (or REO to the extent of
a Foreclosure of a Mortgage Loan), an amount generally equal to (i) the
Scheduled Principal Balance of such Mortgage Loan (or related REO) or (ii) as
specified in the related Prospectus Supplement, the Scheduled Principal Balance
of such Mortgage Loan multiplied by a fraction, the numerator of which is the
Net Rate of the Mortgage Loan and the denominator of which is the Collateral
Value Discount Rate (the "Interest Method").
"Collateral Value Discount Rate" means the percentage rate that, multiplied
by the required payments on the Mortgage Loans securing the Bonds, will assure
the availability of sufficient funds to pay on the Bonds.
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"Compound Value" means with respect to any Payment Date for an Accretion
Class, the original principal amount of such Class of Bonds, plus all interest
accrued and added to the principal thereof through the Accounting Date preceding
the Payment Date, compounded at the interest rate for such Class of Bonds, and
with respect to any calculation on a date other than a Payment Date, the
Compound Value as of the immediately preceding Accounting Date or (if prior to
the first Payment Date) the original principal amount of such Accretion Class of
Bonds. The principal amount of any Accretion Bond at any time will be equal to
its Compound Value. The Compound Value of an Accretion Bond will be reduced by
any payments of principal on such Bond.
"Condemnation Award" means any awards, payments, proceeds or damages
received pursuant to any action or proceeding relating to any condemnation or
other taking, whether direct or indirect, of the Mortgaged Premises or for
conveyances in lieu of condemnation.
"Converted Mortgage Loans" means a Mortgage Loan that, pursuant to the
terms of the related Note, has converted from an adjustable to a fixed Note Rate
or from one fixed Note Rate to a lower fixed Note Rate.
"Current Interest Class" or "Current Interest Bond" means any Class of
Bonds that bear interest at the Class Interest Rate, other than Accretion Bonds
or Principal-Only Bonds.
"Curtailment" means any partial prepayment of principal permitted under the
terms of a Note on a Mortgage Loan that otherwise is current.
"Custodial P&I Account" means the account established by each Servicer into
which the Servicer deposits collections of principal and interest on the
Mortgage Loans.
"Custodial Taxes and Insurance (T&I) Account" means an account maintained
by a Servicer specifically for the deposit and payment of required escrows.
"Cut-off Date" means the date specified in the Prospectus Supplement and
used as a basis for identifying which payments of principal of and interest due
on the Mortgage Loans are for the benefit of the Bondholders.
"Delinquency" means when all or part of the Borrower's Monthly Payment is
not paid on or before the Due Date.
"Discount Class" or "Discount Bonds" means any Class comprised of Bonds
that have a purchase price less than the Parity Price.
"Due Date" means the day of each month on which the Borrower's Monthly
Payment is due as stated in the Note.
"Due Period" means with respect to any Payment Date, the period commencing
on the second day of the calendar month preceding the calendar month in which
such Payment Date occurs and continuing through the first day of the calendar
month in which such Payment Date occurs.
"Eligible Investments" means those investments permitted under the
Indenture and acceptable to the Rating Agencies.
"Event of Default" means an event of default under the Indenture as
described under "The Indenture -- Events of Default."
"FHLMC" means Federal Home Loan Mortgage Corporation.
"Flood Insurance (Flood Insurance Policy)" means an Insurance Policy
insuring against flood damage to a Mortgaged Premises, required for Mortgaged
Premises located in "flood hazard" areas identified by the Secretary of HUD or
the Director of the Federal Emergency Management Agency.
"FNMA" means Federal National Mortgage Association.
"Foreclosure" means a proceeding pursuant to which a Security Instrument is
satisfied or released by foreclosure (whether by power of sale or judicial
proceeding), deed in lieu of foreclosure or any other comparable means.
"Hazard Insurance (Hazard Insurance Policy)" means replacement value
insurance coverage insuring against loss or damage from fire and other perils in
an amount not less than the greater of (i) the Unpaid Principal Balance of the
Mortgage Loan and (ii) 100% of the actual replacement value of the improvements,
annually adjusted, exclusive of foundations and excavations, naming the Issuer,
its successors and assigns as a loss payee, together with all riders and
endorsements thereto. Such coverage will include an inflation guard endorsement
and an agreed amount endorsement that suspends the applicability of any
co-insurance clause.
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"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture between the Issuer and the Trustee,
pursuant to which a Series of Bonds is issued, as such indenture may be
supplemented or amended from time to time by a Series Supplement.
"Insurance Policy" or "Insurance Policies" means any insurance for a
Mortgage Loan required by the terms of the Mortgage Loan and the Servicing
Agreement, including Primary Mortgage Insurance, Hazard Insurance, Flood
Insurance, and Title Insurance.
"Insurance Proceeds" means proceeds payable from an Insurance Policy or a
Pool Insurance Policy.
"Issuer" means MERIT Securities Corporation, a Virginia corporation.
"Liquidation" means (i) application of a payment to a Mortgage Loan that
results in the release of the lien of the Security Instrument on any Mortgaged
Premises, whether through foreclosure, condemnation, prepayment in full or
otherwise or, with respect to REO, an REO Disposition or (ii) the sale of any
defaulted Mortgage Loan.
"Liquidation Proceeds" means the amount received by the Servicer or Special
Servicer in connection with any Liquidation of a Mortgage Loan.
"Losses" means and includes for any Prepayment Period (i) any Realized
Losses on a defaulted Mortgage Loan and (ii) any reduction by a bankruptcy court
of either the Unpaid Principal Balance or Note Rate of a Mortgage Loan subject
to a bankruptcy proceeding.
"Master Servicer" means Resource or the entity specified in the Prospectus
Supplement for a Series that will administer and supervise the performance by
the Servicers of their duties and responsibilities under Servicing Agreements in
respect to Mortgage Loans securing a Series.
"Master Servicer Custodial Account" means a trust account established by
the Master Servicer into which the Servicer remits by wire transfer the Servicer
Remittance in respect of the Mortgage Loans.
"Master Servicer Remittance Date" means the date specified in the Master
Servicing Agreement by which the Master Servicer must remit funds in the Master
Servicer Custodial Account to the Collateral Proceeds Account for a Series.
"Monthly Payment" means with respect to any Mortgage Loan, the total
monthly payment due in the applicable month under the terms of the Note (i.e.,
the sum of the Scheduled Payment, and the monthly escrow deposit to the
Custodial Taxes and Insurance Account).
"Mortgage Collateral" means the Mortgage Loans and certain other assets
evidencing interests in loans secured by residential property securing a Series
or any REO.
"Mortgage Insurer" means any insurance company or other entity that
provides a Primary Mortgage Insurance Policy.
"Mortgage Loan" means the one- to four-family residential mortgage loans
evidenced by the Notes and Security Instruments that the Issuer has pledged to
the Trustee as Collateral for a Series of Bonds.
"Mortgage Loan Documents" means the original Note, the original Security
Instrument, the original assignment of the Security Instrument and any original
intervening assignments, the original Title Insurance Policy and the appraisal
report made at the time the Mortgage Loan was originated, and all other
documents held by the custodian or the Servicer.
"Mortgage Pool" means the group of Mortgage Loans securing a Series of
Bonds.
"Mortgaged Premises" means land and improvements thereon subject to the
lien of a Security Instrument.
"Net Rate" means, with respect to any Mortgage Loan, the Note Rate thereon
minus applicable servicing and administration fees, expressed as a percentage of
the applicable Mortgage Loan.
"Non-Recoverable Advance" means any portion of an Advance previously made
or proposed to be made by the Servicer, Special Servicer or Master Servicer that
has not been previously reimbursed, which in the good faith judgment of the
Special Servicer or the Master Servicer (in the case of the Servicer and the
Master Servicer) will not, or in the case of a proposed P&I Advance, would not
ultimately be recoverable from future payments by the Borrower, Insurance
Proceeds, Condemnation Awards, Liquidation Proceeds or collections related to
the REO, with respect to the Mortgaged Premises for which the Advance was made
or is proposed to be made, or in the case of a proposed T&I Advance or Property
Protection
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Advance, would not be ultimately recoverable from future cash flows on the
Mortgage Loans pledged as collateral for a Series of Bonds.
"Note" means a manually executed written instrument evidencing the
Borrower's promise to repay a stated sum of money, plus interest, to the
noteholder by a specific date according to a schedule of principal and interest
payments.
"Note Rate" means, with respect to a Mortgage Loan, the interest rate
payable by the Borrower on the Mortgage Loan according to the terms of the Note.
"Offered Bonds" means the Bonds actually offered pursuant to a Prospectus
Supplement appended to this Prospectus.
"Original Mortgage Collateral" means Mortgage Collateral initially pledged
to the Trustee to secure a Series of Bonds.
"Originator" means a savings and loan association, savings bank, commercial
bank, credit union, insurance company, or similar institution or an HUD approved
mortgagee that originates a Mortgage Loan.
"Parity Price" is the price at which a Class has a yield to maturity that
is equal to its coupon, after giving effect to any payment delay.
"Participant" means Resource or an affiliate thereof.
"Payment Date" means as to a Series, the date specified in the related
Prospectus Supplement for payment on the Bonds of such Series.
"P&I Advance" means an advance of principal and interest (net of servicing
fees) by the Servicer or the Special Servicer (or, upon a default by such party,
by the Master Servicer or such other party specified in the related Prospectus
Supplement) on a Mortgage Loan subject to a Delinquency.
"Pool Insurer" means any insurance company or other person that provides a
Pool Insurance Policy for a Series.
"Pool Insurance Policy" means an insurance policy to cover any loss
(subject to certain limitations) by reason of default by the Borrowers of the
Mortgage Loans securing a Series to the extent not covered by any Primary
Mortgage Insurance Policy.
"Premium Class" or "Premium Bonds" means any Class comprised of Bonds that
have a purchase price greater than or equal to the Parity Price.
"Prepayment Period" means, as to any Payment Date, the time period used to
identify prepayments or other unscheduled payments of principal or interest
received with respect to Mortgage Collateral that will be used to pay
Bondholders on such Payment Date.
"Primary Mortgage Insurance Policy" means an insurance policy covering a
Mortgage Loan securing a Series against loss of the insured portion of the
Unpaid Principal Balance of the covered Mortgage Loan together with accrued and
unpaid interest thereon.
"Principal Distribution Amount" means, with respect to a current Payment
Date for a Series of Bonds, the amount, if any, by which (i) the aggregate
Collateral Value of the Mortgage Loans securing the Series as of the most recent
Payment Date (or, in regard to the first Payment Date, as of the Cut-off Date
for such Series) exceeds (ii) the aggregate Collateral Value of the Mortgage
Loans securing the Series as of the current Payment Date, unless otherwise
specified in the Prospectus Supplement.
"Principal-Only Class" or "Principal-Only Bonds" means a Class of Bonds
that does not pay or accrue interest.
"Property Protection Advance" means an Advance made by a Servicer or the
Special Servicer in connection with the protection of a Mortgaged Premises,
including, without limitation, expenses related to Foreclosure proceedings and
Servicing Fees.
"Rating Agency(ies)" means, for any Class of Bonds, any nationally
recognized statistical rating agency, or its successor, that on the Closing Date
rated such Class of the Bonds at the request of the Issuer. If such agency or a
successor is no longer in existence, "Rating Agency" will be such nationally
recognized statistical rating agency, or other comparable Person, designated by
the Issuer, notice of which designation will be given to the Trustee and the
Master Servicer. References herein to any rating category of a Rating Agency
will mean such rating category without regard to any plus or minus or numerical
designation.
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"Realized Loss" means, with respect to each defaulted Mortgage Loan or REO
as to which a Liquidation has been made, an amount equal to the sum of (a) the
Unpaid Principal Balance of the Mortgage Loan as of the date of such
Liquidation, (b) interest at the applicable Note Rate, from the date as to which
interest was last paid through the end of the calendar month in which the
Liquidation occurred, on the Unpaid Principal Balance of such Mortgage Loan
outstanding during each Due Period in which accrued interest was not paid, (c)
any Property Protection Advances and Advances for taxes, assessments and
comparable items and insurance premiums, as required by the Servicing Agreement
or Special Servicing Agreement and (d) any other expenses (including any
servicing related fees) related to the Liquidation of the Mortgage Loan or REO,
minus the sum of (i) any funds received in connection with the Liquidation of
the related Mortgage Loan or REO prior to or during the month in which such
Liquidation occurred, (ii) and any Insurance Proceeds received with respect to
such Mortgage Loan or REO.
"With respect to a Mortgage Loan subject to a loan modification, the
Realized Loss is an amount equal to the sum of (a) the Unpaid Principal Balance
of the Mortgage Loan as of the date of such modification, (b) interest at the
applicable Note Rate, from the date as to which interest was last paid through
the end of the calendar month in which the modification occurred, on the Unpaid
Principal Balance of such Mortgage Loan outstanding during each Due Period in
which accrued interest was not paid, (c) any Property Protection Advances and
Advances for taxes, assessments and comparable items and insurance premiums, as
required by the Servicing Agreement, the Master Servicing Agreement or the
Special Servicing Agreement and (d) any other expenses (including any servicing
related fees) related to the modification of the Mortgage Loan, minus the
product of (x) the ratio of the Scheduled Payment (net of the dollar equivalent
of all ongoing servicing related fees on the first Due Date) on the modified
Mortgage Loan divided by the Scheduled Payment (net of the dollar equivalent of
all servicing related fees on such Due Date) on the prior Mortgage Loan, and (y)
the Unpaid Principal Balance of the modified Mortgage Loan.
"Remittance Date" means, the date specified in the related Servicing
Agreement by which the funds in the Custodial P&I Account must be remitted to
the Master Servicer Custodial Account, which in no case will be later in any
month than the Master Servicer Remittance Date.
"REO" or "REO Properties" means Mortgaged Premises acquired by Foreclosure
or by deed-in-lieu of foreclosure.
"REO Disposition" means the receipt by the Servicer in connection with an
REO of Insurance Proceeds, Condemnation Awards and other payments and recoveries
that the Servicer recovers from the sale or other final disposition thereof.
"Reserve Fund" means, unless otherwise provided in the Prospectus
Supplement, any fund in the Trust Estate other than the Collateral Proceeds
Account.
"Resource" means Resource Mortgage Capital, Inc., a Virginia corporation.
"Scheduled Payment" means with respect to any Mortgage Loan, the scheduled
monthly payment of principal and interest at the Note Rate due in the applicable
month under the terms of the Note.
"Scheduled Principal Balance" means with respect to each Mortgage Loan (or
related REO) as of a determination date, the scheduled principal balance thereof
as of the Cut-off Date, increased by the amount of negative amortization, if
any, with respect thereto, and reduced by (a) the principal portion of all
Scheduled Payments due on or before such determination date, whether paid by the
Borrower or advanced by a Servicer or other party, (b) all amounts allocable to
unscheduled principal payments received on or before the last day of the
Prepayment Period preceding such date of determination, and (c) without
duplication, the amounts of any Realized Loss that has occurred with respect to
such Mortgage Loan.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Instrument" means a written instrument creating a valid lien on
the Mortgaged Premises, including any riders thereto. A Security Instrument may
be in a form of a mortgage, deed of trust, deed to secure debt or security deed.
"Senior Bonds" or "Senior Class" means any Class of Bonds of a Series,
designated as such in the Prospectus Supplement, that is entitled to
preferential priority rights, as to a Subordinated Class of Bonds, to payment of
principal and interest from the proceeds of the Mortgage Loans and other assets
securing such Series.
"Series" means a group of Bonds issued pursuant to a separate Series
Supplement.
"Series Supplement" means an indenture that is supplemental to the
Indenture and that authorizes a particular Series.
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"Servicer Remittance" means a Servicer's aggregate payment due each month
to the Master Servicer Custodial Account for Mortgage Loans that have been
pledged as security for a Series of Bonds, which, unless otherwise specified in
the Prospectus Supplement for a Series of Bonds, is equal to (A) the sum of the
following:
(i) all payments of principal and interest with respect to the
Mortgage Loans and any REO (including net Liquidation and Insurance
Proceeds) collected during the related Due Period and deposited in the
Custodial P&I Account;
(ii) any Advance by the Servicer that represents principal of or
interest on a defaulted Mortgage Loan with respect to such Payment Date;
and
(iii) any Scheduled Payments due during, but collected prior to, the
related Due Period; less (B) the sum of the following:
(i) all amounts due the Servicer as the servicing fee, including late
charges, assumption fees, prepayment premiums and similar charges and fees
(but not default interest);
(ii) any Scheduled Payments collected but due on a date subsequent to
the related Due Period; and
(iii) all amounts required to reimburse the Servicer for any
Non-Recoverable Advances.
"Servicer(s)" means the entity or entities identified in the related
Prospectus Supplement that perform the servicing functions with respect to
Mortgage Loans included in the Trust Estate for a Series.
"Special Servicer" means the entity, as may be specified in the Prospectus
Supplement for a Series, that will service, make certain decisions and take
various actions with respect to delinquent or defaulted Mortgage Loans (or
related REO) pledged as security for a Series pursuant to the terms of a Special
Servicing Agreement between the Servicer or Master Servicer and the Special
Servicer.
"Stated Maturity Date" means, with respect to any Class of Bonds of a
Series, the date specified in such Bond of such Class as the fixed date on which
the final installment of the principal of such Bond is due and payable.
"Subordinated Bonds" or "Subordinated Class" means any Class of Bonds of a
Series as to which the right to receive payment of principal and interest from
the proceeds of the Mortgage Loans and other assets securing such Series is
subordinate to the priority rights of Bondholders of a Senior Class of Bonds of
such Series to the extent specified in the related Prospectus Supplement.
"Substitute Mortgage Collateral" means an item of Mortgage Collateral
pledged to the Trustee to secure a Series of Bonds in substitution for an item
of defective Original Mortgage Collateral.
"Substitute Mortgage Loan" means a Mortgage Loan pledged to secure a Series
of Bonds in substitution of a defaulted Mortgage Loan or REO securing a Series
of Bonds.
"Super-Premium Bond" means any Class comprised of Bonds that have a
purchase price significantly greater than the Parity Price as discussed under
"Certain Federal Income Tax Consequences" herein.
"Surplus" means amounts in the Collateral Proceeds Account in excess of the
amount required to pay principal of and interest on the Bonds of a Series and
certain expenses.
"T&I Advance" means an Advance by the Servicer or the Special Servicer of
escrow amounts for tax and insurance payments with respect to any Mortgage Loan
subject to a Delinquency.
"Title Insurance" or "Title Insurance Policy" means an American Land Title
Association (ALTA) mortgage loan title policy form 1970, or other form of Title
Insurance Policy acceptable to the Issuer, including all riders and endorsements
thereto.
"Trustee" means the bank, trust company or other fiduciary named in the
Prospectus Supplement for each Series of Bonds as the trustee under the
Indenture pursuant to which such Series is issued.
"Trust Estate" means, with respect to each Series of Bonds, all right,
title and interest in and to the Collateral pledged or assigned to the Trustee
for such Series of Bonds pursuant to the Indenture for that Series.
"Unpaid Principal Balance" means with respect to any Mortgage Loan, the
outstanding principal balance payable by the Borrower under the terms of the
Note.
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No person has been authorized to give any information or make any
representations, other than those contained in this Prospectus and Prospectus
Supplement, in connection with the offerings made hereby, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Issuer or any other person. This Prospectus and Prospectus
Supplement does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than those to which it relates or an offer to any
person in any jurisdiction in which it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus and Prospectus Supplement
nor any offer or sale made hereunder shall, under any circumstances, create any
implication that the information set forth herein is correct as of any time
subsequent to the date hereof.
---------------------
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary of Terms.........................................................S-5
Risk Factors............................................................S-17
Description of the Bonds................................................S-18
Security for the Bonds..................................................S-26
The Insurer.............................................................S-33
FSA Insurance Policy....................................................S-35
Servicing of the Mortgage Loans.........................................S-36
Maturity and Prepayment Considerations..................................S-38
Yield Considerations....................................................S-44
Use of Proceeds.........................................................S-46
Underwriting............................................................S-46
Experts.................................................................S-46
Legal Matters...........................................................S-46
Ratings.................................................................S-46
ERISA Considerations....................................................S-47
ANNEX I..................................................................I-1
Page
Prospectus
Additional Information.....................................................2
Incorporation of Certain Documents by Reference............................2
Reports to Bondholders.....................................................2
Prospectus Summary.........................................................3
Risk Factors...............................................................7
Description of the Bonds..................................................12
Maturity and Prepayment Considerations....................................15
Yield Considerations......................................................15
Security for the Bonds....................................................16
Origination of the Mortgage Loans.........................................23
Servicing of the Mortgage Loans...........................................25
The Indenture.............................................................30
Certain Legal Aspects of the Mortgage Loans...............................33
The Issuer................................................................38
Resource Mortgage Capital, Inc............................................38
Certain Federal Income Tax Consequences...................................38
State Tax Considerations..................................................49
ERISA Considerations......................................................49
Legal Investment..........................................................50
Use of Proceeds...........................................................51
Plan of Distribution......................................................51
Legal Matters ............................................................51
Financial Information.....................................................51
Glossary..................................................................52
$928,529,000
(Approximate)
MERIT Securities
Corporation
Collateralized Mortgage Bonds,
Series 8
PROSPECTUS SUPPLEMENT
LEHMAN BROTHERS
September 20, 1996
