As filed with the Securities and Exchange Commission on May 13, 1997
Registration No. 333-15539
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3+
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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MERIT Securities Corporation
(Exact name of registrant as specified in its charter)
Virginia
(State of Incorporation)
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54-1736551
(I.R.S. Employer I.D. No.)
10900 Nuckols Road
Glen Allen, Virginia 23060
(804) 217-5800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Thomas H. Potts, President With a Copy to:
MERIT Securities Corporation Kevin J. Buckley, Esq.
10900 Nuckols Road Hunton & Williams
Glen Allen, Virginia 23060 Riverfront Plaza, East Tower
(804) 217-5800 951 East Byrd Street
(Name, address, including zip code Richmond, Virginia 23219-4074
and telephone number, including area
code, of agent for service)
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Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Class Amount Maximum Maximum
of Securities to be to be Offering Price Aggregate Amount of
Registered Registered* Per Unit* Offering Price* Registration Fee
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Collateralized Bonds $1,000,000 100% $1,000,000 $303
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* Estimated solely for calculating the registration fee.
+In addition, pursuant to Rule 429, this Registration Statement on Form S-3
constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-15539 on Form S-3 (filed by Registrant on November 5, 1996). With respect to
any offering of Collateralized Bonds under Registration Statement No. 333-15539,
the prospectus to be used in connection with such offering will utilize the
changed pages included with this filing.
The within Prospectus and related Prospectus Supplements cover the
$1,000,000 in principal amount of Collateralized Bonds being registered
hereunder, plus the $2,161,482,410 in principal amount of Collateralized Bonds
registered by the Registrant under Registration Statement No. 333-15539 on Form
S-3, which is being carried forward. The registration fees in respect to the
Collateralized Bonds registered under Registration Statement No. 333-15539 were
paid at the time of the filing of that Registration Statement.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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MERIT Securities Corporation
Collateralized 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 Bonds (the "Bonds"). Capitalized terms not
otherwise defined herein have the meanings specified in the Glossary.
Each Series of Bonds will be secured by collateral (the "Collateral")
consisting of one or more of the following: (i) one- to four-family, residential
mortgage loans ("Mortgage Loans"), which may include Second Lien Mortgage Loans,
Mortgage Loans that are past due or non-performing as of the Cut-off Date and
REO Properties, (ii) other assets evidencing interests in mortgage loans
(together with the Mortgage Loans, the "Mortgage Collateral"), (iii) mortgage
loans secured by model homes leased to homebuilders ("Model Home Loans"), (iv)
manufactured housing installment sales contracts ("Manufactured Housing Loans")
and (v) installment sales contracts secured by heating, air conditioning and
other facilities installed in one- to four-family residential properties
("Consumer Finance Loans"). A Series of Bonds may also be secured by certain
debt service funds, Reserve Funds, Insurance Policies, Servicing Agreements,
Master Servicing Agreements, Additional Collateral and other credit enhancement
as specified in the related Prospectus Supplement (together with the Collateral,
the "Trust Estate"). Each item of the Collateral for a Series of Bonds may be
referred to herein as a "Loan."
The 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 or servicing residential mortgage loans
or installment sales contracts for manufactured housing and certain facilities
installed in residential properties. The Collateral may include fixed rate or
adjustable rate loans, as specified in the related Prospectus Supplement. See
"Security for the Bonds -- The Collateral" herein. The Mortgage Loans and
Manufactured Home Loans may be underwritten in accordance with underwriting
standards for "non-conforming credits," which include mortgagors whose
creditworthiness and repayment ability do not satisfy FNMA or FHLMC underwriting
guidelines. Mortgage Loans and Manufactured Home Loans underwritten pursuant to
underwriting standards 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 Loans may be higher than
losses on mortgage loans or installment sales contracts originated in accordance
with such guidelines. See "Risk Factors -- Credit Considerations -- Mortgage
Loans -- Underwriting Standards and Potential Delinquencies" herein. The
Collateral securing a Series will be serviced by one or more Servicers that are
subject to supervision by Dynex Capital, Inc. ("Dynex"), as Master Servicer. The
Master Servicer's and each Servicer's obligations will be limited to its
contractual, supervisory or servicing obligations. Unless otherwise specified in
the related Prospectus Supplement, each
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Servicer and the Master Servicer will be obligated under certain circumstances
to make Advances. See "Servicing of the Collateral" herein.
The Prospectus Supplement or Supplements relating to a Series of Bonds
will set forth, among other things, the following information if applicable to
the Series: (i) the Class or Classes of Bonds and authorized denominations of
each Class of Bonds; (ii) the aggregate principal amount, Class Interest Rate
(or method of determining the Class Interest Rate), Payment Dates and Stated
Maturity Date for each Class of Bonds; (iii) the order of application of
principal and interest payments to one or more Classes of Bonds of the 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 Collateral and any other assets securing such Series; (v) the
redemption features pertaining to the Series; (vi) additional information with
respect to the form of any credit enhancement securing one or more Classes of
Bonds; and (vii) additional information with respect to the plan of distribution
of Bonds of each Class. 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 Collateral nor the Bonds will be guaranteed or insured by any governmental
agency or any other party.
Under certain circumstances, the Issuer may pledge Additional
Collateral to the Trustee and issue Additional Bonds of a Series. Any pledge of
Additional 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 12 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.
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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 May 12, 1997
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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 the 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 Commission maintains a Web site
(http://www.sec.gov) containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. 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, 10900 Nuckols Road, Glen Allen,
Virginia 23060, telephone:
(804) 217-5800.
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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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."
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Issuer..................................... MERIT Securities Corporation, a wholly-owned, limited-
purpose financing subsidiary of Issuer Holding Corp.
("IHC"), which is a wholly-owned subsidiary of Dynex
Capital, Inc. ("Dynex"), formerly Resource Mortgage
Capital, Inc. Neither IHC nor Dynex has guaranteed, or
is otherwise obligated with respect to, the Bonds of any
Series. See "The Issuer" herein.
Title of Bonds............................. Collateralized 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, or
determined as specified, in the related Prospectus
Supplement (the "Class Interest Rate"). 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 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."
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Principal Payments......................... To the extent specified in the related Prospectus
Supplement, payments on the Collateral securing a Series,
together with withdrawals from various debt service funds
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
Collateral securing the Series as of the preceding Payment
Date (or, with respect to the first Payment Date, as of the
related Cut-off Date) exceeds (ii) the aggregate Collateral
Value of the 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 a Trust Estate
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. Collateral............................. Mortgage Collateral: The Bonds of a Series may be
secured by (i) fixed or adjustable rate, conventional
mortgage loans secured by mortgages or deeds of trust on
single family (one- to four-family) attached or detached
residential property ("Mortgage Loans"), which may
include Second Lien Mortgage Loans and Mortgage Loans
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that are past due or non-performing
as of the Cut-off Date, and related
REO Properties and (ii) other assets
evidencing interests in mortgage
loans. Mortgage Loans and such other
assets are referred to herein
collectively as "Mortgage
Collateral."
Model Home Loans: The Bonds of a Series may be
secured by fixed or adjustable rate, conventional mortgage
loans (the "Model Home Loans") made by the Participant
or its Affiliate and, in each case, secured by a single family
(one- to four-family) attached or detached residential
property that the Borrower will lease to a homebuilder for
use as a model home.
Manufactured Home Loans: The Bonds of a Series may be
secured by fixed or adjustable rate, conventional
manufactured housing installment sales contracts (the
"Manufactured Home Loans"), each of which will be
secured by a new or used Manufactured Home, or by a
Manufactured Home that has been transferred from a
previous owner to a new Borrower, and may also be
secured by a lien on a parcel of real estate.
Consumer Finance Loans: The Bonds of a Series may be
secured by fixed or adjustable rate, conventional facility
installment sales contracts (the "Consumer Finance
Loans"), each of which will be secured by residential
heating or air conditioning facilities, insulation facilities or
other such facilities and related materials that will be
installed in single family (one- to four-family) attached or
detached residential property.
The Mortgage Collateral, the Model Home Loans, the
Manufactured Home Loans and the Consumer Finance
Loans securing a Series of Bonds are herein referred to
collectively as "Collateral." The Collateral securing the
Bonds of a Series will have an aggregate Collateral Value
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 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
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Prospectus Supplement, are intended to be sufficient to
make the required payments of interest on the Bonds of the
Series and to pay the principal of each Class of Bonds 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 Collateral 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. Insurance Policies..................... If specified in the Prospectus Supplement for a Series of
Bonds, the Issuer may pledge to the Trustee payments due
under certain mortgage insurance, hazard insurance and
other policies, if any (collectively, "Insurance Policies"),
including (a) mortgage Insurance Policies consisting of (i)
Primary Mortgage Insurance Policies that will insure
(subject to their provisions and certain limitations)
Mortgage Loans and Model Home Loans against all or a
portion of any loss sustained by reason of nonpayments by
the Borrowers, (ii) one or more Pool Insurance Policies
providing coverage in amounts described in the related
Prospectus Supplement or (iii) a combination of Primary
Mortgage Insurance and Pool Insurance Policies, (b)
Standard Hazard Insurance Policies insuring Mortgaged
Premises or Manufactured Homes against losses due to
various causes, including fire and windstorm, (c) Special
Hazard Insurance Policies insuring Mortgage Premises and
Manufactured Homes against certain losses that are not
covered by the Standard Hazard Insurance Policies
(including earthquake, landslides and mudflows) in an
amount specified in the related prospectus Supplement and
(d) Flood Insurance against losses to Mortgaged Premises
or Manufactured Homes located in certain flood areas.
D. 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
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acceptable to the Rating Agencies
for such Series in one or more
Reserve Funds that may be used by
the Trustee to make any required
payments of principal or interest on
Classes of Bonds of the Series to
the extent that 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 that Payment Date to make
a required payment of principal or
interest on the Bonds. See "Security
for the Bonds -- Reserve Fund or
Accounts."
E. 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 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 forms of credit enhancement to
provide full or partial coverage for certain defaults and
losses relating to the Collateral.
F. 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.
G. 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 the Series or
other Series on each Payment Date.
Servicing.................................. The Collateral securing a Series will be serviced by one or
more servicers specified in the related Prospectus
Supplement (each, a "Servicer"). Each Servicer must be
approved, and will be supervised, by the Master Servicer.
Each Servicer of Model Home Loans, Manufactured Home
Loans or Consumer Finance Loans will perform the
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servicing in a manner consistent
with the applicable Servicing
Agreement and the servicing
standards and practices that prudent
lending institutions follow with
respect to loans of the same type as
the Model Home Loans, Manufactured
Home Loans and Consumer Finance
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
the Advance is deemed by the Master
Servicer to be recoverable out of
future payments on the 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 Sub- Servicer, which
may be either an Affiliate of the
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 the Collateral --
General."
Master Servicer............................ Dynex will act as Master Servicer (in such capacity, the
"Master Servicer") with respect to all of the Collateral
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 Collateral, provide certain administrative
functions with respect to the Bonds and, unless otherwise
specified in the related Prospectus Supplement, make
limited Advances. However, the Master Servicer will not
be obligated to make an Advance that it deems 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 the
Collateral -- Master Servicing Agreement."
Special Servicer........................... If specified in the related Prospectus Supplement, the
Master Servicer may appoint a special servicer (the
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"Special Servicer") to service, and to make certain
decisions and take certain actions with respect to,
delinquent or defaulted Collateral pledged as security for a
Series. See "Servicing of Collateral -- 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 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 ("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"). A
lower rate of principal payments on the 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 ("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
investments.
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 Collateral, (ii) to repay indebtedness,
if any, that has been incurred to obtain funds to acquire the
Collateral, (iii) to establish any Reserve Funds described in
the related Prospectus Supplement and (iv) to pay costs of
structuring and issuing the 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 real property, including
Manufactured Homes, 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 the 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.
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 the
Collateral, the security therefor and sources of credit enhancement identified
in the related Prospectus Supplement to provide for payments on the Bonds.
Credit Considerations
Mortgage Loans
General. 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 Borrower'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 "-- 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 in the
related Prospectus Supplement, Holders of the Bonds of a Series will bear all
risk of Loss resulting from default by Borrowers 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 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
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shorter period (for example, 15 years). The final balloon payment on such 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 Mortgage Loan or to sell the
related Mortgaged Premises. Accordingly, Balloon Payment Mortgage Loans may be
subject to a higher risk of Delinquency, Foreclosure and Loss than certain other
types of mortgage loans. To the extent Losses on such Mortgage Loans exceed
levels of available credit enhancement, the holders of the Bonds of the related
Series may experience a loss. In addition, to the extent specified in the
related Prospectus Supplement, Losses on the Mortgage Loans in excess of
available credit enhancement may result in an Event of Default under the
Indenture. See "The Indenture -- Events of Default."
In addition, Adjustable Rate 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 Adjustable Rate
Mortgage Loans, after relatively short periods of time. Accordingly, defaults on
Adjustable Rate 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 Mortgage Loans, although little data is available
with respect to the rate of default on such loans. Increases in the required
monthly payments on such Mortgage Loans may result in a default rate that is
higher than that for fixed rate or Level Payment Mortgage Loans. A higher
default rate may result in an increase in Losses on the Mortgage Loans. To the
extent that Losses on the Mortgage Loans exceed levels of available credit
enhancement, the holders of the Bonds of the related Series may experience a
loss. In addition, to the extent specified in the related Prospectus Supplement,
Losses on the Mortgage Loans in excess of available credit enhancement may
result in an Event of Default under the Indenture. 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, Balloon Payment
Mortgage Loans. 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 foreseeable. To the
extent Losses on such Mortgage Loans exceed levels of available credit
enhancement, the holders of the Bonds of the related Series may experience a
loss. In addition, to the extent specified in the related Prospectus Supplement,
Losses on the Mortgage Loans in excess of available credit enhancement
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may result in an Event of Default under the Indenture. See "The Indenture --
Events of Default."
REO Properties and Delinquent and Non-Performing Mortgage Loans. As set
forth in the related Prospectus Supplement, the Collateral for a particular
Series may include, as of the Cut-off Date, REO Properties or Mortgage Loans
that are Delinquent or are non-performing. If so specified in the related
Prospectus Supplement, management of the REO Properties or servicing of 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
REO Properties or to Delinquent or non-performing Mortgage Loans. Investors
should consider the risk that the inclusion of REO Properties or Delinquent or
non-performing Mortgage Loans in a Series may affect the rate of defaults and
prepayments on such Mortgage Collateral and the yield on the Bonds of the
Series. See "Security for the Bonds -- The Collateral."
Second Lien Mortgage Loans. An overall decline in the residential real
estate market could adversely affect the value of the property securing a Second
Lien Mortgage Loan such that the outstanding principal balance of the Second
Lien Mortgage Loan, together with any senior financing thereon, exceeds the
value of the Mortgaged Premises. Because a Mortgage Loan secured by a second
lien is subordinate to the rights of the first lien, such a decline would
adversely affect the position of the related Trust Estate as a junior lienholder
before having such an effect on the position of the related senior lien. 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 its level at the time the Second Lien
Mortgage Loan was originated. As a result, the ratio of the Unpaid Principal
Balance 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 lien 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 with corresponding
delays in the receipt of related proceeds available for payment to Bondholders,
thereby reducing 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 are not
likely to 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 Second Lien Mortgage
Loans having small outstanding principal balances and upon defaulted Mortgage
Loans having larger outstanding principal balances, the amount realized after
expenses of Liquidation would be smaller as a percentage of the outstanding
principal balance
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of the smaller Mortgage Loans. Because the average outstanding principal
balances of the Second Lien Mortgage Loans in a Trust Estate may be relatively
small, realizations net of Liquidation expenses may also be relatively small as
percentages of the Unpaid Principal Balances of the Second Lien Mortgage Loans.
Underwriting Standards and Potential Delinquencies. 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 for Mortgage Loans under
"Origination of the Collateral -- Mortgage Loans and Manufactured Home 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 borrower 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, 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 are likely to be higher than Losses on Mortgage Loans originated in
accordance with such guidelines.
Under the underwriting standards applicable to the Mortgage Loans, the
primary considerations in underwriting a Mortgage Loan, other than the
creditworthiness of the Borrower, are the value of the Mortgaged Premises and
the adequacy of such property as collateral in relation to the amount of the
Mortgage Loan. Because Delinquencies and Foreclosures are likely to be more
frequent for Mortgage Loans originated under underwriting standards for
non-conforming credits than for mortgage loans originated in accordance with
FNMA or FHLMC underwriting guidelines, changes in the values of the related
Mortgage 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
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,
the rate of Losses on the Mortgage Loans may increase, and such increase may be
substantial.
Model Home Loans
As further described in the related Prospectus Supplement, a Model Home
Loan is a mortgage loan made by the Participant or its Affiliate and secured by
Mortgaged Premises that are leased by the Borrower to a homebuilder for use as a
model home. The leases typically have a term shorter than that of the related
Model Home Loan. Because the Borrower of a Model
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Home Loan will have no significant assets other than the Mortgaged Premises and
the related lease payments, the Borrower's ability to make payments of principal
and interest on a Model Home Loan will depend substantially on its receipt of
lease payments from the homebuilder and on its ability to sell the Mortgaged
Premises. Thus, the value of an investment in the Bonds of a Series secured by
Model Home Loans could suffer an adverse effect as a result of a decline in real
estate values in areas where one or more of the related Mortgaged Premises are
located. Such a decline might simultaneously affect adversely the homebuilder's
ability to make the required lease payments (and payments of required taxes,
insurance, utilities and maintenance) and the Borrower's ability to sell the
Mortgaged Premises at a price sufficient to pay the Unpaid Principal Balance and
interest on the Model Home Loan. Such a decline might also adversely affect the
Borrower's ability to sell the Mortgaged Premises even if the homebuilder
successfully fulfills its lease obligation. Accordingly, Model Home Loans may be
subject to a higher risk of Delinquency and Loss than certain other types of
mortgage loans.
In addition, although there are accepted industry standards for
underwriting mortgage loans generally, there are no such standards for
evaluating mortgage loans such as the Model Home Loans. Accordingly, the
Participant has developed its own guidelines for determining the
creditworthiness of homebuilders. There can be no assurance that the
creditworthiness standards applied by the Participant in determining the
eligibility of homebuilders for this program will not result in a greater rate
of Delinquencies than anticipated.
Homebuilder leases securing Model Home Loans that serve as security for
a Series of Bonds may require the homebuilder to make lease payments that are
adjusted from month-to-month based on current interest rates. Homebuilders may
be more likely to default on this type of lease obligation than they would be on
level-payment lease obligations, particularly as their lease obligations
increase. Default by a homebuilder on its lease obligations would render the
Borrower unable to make required Monthly Payments on the related Model Home
Loan.
To the extent that Losses on the Model Home Loans exceed the available
credit enhancement, the Holders of the Bonds of a Series secured by Model Home
Loans would experience a loss.
Manufactured Home Loans
General. A Manufactured Home Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the
Manufactured Home Loan and upon an investment analysis of the related
Manufactured Home designed to determine the permissible Loan size. The ability
of a Borrower to make Monthly Payments will be dependent on the availability of
jobs and general economic conditions. When a Borrower does default on a
Manufactured Home Loan, realization is generally accomplished through
repossession and resale of the related Manufactured Home. Manufactured homes
generally decline in value over time, which may not necessarily be the case with
respect to mortgaged premises securing mortgage loans, and so the Losses
incurred upon repossession and resale of or Foreclosure on Manufactured Homes
securing Manufactured Home Loans generally may be expected to be more
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severe than the Losses that would be incurred upon Foreclosure on Mortgaged
Premises securing first lien Mortgage Loans (in each case, measured as a
percentage of the Unpaid Principal Balance of the related Loan). In addition,
experience with delinquencies and repossessions under manufactured housing
installment sale contracts indicates that recovery experience decreases with
downturns in regional or economic conditions. Thus, if economic conditions
decline in areas where Manufactured Homes are located, the actual rates of
Delinquencies, repossessions and Foreclosures with respect to the Manufactured
Home Loans are likely to increase, and, accordingly, Losses on the Manufactured
Home Loans are likely to increase, perhaps substantially.
To the extent that Losses are not covered by applicable Insurance
Policies, Additional Collateral or other credit enhancement as described in the
related Prospectus Supplement, Holders of the Bonds of a Series will bear all
risk of Loss resulting from default by Borrowers of Manufactured Home Loans, and
this risk of Loss may be allocated disproportionately among the Classes of Bonds
that comprise a Series . Such Losses could result in an Event of Default.
See "The Indenture -- Events of Default."
In addition, adjustable rate Manufactured Home Loans may be
underwritten on the basis of an assessment that the Borrower will have the
ability to make payments in higher amounts after a relatively short time.
Accordingly, defaults on adjustable rate Manufactured Home Loans leading to
repossession and resale (or Foreclosure, in the case of related Real Property)
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.
Losses on Manufactured Home Loans that exceed levels of available credit
enhancement could result in an Event of Default under the Indenture. See "The
Indenture -- Events of Default."
Underwriting Standards and Potential Delinquencies. Manufactured Home
Loans are originated in accordance with credit underwriting standards that are
customary in the industry. These standards generally are more lenient than those
applied to borrowers under many conventional residential first lien mortgage
loans. Accordingly, the Manufactured Home 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 such other underwriting
standards. As a result, losses on the Mortgage Loans are likely to be higher
than losses on mortgage loans originated in accordance with such guidelines.
Under the underwriting standards applicable to the Manufactured Home
Loans, the primary considerations in underwriting a Manufactured Home Loan,
other than the creditworthiness of the Borrower, are the results of an
investment analysis of the Manufactured Home, which is used to determine the
allowable Loan size, and the adequacy of such property as collateral in relation
to the amount of the Manufactured Home Loan. Because Delinquencies and
Foreclosures are likely to be more frequent for Manufactured Home Loans than for
Mortgage Loans originated in accordance with more stringent underwriting
guidelines, decreases in the values of the related Manufactured Homes are likely
to have a greater effect on the Loss experience of such Manufactured Home Loans
than decreases in the values of Mortgaged
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Premises would be expected to have on the Loss experience of such Mortgage
Loans. It is unlikely that the values of the Manufactured Homes securing
Manufactured Home Loans have remained or will remain at the levels in effect on
the dates of origination of the related Manufactured Home Loans. If the values
of the Manufactured Homes decline after the dates of origination of the
Manufactured Home Loans, the rate of Losses on the Manufactured Home Loans may
increase, and the increases may be substantial.
Security Interests in Manufactured Homes. Each Manufactured Home Loan
is secured by a security interest in a Manufactured Home. Perfection of security
interests in Manufactured Homes is subject to a number of state laws, including,
in some states, the Uniform Commercial Code (the "UCC") as adopted in such
states and, in other states, such states' motor vehicle titling statutes. In
some states, perfection of security interests in Manufactured Homes is governed
both by the applicable UCC and by motor vehicle titling statutes. The steps
necessary to perfect a security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, neither the Issuer nor the Participant will amend any certificate of
title to change the lienholder specified therein from the Participant to the
Trustee or take any other steps to effect re-registration of any Manufactured
Home in the Trustee's name with the appropriate state motor vehicle authority.
In addition, the Participant will not deliver any certificate of title to the
Trustee, note thereon the Trustee's interest or file any UCC-3 financing
statements or other instruments evidencing the pledge to the Trustee of the
Issuer's security interest in any Manufactured Home. In some states, in the
absence of such an amendment to the certificate of title or such a filing under
the applicable UCC, it is unclear whether the assignment to the Trustee of the
security interest created by a Manufactured Home Loan in the underlying
Manufactured Home will be effective or whether the Trustee's security interest
in the Manufactured Home will be perfected. In addition, in the absence of
notation of the Trustee's interest in a Manufactured Home on the related
certificate of title, re-registration of the Manufactured Home in the Trustee's
name with the appropriate state motor vehicle authority, delivery of the
certificate of title to the Trustee or filing of an appropriate transfer
instrument under the applicable UCC, it is unclear whether the assignment to the
Trustee of the security interest created by a Manufactured Home Loan in the
underlying Manufactured Home will be effective against creditors of the
Participant or the Issuer or a trustee in bankruptcy of the Participant or the
Issuer. The Issuer will make certain warranties relating to the validity,
perfection and priority of the security interest created by each Manufactured
Home Loan in the underlying Manufactured Home in favor of the Manufactured Home
Loan's originator. A breach of any such warranty that materially and adversely
affects the Trust's interest in any Manufactured Home Loan would create an
obligation on the part of the Participant to repurchase or substitute for the
Manufactured Home Loan unless the breach is cured within 90 days after the
Issuer's discovery of or receipt of notice of the breach.
Conveyance of Manufactured Home Loans. A case (Octagon Gas Systems,
Inc. v. Rimmer, 995 F.2d 948 (10th Cir.), cert. denied 114 S.Ct 554 (1993))
decided by the United States Court of Appeals for the Tenth Circuit contains
language to the effect that accounts sold by a debtor under Article 9 of the UCC
would remain property of the debtor's bankruptcy estate. Although the
Manufactured Home Loans constitute chattel paper under the UCC rather
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than accounts, sales of chattel paper are similarly governed by Article 9 of the
UCC. If, following a bankruptcy of the Participant, a court were to apply the
reasoning of the Tenth Circuit to chattel paper, then delays or reductions in
payments of collections on or in respect of the Manufactured Home Loans could
occur. To the extent the security for any Series of Bonds offered hereunder
contains a material concentration of Manufactured Home Loans secured by
Manufactured Homes located within the Tenth Circuit's jurisdiction, the related
Prospectus Supplement will disclose this concentration and will further describe
the impact the decision could have upon such Series.
Consumer Finance Loans
General. A Consumer Finance Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the Consumer
Finance Loan and upon the purchase price of the related Facilities and the cost
of installing the Facilities in a single family residential property. The
ability of a Borrower to make Monthly Payments will be dependent on the
availability of jobs and general economic conditions. Where a Borrower defaults
on a Consumer Finance Loan, realization is generally accomplished through
repossession and resale of the related Facilities. Facilities generally decline
in value over time, and so the Losses incurred upon repossession and resale of
Facilities securing Consumer Finance Loans generally may be expected to be more
severe than the Losses that would be incurred upon Foreclosure on Mortgaged
Premises securing Mortgage Loans (in each case, measured as a percentage of the
Unpaid Principal Balance of the related Loan). In addition, experience with
delinquencies and repossessions under manufactured housing installment sale
contracts indicates that recovery experience decreases with downturns in
regional or economic conditions, and such downturns are likely to have the same
effect on installment sales contracts like the Consumer Finance Loans. Thus, if
economic conditions decline in areas where Facilities are located, the actual
rates of Delinquencies, repossessions and Foreclosures are likely to increase,
and Losses on the Consumer Finance Loans are likely to increase, perhaps
substantially.
Security Interests in Facilities. Each Consumer Finance Loan is secured
by a security interest in Facilities. Perfection of security interests in
Facilities is subject to state laws, including the Uniform Commercial Code (the
"UCC") as adopted in such states. Because of the expense and administrative
inconvenience involved, neither the Issuer nor the Participant will file any
UCC-3 financing statements or other instruments evidencing the pledge to the
Trustee of the Issuer's security interest in any Facilities. In some states, in
the absence of the filing of an appropriate transfer instrument under the
applicable UCC, it is unclear whether the assignment to the Trustee of the
security interest created by a Consumer Finance Loan in the underlying
Facilities will be effective against creditors of the Participant or Issuer or a
trustee in bankruptcy of the Participant or the Issuer. Unless the related
Prospectus Supplement otherwise provides, the Issuer will make certain
warranties relating to the validity, perfection and priority of the security
interest created by each Consumer Finance Loan in the underlying Facilities in
favor of the Consumer Finance Loan's originator. A breach of any such warranty
that materially and adversely affects the Trust's interest in any Consumer
Finance Loan would create an obligation on the part of the Participant to
repurchase or substitute for the Consumer
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Finance Loan unless the breach is cured within 90 days after the Issuer's
discovery of or receipt of notice of the breach.
Conveyance of Consumer Finance Loans. A case (Octagon Gas Systems, Inc.
v. Rimmer, 995 F.2d 948 (10th Cir.), cert. denied 114 S.Ct 554 (1993)) decided
by the United States Court of Appeals for the Tenth Circuit contains language to
the effect that accounts sold by a debtor under Article 9 of the UCC would
remain property of the debtor's bankruptcy estate. Although the Consumer Finance
Loans constitute chattel paper under the UCC rather than accounts, sales of
chattel paper are similarly governed by Article 9 of the UCC. If, following a
bankruptcy of the Participant, a court were to apply the reasoning of the Tenth
Circuit to chattel paper, then delays or reductions in payments of collections
on or in respect of the Consumer Finance Loans could occur. To the extent the
security for any Series of Bonds offered hereunder contains a material
concentration of Consumer Finance Loans secured by Facilities located within the
Tenth Circuit's jurisdiction, the related Prospectus Supplement will disclose
this concentration and will further describe the impact the decision could have
upon such Series.
Enforcement of Security Interests. Facilities consist of "goods" that
on installation in a single family residential property may become "fixtures."
Goods become fixtures when they become so related to particular real estate that
an interest arises in them under the applicable real estate law. In order to
perfect a security interest in the goods, the Participant will make a "fixture
filing," unless applicable state law makes such a filing inadvisable, and will
also file a financing statement as though the goods were personal property under
the applicable UCC. Generally, a perfected security interest in Facilities
installed in an existing home will, with one exception, have priority over the
conflicting interest of an encumbrancer of the real estate, including a first
lien mortgagee. The exception is that a perfected security interest in fixtures
will not take priority over a construction mortgage recorded before goods become
fixtures if the goods become fixtures before completion of construction.
If the goods constitute fixtures and the Trustee's security interest in
the goods has priority over all other encumbrancers of the affected real estate,
the Servicer may on default remove and repossess the goods (not including
related "ordinary building materials"), provided that the Servicer can do so
peacefully. In addition, the Servicer must reimburse any encumbrancer who is not
the debtor for the cost of repair of any physical damage resulting from the
removal of fixtures, and the person entitled to reimbursement may refuse
permission to remove any fixtures unless the Servicer gives adequate security
for the cost of repair obligation. If the Trustee's security interest in the
goods does not have priority over all other owners and encumbrancers of the
affected real estate, for example because a construction mortgage has priority,
the Servicer may not remove the goods under any circumstances in the case of a
defaulted Consumer Finance Loan.
The value of Facilities is likely to decrease over time. In addition,
each Consumer Finance Loan will be made in an amount equal to the cost of
installation as well as the purchase price of the goods. If the goods are
fixtures, then to the extent that the balance of the Consumer
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Finance Loan reflects sums spent for installation or the purchase of ordinary
building materials, the Servicer may be unable to recover a sum adequate to pay
off the Consumer Finance Loan, even if it can resell the removed goods for their
fair value. Thus, the net proceeds of any resale upon default is likely to be
inadequate to pay off the Unpaid Principal Balance plus accrued and unpaid
interest on the related Consumer Finance Loan. Seeking a judgment against the
debtor for the deficiency is seldom economically feasible, and, for that reason,
the Servicer is unlikely to do so.
Moreover, given that the Consumer Finance Loans involve relatively
small amounts, the Servicer, even with a perfected, first priority security
interest, may determine in many cases that the cost of removal of goods,
particularly if an obligation to pay cost of repairs exists, exceeds the net
proceeds that could be expected from a sale and, as a result, decline to remove
the goods. If the Servicer either declines or is not permitted to remove the
goods, the UCC provisions dealing with fixtures do not indicate how the Servicer
is to proceed. It is not clear under applicable state law whether the Trustee
would be permitted to share in the proceeds of a Foreclosure proceeding brought
by an encumbrancer of the real estate. If the Trustee's security interest in the
goods was not a first priority security interest, there would be little
likelihood in any event that any Foreclosure proceeds would remain after payment
of expenses and satisfaction of the senior encumbrances. The Servicer might have
the right to reduce the Trustee's claim to judgment and proceed against the
debtor's assets. For the same reasons that the Servicer would be unlikely to
seek a deficiency judgment in the event of a repossession and resale, however, a
legal proceeding against the debtor frequently would not be economically
feasible. Thus, in the event of default on a Consumer Finance Loan, the
likelihood that the Trustee Estate will suffer a Loss on the Consumer Finance
Loan will be high.
Losses on the Consumer Finance Loans may reduce the amounts available
for payment on the related Bonds.
Limited Obligations
The Bonds of a Series are obligations of the Issuer only, and Holders
of Bonds of a Series may look only to the assets pledged to the Trustee for that
Series. The Bonds will not represent an interest in or any obligation of Dynex,
IHC or any Affiliate of Dynex or IHC, the Underwriter or any Affiliate of the
Underwriter, the Master Servicer or any Servicer. The Bonds will not be
guaranteed by any government agency or instrumentality, Dynex, IHC or any
Affiliate of Dynex or IHC, the Underwriter or any Affiliate of an Underwriter,
the Master Servicer or any Servicer.
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 the Bonds of each Series may fluctuate with
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changes in prevailing rates of interest and other factors. Consequently, the
sale of Bonds by a Bondholder in any secondary market that 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 IHS. 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 related 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 recover fully 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 IHC or a Participant
The Issuer believes that each transfer of Collateral from IHC to the
Issuer will constitute an absolute and unconditional sale. However, in the event
of the bankruptcy of IHC or the Participant, a trustee in bankruptcy could
attempt to recharacterize the sale of the Collateral as a borrowing secured by a
pledge of the 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 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 recover fully 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.
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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 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 Collateral even if an Event of Default has occurred. See
"The Indenture -- Events of Default" herein.
Modification and Substitution of Collateral
If an item of Collateral 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 item of Collateral 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 Loan 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 Loan Rate of the related Collateral. See "Servicing of the
Collateral -- Defaulted Collateral."
In addition, under certain circumstances, the Issuer may substitute new
Collateral ("Substitute Collateral") for defaulted Collateral. See "Security for
the Bonds -- Substitution of Collateral." The terms of each item of Substitute
Collateral may differ from those of the item of Collateral for which it is
substituted. In particular, the Loan Rate of the item of Substitute Collateral
may be less than that of the item of Collateral for which it is substituted and,
indeed, may be less than the then current market interest rate for loans or
other applicable assets with similar characteristics. The substitution of an
item of Substitute Collateral with a Loan Rate less than that of the item of
Collateral 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 Loan Rates or
Net Loan Rates of the related Collateral. Furthermore, any Bondholder that would
be entitled to receive payments based on the Collateral Value of a defaulted
item of Collateral, REO or Repo Property upon Liquidation of the defaulted item
of Collateral may prefer that the defaulted item of Collateral be Liquidated
rather than replaced with an item of Substitute Collateral, particularly if the
item of Substitute Collateral has a Loan Rate less than the then current market
interest rate for loans or other applicable assets with similar characteristics.
See "Security for the Bonds -- Substitution of Collateral."
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As a condition to any modification or forbearance related to any item
of Collateral or to the substitution of an item of Substitute Collateral, the
Master Servicer is required to determine, in its reasonable business judgment,
that such modification, forbearance or substitution will maximize the recovery
on such item of Collateral 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 an item of Substitute
Collateral (or in establishing the terms of any such modification or forbearance
agreement or the terms of such item of Substitute Collateral).
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,
mortgage-backed certificates, model home loans, manufactured housing installment
sales contracts or facility installment sales contracts ("Additional
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 Collateral may result in a variance of
plus or 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 the Class, and the characteristics of the Collateral may
vary within the parameters specified 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 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 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 Collateral will affect the
average life of each Class of Bonds. The Collateral 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 Collateral may be influenced by a
variety of economic, geographic, social, tax, legal and other factors, including
the difference between the interest rates on the Collateral and prevailing
interest rates for similar loans. In general, if the Collateral is not subject
to prepayment penalties and if prevailing interest rates for similar loans fall
below the interest rates on the Collateral, the rate of principal prepayments
would be expected to increase, especially if the Collateral carries fixed rates
of interest. If prevailing interest rates for similar loans rise above the
interest rates on the Collateral, the rate of principal prepayments would be
expected to decrease. See "Yield Considerations" herein.
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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 Collateral securing such
Series). In general, yields on Premium Bonds will be adversely affected by
higher than anticipated rates of principal payments on the Collateral and
enhanced by lower than anticipated rates. 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 the rating. An investor may obtain further details with respect
to any rating on the Bonds from the Rating Agency issuing the rating. In
addition, any such rating will be based, among other things, on the credit
quality of the Collateral and will represent only an assessment of the
likelihood of receipt by Bondholders of payments with respect to underlying
Collateral. A 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 Collateral,
fail fully to recover their initial investment. Credit ratings assigned to
Classes of Bonds having a disproportionate entitlement to principal or interest
payments on the Collateral specifically do not address the effect 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 Loans.
Insurance and Credit Support Limitations
The Insurance Policies, if any, on the Collateral or the obligation to
deliver Additional 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 -- Insurance on the Collateral" and "-- Pool
Insurance." 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 the Series. This 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
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supporting an actuarial analysis will accurately reflect future experience or
any assurance that the data derived from a large pool of housing-related loans
will accurately predict the Delinquency, Foreclosure or Loss experience of any
particular pool of Collateral.
Lender Regulations
Numerous federal and state consumer protection laws impose requirements
on lending under mortgage loans or retail installment sales contracts such as
those included in the Collateral, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities on the
part of the lender's assignees to the Borrowers for amounts due under such
mortgage loans or contracts or to a Borrower's right of set-off against claims
by such assignees as a result of the lender's or seller's noncompliance. To the
extent these laws affect the Collateral, these laws would apply to the Trustee
as assignee of the Collateral. The Issuer will warrant that the origination of
each item of Collateral complied with all requirements of law and that there
exists no right of rescission, set-off, counterclaim or defense in favor of the
Borrower under any item of Collateral and that each item of Collateral is
enforceable against the related Borrower in accordance with its terms, subject
to applicable bankruptcy and similar laws, laws affecting creditors' rights
generally and general principles of equity. A breach of any such warranty that
materially and adversely affects the Trustee's interest in any Loan would create
an obligation on the part of the Issuer to repurchase or substitute for the item
of Collateral unless the breach is cured within 90 days after the Issuer's
discovery of the breach or after notice of the breach is provided to the Issuer.
If the credit support provided by any Subordinated Bonds, insurance or other
credit enhancement is exhausted, application of these consumer protection laws
could limit the ability of the Bondholders to realize upon Mortgaged Premises,
Manufactured Homes, Real Property or Facilities securing defaulted items of
Collateral or could limit the amount collected on a defaulted Loan to less than
the amount due thereunder. See "Certain Legal Aspects of the Collateral --
Manufactured Home Loans -- Enforcement of Security Interests in Manufactured
Homes" and "-- Consumer Protection Laws" herein and "Certain Legal Aspects of
the Collateral -- Mortgage Loans and Model Home Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders" herein.
Limitations on Subordination
With respect to Bonds of a Series that includes a Subordinated Class,
while the subordination feature is intended to enhance the likelihood of timely
payment of principal and interest to Holders of Senior Bonds, the available
subordination may be limited, as specified in the related Prospectus Supplement.
In addition, with respect to Bonds of a Series supported by a Reserve Fund, the
Reserve Fund could be depleted under certain circumstances. In either case,
shortfalls could result for both the Senior Bonds and the Subordinated Bonds of
such Series. Prospective purchasers of a Class of Bonds should carefully review
the credit risks associated with the Class resulting from its subordination or
from the timing of the distributions intended to be made on the Class.
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Original Issue Discount
Discount Bonds generally will be treated as issued with original issue
discount for federal income tax purposes. In addition, certain classes of
Premium Bonds may be treated by the Trustee as issued with original issue
discount. The Trustee will report original issue discount with respect to such
Discount and Premium Bonds on an accrual basis, which may be prior to the
receipt of cash associated with such income. See "Certain Federal Income Tax
Consequences" herein.
Legal Investment Considerations
No representation or warranty is 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 (a) that is (i)
secured by Second Lien Mortgage Loans or (ii) secured by Consumer Finance Loans
or (b) that is 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.
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 Dynex'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 Dynex 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 type of Bond, the specific designation of the Class,
the Stated Maturity Date, the aggregate principal amount, the Payment Dates, the
Class Interest Rate (or method of determining such rate), any redemption
features and other related terms.
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The Bonds of each Series will be secured by the 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 the Series), the Insurance Policies, the Bond Insurance, the
Surplus amounts, other credit enhancement, 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 after 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
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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.
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
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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 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 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 the Series) exceeds (ii) the aggregate Collateral Value of the Collateral
securing the Series as of the current Payment Date. Unless otherwise specified
in the related Prospectus Supplement, the Collateral Value of any Collateral
securing a Series will generally equal (i) the Scheduled Principal Balance of
the Collateral or (ii) as specified in the related Prospectus Supplement, the
Scheduled Principal Balance of the Collateral multiplied by a fraction, the
numerator of which is the Net Rate of the Collateral and the denominator of
which is the Collateral Value Discount Rate.
The Prospectus Supplement will specify (i) the order in which payments
of principal (including prepayments) on the 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 Collateral or
pools of 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
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be determined by reference to the maturity date of the Collateral pledged to the
related 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 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 Collateral. The rate of
principal payments on the Collateral securing a Series will depend on the
characteristics of the 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 Collateral. See "Maturity
and Prepayment Considerations" and "Yield Considerations" herein.
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 accrued to the Payment Date. 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 Collateral securing the related Series or Class of Bonds
will be in amounts (taking into account Reserve Funds 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, (i) a Class of Bonds
may be a Principal Only Class comprised solely of Principal Only Bonds, which
will not bear interest, and (ii) a Class of Bonds may be a High Coupon Class
comprised solely of High Coupon Bonds, which will receive only relatively small
payments of principal. If specified in the related Prospectus Supplement, a
Class of Bonds may be an Accretion Class, which is comprised solely of Accretion
Bonds on which interest will accrue but will not be paid ("Deferred Interest")
until each Class of Bonds of the Series, if any, with an earlier priority of
payment has been paid in full or as otherwise specified in the related
Prospectus Supplement. Deferred Interest will be added to the principal of each
Class of Accretion Bonds on each Accounting Date until all Classes of Bonds that
have an earlier payment priority are paid in full, and, thereafter, interest
will be paid on the Compound Value of the Accretion Bonds. The Compound Value of
a Class of Accretion Bonds will equal the original principal amount of such
Class, plus Deferred Interest through the Accounting Date preceding the
determination date, less any principal payments made on such Class of Bonds.
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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 the 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 redeemed will be the
percentage of the unpaid principal amount of such Bond 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
Collateral, (ii) the frequency and scope of any forbearance or modification
relating to defaulted Collateral and (iii) the optional redemption provisions of
a Series of Bonds.
The rate of principal payments on Collateral will be affected by the
amortization schedules of the Collateral 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 Collateral. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Collateral and the Collateral may
be voluntarily prepaid in accordance with the applicable terms, the Collateral
would likely be subject to a higher rate of principal prepayments than if
prevailing rates remain at or above the rates borne by the Collateral.
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 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 was required under the original
terms of the Loan (including an extension of the final Due Date) and therefore
would have an effect on the average life of a Class of Bonds opposite to the
effect that a prepayment of a Loan would have. To the extent one or more Loans
is in default on its revised final Due Date and the respective Servicer is
unable to liquidate timely the defaulted Loan, the Issuer may fail to pay one or
more
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Classes of the Bonds in full by their Stated Maturity Date. See "Servicing of
the Collateral -- Master Servicing Agreement" and " -- Special Servicing
Agreement" herein.
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 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 payments of principal of the Collateral and, to a lesser extent, the
frequency and scope of any modifications or substitutions of Loans. If the
purchaser of a Bond offered at a discount from its Parity Price calculates the
anticipated yield to maturity of the Bond based on an assumed rate of payment of
principal that is faster than that actually received on the Collateral, the
actual yield to maturity will be lower than the calculated yield. If the
purchaser of a Bond offered at a premium over its Parity Price calculates the
anticipated yield to maturity of the Bond based on an assumed rate of payment of
principal that is slower than that actually received on the Collateral, the
actual yield to maturity will be lower than the calculated yield.
The timing of changes in the rate of payment of principal on the
Collateral 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 an item of Collateral, 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 Collateral 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 Collateral and the
suitability of the Class of Bonds to their investment objectives. For factors
affecting principal payments on Loans, including the impact of modifications and
substitutions of Collateral, see "Maturity and Prepayment Considerations" above.
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Investors should consider the risk that rapid rates of prepayment on
the Collateral, 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 a Bond may be lower than the
applicable Class Interest Rate. Slow rates of prepayments on the Collateral, 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 a Trust Estate consisting
of (i) 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 Property or Repo Property acquired in
respect of such Collateral through Foreclosure or repossession, (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 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, an interest rate agreement with a
third party. Scheduled payments of principal of and interest on the 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 the Series, are
intended to be sufficient to make the required payments of interest on the Bonds
of the Series and to pay the entire principal amount of each Class of Bonds of
the Series not later than the Stated Maturity Date of the Class of Bonds. Except
as otherwise specified in the related Prospectus Supplement, a Trust Estate
(other than certain credit enhancement items) will secure only one Series of
Bonds.
The Collateral
The Prospectus Supplement for a Series will describe in general the
type of Collateral that will secure the Series. The Collateral may be composed
of Mortgage Collateral, Model Home Loans, Manufactured Home Loans, Consumer
Finance Loans or certain other assets evidencing interests in or related to
loans secured by residential property.
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The Mortgage Collateral
General
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Collateral securing a Series will consist of Mortgage Loans. Generally,
Mortgage Loans will be secured by first liens on single family (one-family or
two- to four-family) attached or detached residential property. If specified in
the related Prospectus Supplement, the Collateral securing a Series of Bonds may
include Mortgage Collateral consisting of Second Lien Mortgage Loans, 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 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,
including REO Properties or non-performing Mortgage Loans in the Trust Estate
for a Series of Bonds may increase the rate of defaults and prepayments on the
Collateral and, in turn, adversely 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 Mortgage Loans may consist of (i) detached homes,
(ii) attached homes (units having a common wall), (iii) units located in
condominiums (iv) manufactured homes and (v) other types of homes or units set
forth in 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 ("Adjustable Rate Mortgage Loans")
to equal the sum (which may be rounded) of a Gross Margin and an Index, all as
described in the related Prospectus Supplement; 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 Adjustable Rate Mortgage 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
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principal balance of the Mortgage 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 Adjustable Rate Mortgage Loans.
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,
Foreclosure and Loss than certain other types of mortgage loans.
In addition, Adjustable Rate 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 Adjustable Rate
Mortgage Loans, after relatively short periods of time. Accordingly, defaults on
Adjustable Rate 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 securing a Mortgage Loan 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 Collateral -- Mortgage Loans and Model Home Loans -- Due-on-Sale
Provisions" herein.
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.
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Second Liens
Certain of the Mortgage Loans securing a Series of Bonds may be Second
Lien Mortgage Loans, and the related first lien mortgage loans ("First Liens")
may not be included in the Collateral. The primary risk to holders of Second
Lien Mortgage Loans 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 Second Lien 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 and 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 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 Second Lien 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 mortgagee may not
foreclose on the property securing a Second Lien Mortgage Loan unless it
forecloses subject to the First Lien.
Even assuming that the Mortgaged Premises provide adequate security for
the Second Lien Mortgage Loans, substantial delays could be encountered in
connection with the Liquidation of defaulted Mortgage Loans, with corresponding
delays in the receipt of related proceeds by Bondholders. An action to foreclose
on a Mortgaged Premises securing a Mortgage Loan is regulated by state statutes
and rules, is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed and may require 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 Lien Mortgage
Loans will not vary directly with the Unpaid Principal Balances of the Loans at
the time of default. Therefore,
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assuming that a Servicer took the same steps in realizing upon a defaulted
Second Lien Mortgage Loan having a small remaining Unpaid Principal Balance as
it would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of Liquidation would be
smaller as a percentage of the Unpaid Principal Balance of the defaulted Second
Lien Mortgage Loan than it would be the case with the defaulted mortgage loan
having a large Unpaid Principal Balance. Because the average outstanding
principal balance of the Second Lien Mortgage Loans generally is 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 Unpaid Principal Balance of
a Second Lien Mortgage Loan than would be the case for a typical conventional,
first lien mortgage loan.
Repurchase of Converted Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by Adjustable Rate Mortgage Loans the Note Rates of which
are 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 may at its
option repurchase any such Adjustable Rate Mortgage Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Adjustable Rate Mortgage Loan, plus 30 days of interest
thereon at the applicable Note Rate. The purchase price will be treated as a
prepayment of the 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.
Other Mortgage Collateral
A Series of Bonds 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.
The Model Home Loans
Each Model Home Loan securing a Series of Bonds will be secured by a
first lien on a single family (one- to four- family) attached or detached
residential property that is used as a model home. The Borrower, which may be an
Affiliate of the Participant, will use the proceeds of the Model Home Loan to
purchase the related Mortgaged Premises from a homebuilder and will then lease
the property back to the homebuilder, who will use it as a model home. The
homebuilder will agree pursuant to the lease agreement to pay all taxes,
insurance premiums, utility costs and maintenance costs, and to make lease
payments to the Borrower, during the term of the lease.
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The Borrower is required to make interest payments during the life of a
Model Home Loan either at a fixed annual rate, an adjustable annual rate based
on a short-term Index or a combination of the two. Adjustable interest rates may
not be subject to a cap. The lease payments will be designed to enable the
Borrower to make Monthly Payments on the Model Home Loan during the period of
the lease. Typical lease terms for the leases will be shorter than the maturity
of the related Model Home Loans, which will usually have a shorter maturity than
conventional, first lien mortgage loans. Generally, the lessee will be permitted
to extend the lease on a month-to-month basis and may terminate at any time upon
notice to the Borrower and sale of the related Mortgaged Premises on the
Borrower's behalf.
If the Loan Rate applicable to the Model Home Loan and the lease
payments required by the lease agreement between the Borrower and the
homebuilder are adjustable and not subject to a cap, the rate of Delinquencies
on the lease agreement, and thus the default rate on the Model Home Loans, may
increase, particularly if the Loan Rates and required lease payments increase.
The Borrower may have no assets other than the Mortgaged Premises and
the lease payments received from lessees of the Mortgaged Premises. In that
event, its ability to make Monthly Payments on a Model Home Loan after the term
of the related lease expires, or in the event that the homebuilder defaults on
its lease, will depend on the ability of the Borrower to sell the related
Mortgaged Premises for an amount equal to or greater than the Unpaid Principal
Balance of the Model Home Loan.
The Prospectus Supplement applicable to a series of Bonds secured by
Model Home Loans will include for such Loans the information described herein
under "Security for the Bonds -- The Mortgage Collateral -- General."
The Manufactured Home Loans
General
If so specified in the Prospectus Supplement for a Series of Bonds, the
related Series may be secured by Manufactured Home Loans. The Collateral also
may include any Manufactured Home or Real Property that initially secured a
Manufactured Home Loan and that is acquired by repossession, Foreclosure or
otherwise.
Unless otherwise provided in the Prospectus Supplement for a Series,
the Issuer will acquire the underlying Manufactured Home Loans from a
Participant that will have originated the Manufactured Home Loans or purchased
them from other originators. Specific information respecting the Manufactured
Home Loans included as security for a particular Series of Bonds will be
provided in the related Prospectus Supplement and, to the extent such
information is not fully provided in the related Prospectus Supplement, in a
Current Report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such Bonds. A copy
of the Indenture with respect to each Series of Bonds will be attached
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to the related Current Report on Form 8-K and will be available for inspection
at the corporate trust office of the Trustee (the location of which will be
specified in the related Prospectus Supplement).
For each Series of Bonds, the Issuer will cause the Manufactured Home
Loans included as security for the related Series to be assigned to the Trustee
named in the related Prospectus Supplement (the "Trustee").
The Manufactured Home Loans securing a Series of Bonds will consist of
conventional manufactured housing installment sales contracts. Each Manufactured
Home Loan will be secured by a Manufactured Home, and some Manufactured Home
Loans may also be secured by a lien on a parcel of real estate ("Real
Property"). Each Manufactured Home Loan will be fully amortizing and, unless
otherwise specified in the Prospectus Supplement for a Series, will bear
interest at a fixed or adjustable Loan Rate. Unless otherwise provided in the
related Prospectus Supplement, the Manufactured Home Loans will have terms of
from 7 to 30 years. Each Manufactured Home Loan will be assumable, subject to
underwriting in accordance with standards customary in the industry.
The Issuer will represent that the Manufactured Homes securing the
Manufactured Home Loans consist of manufactured homes within the meaning of
Title 42 of the United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [Chapter 70 under Title 42 of the
United States Code]."
With respect to the Manufactured Home Loans expected to secure a Series
of Bonds, the related Prospectus Supplement will specify, to the extent known
(i) the aggregate principal balance of the Manufactured Home Loans, (ii) the
range of remaining terms to maturity or weighted average remaining term to
maturity of the Manufactured Home Loans, (iii) the current Scheduled Principal
Balance of the largest Manufactured Home Loan and the average Unpaid Principal
Balance of the Manufactured Home Loans, (iv) the weighted average Loan Rate or
the range of Loan Rates borne by the Manufactured Home Loans and (v) the
geographic distribution of the Manufactured Homes.
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Types of Manufactured Home Loans
Manufactured Home Loans may be subject to various types of payment
provisions. In addition to other types of Manufactured Home Loans described in
the related Prospectus Supplement, the Manufactured Home Loans securing a Series
may consist of (1) "Level Payment Loans," which may provide for the payment of
interest and full repayment of principal in level Monthly Payments with a fixed
rate of interest computed on their declining principal balances; (2) "Life Floor
Adjustable Rate Loans," which may provide for fixed Loan Rates for a period of
years, followed by periodic adjustments that cause their Loan Rates to equal the
sum of a Gross Margin and an Index, subject to Periodic Rate Caps, a Maximum
Rate and a lifetime floor equal to the initial fixed Loan Rate; and (3)
"Convertible Loans," which are Life Floor Adjustable Rate Loans subject to
provisions pursuant to which, subject to certain limitations, the related
Borrowers may exercise an option to convert the adjustable Loan Rate to a fixed
Loan Rate.
Repurchase of Converted Manufactured Home Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by Manufactured Home Loans the Loan Rates of which are
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 may at its
option repurchase any adjustable rate Manufactured Home Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Loan, plus 30 days of interest thereon at the
applicable Loan Rate. The purchase price will be treated as a prepayment of the
Manufactured Home Loan. Until a Converted Manufactured Home Loan is purchased as
described above, it will remain in the Trust Estate with a fixed Loan Rate.
The Consumer Finance Loans
A Series of Bonds may be secured by Consumer Finance Loans. The
Collateral also may include any Facilities that initially secured a Consumer
Finance Loan and that are acquired by repossession, Foreclosure or otherwise.
The Issuer will acquire the underlying Consumer Finance Loans from the
Participant, which will have originated the Consumer Finance Loans or acquired
them from other originators. Specific information respecting the Consumer
Finance Loans included as security for a particular Series of Bonds will be
provided in the related Prospectus Supplement and, to the extent such
information is not fully provided in the related Prospectus Supplement, in a
Current Report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such Bonds. A copy
of the Indenture with respect to each Series of Bonds will be attached to the
related Current Report on Form 8-K and will be available for inspection at the
corporate trust office of the Trustee (the location of which will be specified
in the related Prospectus Supplement).
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For each Series of Bonds to be secured by Consumer Finance Loans, the
Issuer will cause the Loans to be assigned to the Trustee.
The Consumer Finance Loans securing a Series of Bonds will consist of
conventional, installment sales contracts. Each Consumer Finance Loan will be
secured by the related Facilities, will be fully amortizing and will bear
interest at a fixed or adjustable Loan Rate. Unless otherwise provided in the
related Prospectus Supplement, the Consumer Finance Loans will have terms based
on the useful lives of the related Facilities, which will typically be 5 to 15
years, and will generally range in original principal amount from $2,500 to
$25,000. The originator of a Consumer Finance Loan will perfect the security
interest in the related Facilities by making a "fixture filing," unless such a
filing is inadvisable under applicable state law, and will file a financing
statement treating the Facilities as personal property, under the provisions of
the UCC of the state where the related single family residential property is
located. Each Consumer Finance Loan will be assumable, subject to underwriting
in accordance with underwriting standards that are customary in the industry.
With respect to the Consumer Finance Loans expected to secure a Series
of Bonds, the related Prospectus Supplement will specify, to the extent known,
(i) the aggregate principal balance of the Consumer Finance Loans, (ii) the
range of remaining terms to maturity or weighted average remaining term to
maturity of the Consumer Finance Loans, (iii) the current Scheduled Principal
Balance of the largest Consumer Finance Loan and the average Unpaid Principal
Balance of the Consumer Finance Loans, (iv) the weighted average Loan Rate or
the range of Loan Rates borne by the Consumer Finance Loans and (v) the
geographic distribution of the related Facilities.
Substitution of Collateral
Unless otherwise provided in the Prospectus Supplement for a Series and
subject to the limitations set forth below, the Issuer at any time may deliver
to the Trustee other items of Collateral in substitution for any one or more
items of Collateral pledged as security for the Series. The Issuer will have the
option to pledge to the Trustee, in substitution for a defaulted item of
Collateral, a new item of Collateral ("Substitute Collateral"), to the extent
that the Master Servicer has determined, in its reasonable business judgment,
that the present value of any potential Loss on the defaulted item of Collateral
will be reduced through the substitution of Substitute Collateral for the
defaulted item of Collateral, and provided that the Substitute Collateral (i) is
secured by the collateral that secures the defaulted item of Collateral, (ii)
has either (A) an initial principal balance equal to or less than the Scheduled
Principal Balance of the defaulted item of Collateral for which it is
substituted or (B) a loan-to-value ratio, in the case of a Mortgage Loan, 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 item of Collateral exceeds the Collateral Value of the Substitute
Collateral would constitute a Loss on the item of Collateral. Upon the pledge of
Substitute Collateral, the Trustee will release the defaulted item of Collateral
from the lien of the Indenture.
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In addition, unless otherwise provided in the Prospectus Supplement,
the Issuer may pledge to the Trustee items of Collateral in substitution for
items of Collateral initially pledged (each, an "Original Loan") as security for
a Series of Bonds in the event of a breach of a representation or warranty by
the seller of the Original Loan or in the case of defective or incomplete
documentation with respect to the Original Loan. Any substitute items of
Collateral will have an interest rate within one percentage point in excess of
the Loan Rate of the Original Loan for which it is substituted, a principal
balance or value at least equal to the principal balance or value of the
Original Loan for which it is substituted and a maturity within 180 days of the
maturity of the Original Loan for which it is substituted. As more particularly
set forth in the Indenture, a substitute Loan must have characteristics
substantially similar to those of the Original Loan for which it is 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, mortgage certificates, model home
loans or manufactured home or facility installment sales contracts ("Additional
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
Collateral and the material terms of the Additional Bonds. Any pledge of
Additional 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 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 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 or minus 0.05 years from 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
Collateral and the Collateral as augmented by the Additional Collateral will
conform to the parameters for Additional 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 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 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.
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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 Collateral -- Payments on Collateral" 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.
On or before each Master Servicer Remittance Date, the Master Servicer
will transfer from the Master Servicer Custodial Account to the Collateral
Proceeds Account the proceeds of the Collateral that are distributable to the
Bondholders. The proceeds of the Collateral deposited into the Collateral
Proceeds Account generally will consist of the sum of (i) the aggregate Servicer
Remittance relating to the Collateral 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 that 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.
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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.
Insurance on the Collateral
Each Mortgage Loan securing a Series of Bonds generally will be covered
by Title Insurance, a Standard Hazard Insurance Policy and, if so specified in
the related Prospectus Supplement, a Primary Mortgage Insurance Policy
(collectively, the "Mortgage Insurance Policies"). Each Model Home Loan securing
a Series generally will be covered by Title Insurance and a Standard Hazard
Insurance Policy. Each Manufactured Home Loan securing a Series of Bonds
generally will be covered by a Standard Hazard Insurance Policy. In addition,
the related Prospectus may specify that the Mortgage Loans, Model Home Loans or
Manufactured Home Loans securing a Series of Bonds will be covered by a Special
Hazard Insurance Policy. To the extent provided in the related Prospectus
Supplement, in lieu of certain Insurance Policies, Additional Collateral (or
instruments secured by Additional Collateral) may be pledged to the Trustee to
secure the timely payment of principal of and interest on the Collateral 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 on the Mortgage Loans or the Manufactured Home Loans securing a Series
that are not covered by any Primary Mortgage Insurance Policy or exceed the
coverage provided by 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 the 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 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 or the Manufactured Home securing the defaulted Manufactured Home 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 or Manufactured Home, or to protect the Mortgaged Premises or
Manufactured Home from waste, so that the Mortgaged Premises or Manufactured
Home 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
or Manufactured Home first became effective, ordinary wear and tear excepted,
(3) property sales expenses, (4) any outstanding liens on the Mortgaged Premises
or Manufactured Home, 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 or Manufactured Home, to restore the Mortgaged Premises
or Manufactured Home 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 relating to a Mortgage Loan 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 covered by the Pool
Insurance Policy 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 generally be: (a) the
amount of the unpaid principal balance of the Mortgage Loan or Manufactured Home
Loan immediately prior to the Approved Sale of the related Mortgaged Premises or
Manufactured Home; (b) the amount of the accumulated unpaid interest on such
Mortgage Loan or Manufactured Home 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 Mortgage Insurance Policies). The Pool
Insurance Policy may not reimburse the insured for attorneys'
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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 or Manufactured
Home 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 or Manufactured Home 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 or
Manufactured Home by the Pool Insurer. If the Pool Insurer elects to take title
to the Mortgaged Premises or Manufactured Home, 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 related Mortgaged Premises or Manufactured Home.
If any property securing a defaulted Mortgage Loan or Manufactured Home 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 or Manufactured Home Loan will not be required to expend its own
funds to restore the damaged Mortgaged Premises or Manufactured Home 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 or
Manufactured Home 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
Mortgage 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 or Manufactured Home Loan, including
misrepresentation by the Borrower or the Originator, (ii) failure to construct
Mortgaged Premises or a Manufactured Home in accordance with plans and
specifications, and (iii) a claim in respect of a defaulted Mortgage Loan
occurring when the Servicer of the Mortgage Loan, at the time of default or
thereafter, was not approved by the Mortgage Insurer. A failure of coverage
attributable to one of the foregoing events might result in a breach of the
Participant's representations and warranties described under "Origination of the
Collateral -- Representations and Warranties" herein 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 or Manufactured
Home Loan if the breach cannot be cured. See "Origination of the Collateral --
Representations and Warranties" herein. In addition, if a terminated Servicer
has failed to comply with its obligation under the Servicing Agreement to
purchase a Mortgage Loan or Manufactured Home Loan 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 or Manufactured Home Loan. See
"Servicing of the Collateral -- Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted Collateral" herein.
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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 or Manufactured Homes covered thereby. The amount of claims paid
includes certain expenses incurred by the Servicer or the Master Servicer of the
defaulted Mortgage Loan or Manufactured Home Loan, as well as accrued interest
on delinquent Mortgage Loans or Manufactured Home Loans to the date of payment
of the claim. See "Certain Legal Aspects of the Collateral -- Mortgage Loans and
Model Home Loans -- Foreclosure" herein. The net amounts realized by the Pool
Insurer will depend primarily on the market value of the Mortgaged Premises or
Manufactured Home securing the defaulted Mortgage Loan or Manufactured Home
Loan. The market value of the Mortgaged Premises or Manufactured Home 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 or Manufactured Home
Loan would be recoverable by it from the proceeds of the Liquidation of such
Mortgage Loan or Manufactured Home 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 by it from
either the Pool Insurance Policy or any other related source. See "Servicing of
the Collateral -- Advances." The original amount of coverage under the Pool
Insurance Policy securing a Series may also be reduced or canceled 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 or Manufactured
Homes securing other Series of Securities or that secure other mortgage-backed
securities or collateralized mortgage or manufactured housing contract
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
Credit enhancements acceptable to each Rating Agency may be used to
provide for coverage of certain risks of default or losses on the Collateral.
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:
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(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 Collateral 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
Collateral, 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 Collateral 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 Collateral, upon which the Trustee may draw
in the event amounts received as payments on the Collateral
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;
(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 or Manufactured Homes. 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 Collateral for that Series and related property.
The related Prospectus Supplement may specify that payments received on such
Collateral 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
Classes of Bonds.
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Unless otherwise specified in the related Prospectus Supplement, in the
event of Delinquencies in payments of principal or interest on the Collateral,
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
Collateral -- Advances" herein.
There can be no assurance that real estate values will remain at
present levels in the areas in which the Mortgaged Premises, Manufactured Homes,
Real Property or Facilities will be located. If the real estate market relating
to 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 housing lending
industry. To the extent that Losses are not covered by applicable credit
enhancements described in the related Prospectus Supplement, they will be borne
by Bondholders of the Series secured by such pool as specified in the related
Prospectus Supplement.
With respect to any Series that includes Adjustable Rate Loans, there
may be a higher likelihood of defaults and Losses on such Loans during periods
of higher prevailing interest rates. With respect to any Series that includes
one or more Subordinated Classes of Bonds, Losses generally will be borne first
by the Issuer, to the extent of any Surplus, and then, to the extent of the
subordination in right of payment of the Subordinated Classes, by the
Bondholders of the Subordinated Classes, as specified in the related Prospectus
Supplement.
Bond Insurance and Surety Bonds
If so provided in the Prospectus Supplement for a Series of Bonds,
deficiencies in amounts otherwise payable on the Bonds or certain Classes
thereof will be covered by Bond Insurance 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, timely payments of interest and 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 COLLATERAL
Mortgage Loans and Manufactured Home Loans
Each Mortgage Loan 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. Each Manufactured Home Loan will
be originated by the Participant or acquired by the Participant
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from the originator. In originating a Mortgage Loan or a Manufactured Home 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 for a Series of Bonds will disclose the percentage of
Mortgage Loans or Manufactured Home Loans included in the Collateral 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 for
Mortgage Loans are less stringent than those applied by FNMA or FHLMC, primarily
in that the Participant's guidelines 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. The Participant will also apply the same
underwriting standards for Manufactured Home Loans, with one exception: in
underwriting a Mortgage Loan, the Participant has an appraisal, described below,
performed on the Mortgaged Premises, while in evaluating a Manufactured Home
Loan, it performs an investment analysis based principally on the invoice cost,
in the case of a new manufactured home, and a national appraisal guide used to
determine retail values, in the case of a used manufactured home.
Both the FNMA and FHLMC underwriting standards and the Participant's
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 and manufactured housing installment sales contracts
originated under the Participant's underwriting standards generally are based on
loan application packages submitted by mortgage brokerage companies,
manufactured home dealers or consumers 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 loans or
contracts. 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 statement of income as well as an
authorization for a credit report that 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 collateral for a Mortgage Loan, an
appraisal is made of each Mortgaged Premises 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
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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.
In assessing a possible Manufactured Home Loan, the Participant
determines the amount that it is willing to lend based not on an appraisal but
on an investment analysis based on the invoice price of the Manufactured Home
plus accessories, freight, taxes, insurance and other costs. The use of an
investment analysis in the underwriting of manufactured housing installment
sales contracts is customary in the financing of manufacturing housing. If the
Manufactured Home Loan is also to be secured by Real Property, the Participant
may have the Real Property appraised in the same manner as Mortgaged Premises
are appraised.
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 or contract (generally
determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the Mortgaged Premises or Manufactured Home (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, emphasis is placed both on the
value and adequacy of the Mortgaged Premises or Manufactured Home as collateral
and on credit underwriting, although certain credit underwriting documentation
concerning income and employment verification is waived. The maximum permitted
loan-to-value ratios for loans originated under such program are generally lower
than those permitted for similar loans originated pursuant to the full
documentation program.
Model Home Loans
Each Model Home Loan will be originated by a mortgagee approved by HUD.
In originating such Loans, the Originator will follow its own credit approval
process. That process utilizes standards for Loan diversification by home
builder and by geographic area in which the
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model home is located. The Originator will review the operating practices and
financial condition of each home builder that applies for participation. The
Originator will also have the related model home appraised in conformance with
FNMA or FHLMC appraisal standards then in effect.
Consumer Finance Loans
Each Consumer Finance Loan securing a Series of Bonds will be
originated by the Participant or acquired by the Participant from the
Originator. The Originator will require that an authorized contractor install
the Facilities in the related single family residential property. The Originator
will require a completed loan application from each potential borrower and will
examine the application and base credit decisions primarily on Fair Isaac
("FICO") credit scores. A FICO score represents a numerical weighing of a
borrower's credit characteristics that permits lenders to determine the credit
risk that a borrower presents and the likelihood that a Loan will be repaid.
FICO scores are empirically derived from historical credit data. These
scores estimate, on a relative basis, which loans are most likely to default in
the future. A FICO score is generated through the statistical analysis of a
number of credit-related characteristics or variables. Common characteristics
include number of credit lines (trade lines), payment history, past
delinquencies, severity of delinquencies, current levels of indebtedness, types
of credit and length of credit history. Attributes are the specific values of
each characteristic. A scoreboard (the model) is created with weights or points
assigned to each attribute. Weights are developed by optimizing the combination
of weight values for each characteristic that were most predictive for a
specific data set. An individual applicant's credit score is derived by adding
together the attribute weights for that applicant.
Representations and Warranties
The Issuer generally will acquire Loans from the Participant. The
Participant may act as a Servicer of Loans securing a Series or an unrelated
entity may act as Servicer. The Participant will make certain representations
and warranties with respect to Loans in the agreement by which the Participant
transfers its interest in the Loans to the Issuer. 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 Loan has been originated
in compliance with all applicable laws, rules and regulations; (ii) that each
Insurance Policy is the valid and binding obligation of the Insurer; and (iii)
that, in the case of each Mortgaged Premises and Manufactured Home, each
Security Instrument constitutes a good and valid first or, if applicable, second
lien on the collateral securing the Loan; and (iv) that the Borrower holds good
and marketable title to the collateral securing the Loan. 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
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Participant is required to deliver a final title insurance policy or
satisfactory evidence of the existence of such a policy.
In the event the Participant breaches a representation or warranty with
respect to a Loan or if any principal document executed by the Borrower relating
to a 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 the breaching party to
purchase the Loan upon deposit with the Trustee of funds equal to the then
Unpaid Principal Balance of the Loan plus accrued interest thereon at the Loan
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
Loan or the delivery by the Participant to the Trustee of a materially defective
document with respect to a Loan, the Participant may under certain
circumstances, in lieu of repurchasing the Loan, substitute a Loan having
characteristics substantially similar to those of the defective Loan. See
"Security for the Bonds -- Substitution of Collateral" herein. The Participant's
obligation to purchase a Loan will not be guaranteed by the Issuer or any other
party, unless otherwise specified in the related Prospectus Supplement.
SERVICING OF THE COLLATERAL
General
For the Collateral securing each Series, various Servicers, which may
include Dynex or an Affiliate, will provide certain customary servicing
functions pursuant to servicing agreements ("Servicing Agreements"), which will
be pledged to the Trustee to secure the related Bonds. The Servicers will be
entitled to withhold their servicing fees and certain other fees and charges
from payments on the Collateral they service. 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 and Model Home
Loans generally will be approved or will utilize a Sub-Servicer that is 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 any Sub-Servicer's servicing
records and evaluate the ability of the Servicer and Sub-Servicer to comply with
required servicing procedures. 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, any
Sub- Servicer.
Each Servicer or Sub-Servicer (subject to the general supervision of
the Servicer) of Collateral other than Mortgage Loans and Model Home Loans must
be approved by the Master
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Servicer and will perform all services and duties specified in the related
Servicing Agreement consistently with the servicing standards and practices of
prudent lending institutions with respect to installment sales contracts of the
same types as the Manufactured Home Loans and Consumer Finance Loans in those
jurisdictions where the Manufactured Homes and Facilities are located or as
otherwise specified in the related Servicing Agreement.
The duties to be performed by the Servicers with respect to Collateral
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 Collateral 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 Loan serviced by the Servicer and (ii) certain other
fees, including but not limited to, late payments, conversion or modification
fees and assumption fees, as applicable. 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 Collateral for each 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
Collateral for the 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 for the purpose of enforcing the provisions of
the Servicing Agreements, monitoring each Servicer's servicing activities,
reconciling the results of such monitoring with information provided by the
Servicer and making 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 remitted on the Collateral securing the Series 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 a
representation 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, appoint a
substitute Servicer acceptable to the Trustee to assume the servicing
obligations of the terminated Servicer.
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Forms of Servicing Agreements have been filed as exhibits to, or
incorporated by reference in, 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 Collateral
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 the
Collateral. 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 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 Monthly Payments on the Collateral securing a 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, if any, 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 a Series of Bonds any P&I Advances 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 Collateral securing such Series.
Advances
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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 Collateral securing such Series,
(i) delinquent payments of principal of and interest on the Collateral 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 the party deems the 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 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
Collateral, Insurance Proceeds or Liquidation Proceeds of the Collateral for
which such amounts were advanced. If an Advance made by a Servicer, the Master
Servicer or the Trustee later proves to be unrecoverable, the 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 Collateral securing any Series will be intended to enable the
Issuer to make timely payments of principal and interest on the Bonds of the
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 or
any Servicer will insure or guarantee any Series or any Collateral 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 Collateral, or
Insurance Proceeds or Liquidation Proceeds of the Collateral, for which the
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 with
respect to the Collateral securing the Series and under the applicable Insurance
Policies with respect to each such Loan and, consistent with the Servicing
Agreement, to follow with respect to Mortgage Loans such collection procedures
as it normally would follow with respect to mortgage loans serviced for FNMA.
The servicing of Manufactured Home Loans and Consumer Finance Loans is
generally similar to the servicing of Mortgage Loans, except that, in general,
servicers of the
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Manufactured Home Loans and Consumer Finance Loans will place greater emphasis
on making prompt telephone contact with delinquent Borrowers than is generally
customary in the case of the servicing of Mortgage Loans.
The Security Instrument used in originating a Mortgage Loan may, at the
lender's option, contain a "due-on-sale" clause. See "Certain Legal Aspects of
the Collateral -- Mortgage Loans and Model Home Loans -- Due-On-Sale Provisions"
herein. The Servicing Agreements will require the Servicers of Mortgage Loans to
use reasonable efforts to enforce a "due-on-sale" clause 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 a Mortgaged Premises has been or is about to be conveyed by the
Borrower and the "due-on-sale" clause has not been enforced or the Note related
to any Loan is by its terms assumable, the Servicer will be authorized to take
or enter into an assumption agreement 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 collateral securing a Loan, the Servicer will release the original
Borrower from liability upon the Loan and substitute the new Borrower as obligor
thereon. In no event can the assumption agreement permit a decrease in the
applicable interest rate or an increase in the term of the Loan. Fees collected
for entering into an assumption agreement will be retained by the Servicer of
the related Loan.
Defaulted Collateral
With respect to any item of Collateral 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 Monthly Payment that a Borrower is required to make with respect to a
Loan, provided that the payment of principal and interest is only deferred and
not forgiven. A "modification" consists of a permanent reduction in the Monthly
Payment that a Borrower is required to make with respect to a Loan, and may
result in a Realized Loss on the Loan. A Loan modification may involve a
reduction in the Loan Rate of the Loan, its Unpaid Principal Balance or both. A
forbearance or modification of a Loan only will be permitted if the Servicer
and, if required, the Master Servicer have determined that in their good faith
business judgment granting the forbearance or modification will maximize the
recovery on the 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 Loan, the general condition of the collateral for the
Loan and the likely proceeds from the Foreclosure and Liquidation of a Mortgaged
Premises or the repossession and Liquidation of a Manufactured Home or
Facilities.
Except as otherwise specified in the Prospectus Supplement, the Issuer
will be entitled to purchase any Loan that has a payment that is 90 days past
due upon payment to the Trustee
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of the Unpaid Principal Balance of the Loan plus accrued and unpaid interest
thereon through the Payment Date following the date of purchase.
The Servicers will not exercise any discretion with respect to changes
in any of the terms of any Loan (including but not limited to the Loan Rate,
whether the term of the Loan is extended for a further period and the specific
provisions applicable to such an extension) or the disposition of REO Property
or Repo Property without the consent of the Master Servicer.
Maintenance of Insurance Policies; Claims Thereunder and Other Realization Upon
Defaulted Collateral
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, in certain areas, and, with respect
to Mortgage Loans, any Primary Mortgage Insurance Policy relating to a Loan that
it services.
If any collateral securing a defaulted Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy and any
Flood Insurance Policy are insufficient to restore the damaged property to the
condition that will permit recovery under the related Insurance Policy, the
Servicer will not be required to expend its own funds to restore the damaged
collateral unless it determines that it can recover the expenses from
Liquidation Proceeds or 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 Collateral securing the Series and to
take the reasonable steps necessary to permit recovery under the Insurance
Policy with respect to defaulted Loans or losses on the collateral securing such
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 defaulted Collateral. See
"Certain Legal Aspects of the Collateral -- Environmental Considerations"
herein. In this regard, the Servicer or Master Servicer will sell the Loan
collateral pursuant to Foreclosure or trustee's sale or, in the event a
deficiency judgment is available against the Borrower or other Person, proceed
to seek recovery of the deficiency against the appropriate person. To the extent
that the proceeds of any Liquidation proceeding are less than the Collateral
Value of the defaulted Collateral, there will be a reduction in the value of the
Collateral for the related Series, and the holders of Bonds of the Series may
not receive full principal of and interest on their 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
the 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 Special Hazard Insurance Policy and any Pool Insurance Policy for a Series
on a timely basis. Any premiums may be payable on a monthly basis in advance or
pursuant
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to any other payment schedule acceptable to the applicable insurer. In the event
that a Special Hazard Insurance Policy or Pool Insurance Policy for a Series is
canceled 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 that is equal to the then
existing coverage (or the lesser amount if the Master Servicer confirms in
writing with the Rating Agencies rating the Bonds that the lesser amount will
not impair the rating on the Bonds) of the Special Hazard Insurance Policy or
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 replacement policy or bond is greater
than the cost of the policy or bond that has been terminated, 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 increased cost, so long as the 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 each Servicer
must provide the Master Servicer with a copy of its audited financial statements
for the year. In addition, the Servicer will be required to deliver an officer's
certificate to the effect that it has fulfilled its obligations under the
applicable 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 promptly to make available to the Trustee any
compliance reporting that it receives from a Servicer.
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 a 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.
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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 involving 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.
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,
Dynex will act as the master servicer (in such capacity, the "Master Servicer")
of the Collateral pursuant to the terms of the Master Servicing Agreement
between Dynex and the Issuer. Pursuant to the Master Servicing Agreement, the
Master Servicer (i) will supervise the servicing of the Collateral by the
Servicers, (ii) will instruct, among other things, each Servicer as to the
proper actions to be taken with respect to defaulted Collateral, (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 will remain
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 Loan expressed as a fixed percentage of the remaining
Scheduled Principal Balance of the 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
Collateral, 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 Collateral 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 Collateral
securing a Series. The Special Servicer may engage various independent
contractors to perform certain of its responsibilities, provided, however, that
the Special Servicer remains fully responsible and liable for all of its
obligations under the special servicing agreement (the "Special Servicing
Agreement"). As may be further specified in the related Prospectus Supplement, a
Special Servicer may be entitled to various fees, including, but not limited to,
(i) a monthly engagement fee applicable to each Loan, expressed as a fixed
percentage of the Scheduled Principal Balance of the Loan as of the
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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 Loan, or (iii) a performance fee applicable to each
liquidated Loan based upon the Liquidation Proceeds.
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" herein 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
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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 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
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
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Agency to the Class or Series and (ii) the supplemental indenture effects no
change in principal priority schedules, interest rates, redemption prices,
substitution of Collateral, 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, a Class of 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
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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 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
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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 regarding the levels of Delinquencies and Losses on the
Collateral, losses
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with respect to each related Class of Bonds, and the amount of servicing and
master servicing fees paid with respect to the Collateral in the related
Collateral 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.
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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 COLLATERAL
The following discussion contains summaries of certain legal aspects of
mortgage loans, such as the Mortgage Loans and the Model Home Loans, and
installment sales contracts, such as the Manufactured Home Loans and the
Consumer Finance 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, to reflect the laws of any particular
state or to encompass the laws of all states in which the collateral for the
Loans is situated. The summaries are qualified in their entirety by reference to
the applicable federal and state laws governing the Collateral.
Mortgage Loans and Model Home Loans
General
Mortgage Loans and Model Home Loans as described herein are distinct
from Land Secured Loans (which are discussed below under "-- Manufactured Home
Loans -- Foreclosure under Real Property Laws"). A Mortgage Loan or Model Home
Loan is secured by Mortgage Premises on which a single family, (one- to
four-family) attached or detached residential structure is located, whereas a
Land Secured Loan is secured primarily by a Manufactured Home and is secured
only secondarily by Real Property.
The Mortgage Loans and Model Home Loans will be secured by Security
Instruments consisting of either mortgages, deeds of trust, deeds to secure debt
or security deeds, depending upon the prevailing practice in the state in which
the underlying Mortgaged Premises are located. The filing of a mortgage, deed of
trust, deed to secure debt or security deed 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
instrument and generally on the 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
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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
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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.
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 mortgage or a junior deed of
trust 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.
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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,
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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.
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.
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 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.
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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, as amended (the
"Relief Act"), 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 certain proceedings 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
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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 terms of the Relief Act, an obligor who enters military
service after the origination of such obligor's Mortgage Loan (including an
obligor who is a member of the National Guard or who is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above a specified annual rate during the period of
such obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. Any shortfall in
interest collections resulting from the application of the Relief Act, to the
extent not covered by the subordination of a Class of Subordinated Bonds, could
result in losses of Bondholders. In addition, the Relief Act imposes limitations
that would impair the ability of the Servicer to foreclose on an affected
Mortgage Loan during the obligor's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to liquidate the related Mortgaged Premises
in a timely fashion.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides, that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The statute authorized any
state to reimpose limitations on interest rates and finance charges by adopting
a law or constitutional provision that expressly rejects application of the
federal law before April 1, 1983. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where the Title V was not so rejected,
any state is authorized by the law to adopt a provision limiting discount points
or other charges on loans covered by Title V.
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Manufactured Home Loans
General
As a result of the pledge of the Manufactured Home Loans underlying a
Series to the related Trustee, the Trustee will succeed to all of the rights
(including the right to receive payments on the Manufactured Home Loans) of the
obligees under the Manufactured Home Loans. Each Manufactured Home Loan
evidences both (1) the obligation of the Borrower to repay the Loan evidenced
thereby and (2) the grant of a security interest in the related Manufactured
Home to secure repayment of the Loan. Certain aspects of both features of the
Manufactured Home Loans are described more fully below.
The Manufactured Home Loans generally are "chattel paper" as defined in
the Uniform Commercial Code (the "UCC") in effect in the states in which the
Manufactured Homes initially were located. Under the Servicing Agreement, the
Servicer will retain possession of the Manufactured Home Loans as custodian for
the Trustee. Because the Servicer is not relinquishing possession of the
Manufactured Home Loans, the Participant or the Issuer will file a UCC-1
financing statement in the appropriate recording offices as necessary to perfect
the Trustee's interest in the Manufactured Home Loans. Notwithstanding such
filings, if, through negligence, fraud or otherwise, a subsequent purchaser from
the Participant or from a predecessor owner of a Manufactured Home Loan were
able to take physical possession of the Manufactured Home Loan without notice of
the pledge of the Manufactured Home Loans to the Trustee, the Trustee's interest
in the Manufactured Home Loans could be subordinated to the interest of such
purchaser. To provide a measure of protection against this possibility, within
ten days after the Closing Date, unless otherwise specified in the related
Prospectus Supplement, the Manufactured Home Loans will be stamped or marked
otherwise to reflect their pledge by the Issuer to the Trustee.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Manufactured Home Loans may be
located in any or all of the 50 states and the District of Columbia. The manner
in which liens on Manufactured Homes are "perfected" is governed by applicable
state law. In many states ("Title States"), a lien on a manufactured home may be
"perfected" under applicable motor vehicle titling statutes by notation of the
secured party's lien on the related certificate of title or by delivery of
certain required documents and payment of a fee to the state motor vehicle
authority to re-register the home, depending upon applicable state law. In some
states ("UCC States"), perfection of a lien on a manufactured home is
accomplished pursuant to the provisions of the applicable UCC by filing UCC-3
financing statements or other appropriate transfer instruments with all
appropriate UCC filing offices. Some states are both Title States and UCC
States. The Issuer will cause the security interests created by the Manufactured
Home Loans in the related Manufactured Homes to be pledged to the Trustee on
behalf of the Bondholders. However, unless otherwise specified in the related
Prospectus Supplement, because of the expense and administrative inconvenience
involved, the Participant will not amend any certificate of title to change the
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lienholder specified therein from the Participant to the Trustee, deliver any
documents or pay fees to re-register any Manufactured Home, or file any UCC
transfer instruments, and the Participant will not deliver any certificate of
title to the Trustee or note thereon the Trustee's interest. In some states,
simple assignment of the security interest created by a Manufactured Home Loan
in the related Manufactured Home constitutes an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title, re- registration of the underlying home or filing of any statement
under the applicable UCC, and the assignee succeeds to the seller's rights as
the secured party as to such Manufactured Home. In other states, however, the
law is unclear whether a security interest in a Manufactured Home is effectively
assigned in the absence of an amendment to a certificate of title,
re-registration of the underlying home, or the filing of an appropriate UCC
transfer instrument, as appropriate under the applicable state law. In such
event, the assignment of the security interest created by a Manufactured Home
Loan in the related Manufactured Home may not be effective against creditors of
the Participant or the Issuer or a trustee in bankruptcy of the Participant or
Issuer.
In recent years, manufactured homes have become increasingly large and
often are attached to their sites, without appearing to be readily mobile.
Perhaps in response to these trends, courts in many states have held that
manufactured homes, under certain circumstances, are subject to real estate
title and recording laws. As a result, a security interest created by an
installment sales contract in a manufactured home located in such a state could
be rendered subordinate to the interests of other parties claiming an interest
in the home under applicable state real estate law. In order to perfect a
security interest in a manufactured home under real estate laws, the holder of
the security interest must file either a real estate mortgage, deed of trust,
deed to secure debt or security deed, as appropriate under the real estate laws
of the state in which the related home is located (any of the foregoing, a
"Mortgage") or a "fixture filing" under the provisions of the applicable UCC.
These filings must be made in the real estate records office of the jurisdiction
in which the home is located. The Participant will not be required to make
fixture filings or to file Mortgages with respect to any of the Manufactured
Homes (except in the case of Land Secured Loans, as described below).
Consequently, if a Manufactured Home is deemed subject to real estate title or
recording laws because the owner attaches it to its site or otherwise, the
Trustee's interest therein may be subordinated to the interests of others that
may claim an interest therein under applicable real estate laws.
The Trustee's security interest in a Manufactured Home would be
subordinate to, among others, subsequent purchasers for value of the
Manufactured Home and holders of perfected security interests therein, in either
case without notice of the Trustee's adverse interest in such home. In the
absence of fraud, forgery or affixation of the Manufactured Home to its site by
the Manufactured Home owner, or administrative error by state recording
officials, the notation of the lien of the Participant on the related
certificate of title or delivery of the required documents and fees necessary to
register the home in the name of the Participant or the public filing of
appropriate transfer instruments reflecting the lien of the Participant, in each
case as required under applicable state law, will be sufficient to protect the
Bondholders against the rights of subsequent purchasers of a Manufactured Home
or subsequent lenders who take a
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security interest in the Manufactured Home from anyone other than the
Participant because they will be on notice of the interest in the Manufactured
Home held by the Participant.
Certain of the Manufactured Home Loans ("Land Secured Loans") will be
secured by real estate as well as a Manufactured Home. The Issuer will cause the
liens created by the Land Secured Loans on the related real estate to be
assigned to the Trustee. The Manufactured Home Loan file for each Land Secured
Loan will be required to include an original or a certified copy of the recorded
Mortgage relating to the Land Secured Loan, together with originals or certified
copies of a chain of recorded assignments of the Mortgage sufficient to reflect
the Participant as the record holder of the Mortgage and the lien it evidences
on the related real estate. Assignments in recordable form for such Mortgages
naming the Trustee as assignee will not be prepared by the Servicer or the
Issuer. However, the Issuer will deliver to the Trustee a power of attorney
entitling the Trustee to prepare, execute and record such assignments of
Mortgages, in the event that recordation thereof becomes necessary to enable the
Servicer to foreclose on the related real property.
Under the laws of most states, in the event that a manufactured home is
moved to a state other than the state in which it initially is registered, any
perfected security interest in the manufactured home would continue
automatically for four months after relocation, during which time the security
interest must be re-perfected in the new state in order to remain perfected
after the four-month period. Generally, a security interest in such a
manufactured home may be re- perfected after the expiration of the four-month
period, but, for the period between the end of the four-month period and the
date of re-perfection, the security interest would be unperfected.
If a Manufactured Home is moved to a UCC State, an appropriate UCC
financing statement generally would have to be filed in such state within the
four-month period after the move in order for the Participant's security
interest in the Manufactured Home to remain perfected continuously. If a
Manufactured Home is moved to a Title State, re-perfection of a security
interest in such home generally would be accomplished by registering the
Manufactured Home with the Title State's motor vehicle authority. In the
ordinary course of servicing its portfolio of manufactured housing installment
sales contracts, the Servicer takes steps to re- perfect its security interests
in the related manufactured homes upon its receipt of notice of registration of
a home in a new state (which it should receive by virtue of the notation of its
lien on the original certificate of title, if the home is moved from a Title
State to a Title State) or of information from a related borrower as to
relocation of such home. In some Title States, the certificate of title to a
Manufactured Home (which is required to be in the Servicer's possession) must be
surrendered before the home can be re-registered; in such states a Borrower
could not re-register a Manufactured Home to a transferee without the Servicer's
assistance. In other Title States, when a Borrower under a Manufactured Home
Loan sells the related Manufactured Home (if it is located in a Title State both
before and after the sale), the Participant should at least receive notice of
any attempted re-registration thereof because its lien is noted on the related
certificate of the title and accordingly it should have the opportunity to
require satisfaction of the related Manufactured Home Loan before releasing its
lien on the home. If the motor vehicle authority of a Title State to which a
Manufactured Home is relocated or in which a
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Manufactured Home is located when it is transferred registers the Manufactured
Home in the name of the owner thereof or the owner's transferee without noting
the Participant's lien on the related certificate of title, whether because (1)
such state did not require the owner to surrender the certificate of tile issued
prior to the transfer or issued by the Title State from which the home was moved
or failed to notify the Participant of re-registration and failed to note the
Participant's lien on the new certificate of title issued upon re-registration
or (2) the Manufactured Home was moved from a state that is not a Title State,
re-registration could defeat the perfection of the Participant's lien in the
Manufactured Home. In addition, re-registration of a Manufactured Home (whether
due to a transfer or relocation thereof) in a state, such as a UCC State, that
does not require a certificate of title for registration of a Manufactured Home,
could defeat perfection of the Participant's lien thereon.
If the Participant and the Servicer are not the same entity, the
Participant will be required to report to the Servicer any notice it receives of
any re-registration of a Manufactured Home. Under the related Servicing
Agreement, the Servicer is obligated to take all necessary steps, at its own
expense, to maintain perfection of the Trustee's security interests in the
Manufactured Homes, to the extent it received notice of relocation, sale or
re-registration thereof. However, the Servicer has no independent obligation to
monitor the status of the Participant's lien on any Manufactured Home.
Under the laws of most states, liens for repairs performed on a
manufactured home and for property taxes on a manufactured home take priority
even over a prior perfected security interest. Such liens could arise at any
time during the term of a Manufactured Home Loan. No notice will be given to the
Trustee or Bondholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer, on behalf of the Trustee, to the extent required by the
related Servicing Agreement, may take action to enforce the Trustee's security
interest with respect to Manufactured Home Loans in default by repossession and
resale of the Manufactured Homes securing the defaulted Manufactured Home Loans.
So long as the manufactured home has not become subject to the real estate laws
of a state, a creditor is entitled, in most states, to repossess a manufactured
home through the voluntary surrender thereof, by "self-help" repossession that
is "peaceful" (i.e., not including any breach of the peace) or, if the creditor
is unable to repossess through either of the foregoing means, by judicial
process. The holder of a Manufactured Home Loan must give the debtor a number of
days' notice, which varies depending on the state (usually ranging from 10 to 30
days depending on applicable state law), prior to commencement of any
repossession action. The UCC and consumer protection laws in most states place
restrictions on repossession sales; among other things, such laws require prior
notice to the debtor and commercial reasonableness in effecting such a sale. The
law in most states also requires that the debtor be given notice prior to any
resale of a repossessed home so that the debtor may redeem the home at or before
such resale. In the event of repossession and resale of a Manufactured Home, the
Trustee would be entitled to receive the net proceeds of the
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resale up to the amount of the Unpaid Principal Balance of the related
Manufactured Home Loan plus all accrued and unpaid interest thereon at the
related Loan Rate.
Under applicable laws of most states, a creditor is entitled to obtain
a judgment against a debtor for any deficiency remaining after repossession and
resale of the manufactured home securing such debtor's loan. However, obtaining
and collecting deficiency judgments is seldom economically feasible and, for
that reason, the Participant generally has not attempted to obtain deficiency
judgments. In addition, some states impose prohibitions or limitations on
deficiency judgments, and certain other statutory provisions, including federal
and state bankruptcy and insolvency laws and general equitable principles, the
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of a secured lender to repossess and resell collateral or to
enforce a deficiency judgment. For example, in certain proceedings under the
Federal Bankruptcy Code, when a court determines that the value of a home is
less than the principal balance of the loan it secures, the court may prevent a
lender from repossessing or foreclosing on the home, and, as part of the
debtor's rehabilitation plan, reduce the amount of the secured indebtedness to
the value of the home as it 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 manufactured
housing installment sale contract not secured by the debtor's principal
residence, also may reduce the monthly payments due under such contract, change
the rate of interest and alter the 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 all or any portion of the
amounts otherwise due on a Manufactured Home Loan, the Servicer will not be
required to advance such amounts, and any loss in respect thereof may reduce
amounts available for payment on the related Bonds.
Under the terms of the federal Relief Act, a Borrower who enters
military service after the origination of such Borrower's Manufactured Home Loan
(including a Borrower who is a member of the National Guard or who is in reserve
status at the time of the origination of the Manufactured Home Loan and is later
called to active duty) may not be charged interest above a specified annual rate
during the period of the Borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action could
have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Manufactured Home
Loans. Any shortfall in interest collections resulting from the application of
the Relief Act, to the extent not covered by the subordination of a Class of
Subordinated Bonds, could result in losses to Bondholders. In addition, the
Relief Act imposes limitations that would impair the ability of the Servicer to
repossess or foreclose on the Manufactured Home securing an affected
Manufactured Home Loan during the Borrower's period of active duty status. Thus,
in the event that such a Manufactured Home Loan goes into default, there may be
delays and losses occasioned by the inability to liquidate the related
Manufactured Home in a timely fashion.
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Foreclosure under Real Property Laws
If a Manufactured Home has become attached to real estate to a degree
such that the home would be treated as real property under the laws of the state
in which it is located, it may not be legally permissible for the Servicer to
repossess the home under the provisions of the UCC or other applicable personal
property laws. If so, the Servicer could obtain possession of the home only
pursuant to real estate mortgage foreclosure laws. See "- Mortgage Loans and
Model Home Loans - Foreclosure" above. In addition, in order to realize upon the
Real Property securing any Land Secured Loan, the Servicer must proceed under
applicable state real estate mortgage foreclosure laws. The requirements that
the Servicer must meet in order to foreclose on the Real Property securing a
Land Secured Loan, and the restrictions on such foreclosure, are identical to
the requirements and restrictions that would apply to foreclosure of any
Mortgage Loan. For a description of such foreclosure, see "- Mortgage Loans and
Model Home Loans" above. Mortgage foreclosure generally is accomplished through
judicial action, rather than by private action as permitted under personal
property laws, and real estate laws generally impose stricter notice
requirements and require public sale of the collateral. In addition, real estate
mortgage foreclosure is usually far more time-consuming and expensive than
repossession under personal property laws, and applicable real estate law
generally affords debtors many more protections than are provided under personal
property laws. Rights of redemption under real estate laws generally are more
favorable to debtors than they are under personal property laws, and in many
states antideficiency judgment legislation will be applicable in the real estate
foreclosure context even if it would not apply to repossessions under personal
property laws. If real estate laws apply to a Manufactured Home, to the extent
the Participant has not perfected its security interest in a Manufactured Home
under applicable real estate laws, the Participant's security interest in the
Manufactured Home would be subordinate to a lien on the home recorded pursuant
to applicable real estate laws.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides, subject to certain
conditions described in the next sentence, that state usury limitations shall
not apply to any loan that is secured by a first lien on certain kinds of
manufactured housing. The Manufactured Home Loans would be covered under Title V
if they satisfy certain conditions governing, among other things, the terms of
any prepayments, late charges and deferral fees and requiring 30 days' prior
notice before the institution of any action leading to repossession of or
foreclosure with respect to the related manufactured home.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting a law or constitutional provision that expressly
rejects application of the federal law before April 1, 1983. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
the Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
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Consumer Finance Loans
General
As a result of the pledge of the Consumer Finance Loans underlying a
Series to the related Trustee, the Trustee will succeed to all of the rights
(including the right to receive payments on the Consumer Finance Loans) of the
obligees under the Consumer Finance Loans. Each Consumer Finance Loan evidences
both (1) the obligation of the Borrower to repay the Loan evidenced thereby, and
(2) the grant of a security interest in the related Facilities to secure
repayment of the Consumer Finance Loan. Certain aspects of both features of the
Consumer Finance Loans are described more fully below.
The Consumer Finance Loans generally are "chattel paper" as defined in
the Uniform Commercial Code (the "UCC") in effect in the states in which the
Facilities are located. Under the Servicing Agreement, the Servicer will retain
possession of the chattel paper evidencing the Consumer Finance Loans as
custodian for the Trustee. Because the Servicer is not relinquishing possession
of the Consumer Finance Loans, the Servicer will file a UCC-1 financing
statement in the appropriate recording offices as necessary to perfect the
Trustee's interest in the Consumer Finance Loans. Notwithstanding such filings,
if, through negligence, fraud or otherwise, a subsequent purchaser from the
Participant or from a predecessor owner of the chattel paper evidencing the
Consumer Finance Loans were able to take physical possession of the Consumer
Finance Loans without notice of the pledge of the Consumer Finance Loans to the
Trustee, the Trustee's interest in the Consumer Finance Loans could be
subordinated to the interest of such purchaser. To provide a measure of
protection against this possibility, within ten days after the Closing Date,
unless otherwise specified in the related Prospectus Supplement, the documents
evidencing the Consumer Finance Loans will be stamped or marked otherwise to
reflect their pledge by the Issuer to the Trustee.
Security Interests in the Facilities
The Facilities securing the Consumer Finance Loans may be located in
single family residential properties in any or all of the 50 states and the
District of Columbia. The manner in which security interests in Facilities are
"perfected" is governed by applicable state law. Generally, a security interest
in Facilities may be perfected by filing UCC financing statements or other
required transfer documents with appropriate offices. In connection with a
Series of Bonds secured by Consumer Finance Loans, the Participant will cause
the security interests created by the Consumer Finance Loans to be assigned to
the Issuer and, in turn, assigned to the Trustee. Unless otherwise specified in
the related Prospectus Supplement, however, because of the expense and
administrative inconvenience involved, neither the Participant nor the Issuer
will file any UCC transfer documents reflecting the assignment to the Trustee.
Generally, under the UCC, simple assignment of the security instrument created
by the Consumer Finance Loan constitutes an effective conveyance of the security
instrument without the filing of any statement under the UCC. In some states,
however, the law is unclear as to whether a security interest is effectively
assigned in the absence of filing an appropriate UCC transfer instrument. In
such
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a state, the assignment of the security interest created by a Consumer Finance
Loan in the related Facilities may not be effective against creditors of the
Participant or the Issuer or a trustee in bankruptcy of the Participant or
Issuer.
The Trustee's security interest in Facilities would be subordinate to,
among others, subsequent purchasers for value of the Facilities and holders of
perfected security interests therein, in either case without notice of the
Trustee's adverse interest in the Facilities. In the absence of fraud or
forgery, or administrative error by state recording officials, the public filing
of appropriate transfer instruments reflecting the lien of the Participant, in
each case as required under applicable state law, will be sufficient to protect
the Bondholders against the rights of subsequent purchasers of Facilities or
subsequent lenders who take a security interest in the Facilities from anyone
other than the Participant because they will be on notice of the interest in the
Facilities held by the Participant.
The Facilities consist of equipment, facilities and materials (referred
to as "goods" in this discussion) that will be installed in existing, single
family residential properties, and the goods may become "fixtures." Generally,
goods become fixtures under the UCC when they become so related to particular
real estate that an interest arises in them under the real estate law of the
applicable state. In order to perfect a security interest in goods (the UCC
provides that no security interest may exist in "ordinary building materials"
incorporated into an improvement to real estate), the Participant will make a
"fixture filing" under the applicable UCC, unless such a filing is inadvisable
under applicable state law. The Participant will also perfect a security
interest in the goods as personal property in the customary manner required by
the applicable UCC. With respect to a Series of Bonds secured by Consumer
Finance Loans, the Participant will assign its security interest in the related
goods to the Issuer, which will pledge them to the Trustee.
In most states, with respect to the installation of goods that become
fixtures in an existing single family residential property, a perfected security
interest in the goods will, with one exception, have priority over the
conflicting interest of an encumbrancer of the real estate, including the
mortgagee under a first lien mortgage secured by the related real estate, if (i)
the security interest was created in connection with the purchase of the goods,
(ii) the interest of the encumbrancer arises before the goods become fixtures,
(iii) the security interest is perfected by the fixture filing before the goods
become fixtures or within a specified time thereafter and (iv) the debtor has an
interest of record in or possession of the real estate. The exception is that a
perfected security interest in fixtures will not take priority over a
construction mortgage recorded before the goods become fixtures if the goods
become fixtures before completion of construction. In a very small minority of
states, a perfected security interest in goods that are or are to become
fixtures will not have priority over the conflicting interest of an encumbrancer
whose security interest in the related single family residential property was
perfected before the perfection of the security interest in the fixtures.
Under the laws of most states, liens for repairs performed on a home
and for property taxes on a home take priority even over a prior perfected
security interest. Such liens could
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arise at any time during the term of a Consumer Finance Loan. No notice will be
given to the Trustee or Bondholders in the event such a lien arises.
Enforcement of Security Interests
The Servicer, on behalf of the Trustee, to the extent required by the
related Servicing Agreement, may take action to enforce the Trustee's security
interest with respect to Consumer Finance Loans in default.
If the goods securing a defaulted Consumer Finance Loan have not become
fixtures under applicable state law, the Servicer may remove and repossess the
goods subject to the requirements with respect to "peaceful repossession,"
notice to the debtor of repossession and resale and rights of redemption in the
debtor discussed herein under "Certain Legal Aspects of the Collateral --
Manufactured Home Loans -- Enforcement of Security Interests."
If the goods constitute fixtures and the Trustee's security interest in
the related goods has priority over all other encumbrancers of the affected
single family residential property, on default the Servicer may remove and
repossess the goods (not including the related "ordinary building materials"),
subject to the requirements described in the preceding paragraph. In addition,
the Servicer must reimburse any encumbrancer who is not the debtor for the cost
of repair of any physical damage to the dwelling resulting from the removal of
fixtures, and the person entitled to reimbursement may refuse permission to
remove any fixtures unless the Servicer gives adequate security for the cost of
repair obligation.
If the Trustee's security interest in the goods does not have priority
over all other owners and encumbrancers of the affected real estate, for example
because a construction mortgage has priority, the Servicer may not remove the
goods under any circumstances in the case of a defaulted Consumer Finance Loan.
Each Consumer Finance Loan will be made in an amount equal to the cost
of the purchase and installation of the goods, which amount will include the
cost of labor and may include "ordinary building materials" that cannot be
repossessed. In addition, the value of Facilities, to a greater extent than
Mortgaged Premises, is likely to decrease over time. Either or both of these
factors could cause the net proceeds of any resale on default to be inadequate
to pay off the Unpaid Principal Balance plus accrued and unpaid interest on the
related Consumer Finance Loan. Under applicable laws of most states, the
Servicer might be able to seek a judgment against the debtor for the deficiency,
but obtaining such judgments is seldom economically feasible, and, for that
reason, the Servicer is unlikely to pursue this course of action. In addition,
certain legal prohibitions or restrictions on deficiency judgments and other
laws affording protections to debtors, discussed above under "-- Manufactured
Home Loans -- Enforcement of Security Interests," may apply in the case of
Consumer Finance Loans.
Given that the Consumer Finance Loans involve relatively small amounts,
even with a perfected, first priority security interest, the Servicer is likely
to determine in many cases that
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the cost of removal of goods, particularly if an obligation to pay cost of
repairs exists, exceeds the net proceeds that could be expected from a sale and,
as a result, decline to remove the goods. If the Servicer either declines or is
not permitted to remove the goods, the UCC provisions dealing with fixtures do
not indicate how the Servicer is to proceed. It is not clear whether under
applicable state law the Trustee would be able to share in the proceeds of a
Foreclosure proceeding brought by an encumbrancer of the real estate. If the
Trustee's security interest in the goods is not a first priority security
interest, there may be little likelihood that any Foreclosure proceeds would
remain after payment of expenses and satisfaction of the senior encumbrances.
The Servicer may have the right to reduce the Trustee's claim to judgment and
proceed against the debtor's assets. For the same reasons that the Servicer
would be unlikely to seek a deficiency judgment in the event of a repossession
and resale, however, a legal proceeding against the debtor frequently will not
be economically feasible.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to prevent a seller of goods pursuant to a consumer
credit contract (and certain related lenders and assignees) from transferring
the contract free of claims by the debtor thereunder against the seller. The
effect of this rule is to subject the assignee of a consumer credit contract to
all claims and defenses that the debtor could have asserted against the seller
under the contract. Assignee liability under this rule (which would be
applicable to the Trust, as pledgee of the Manufactured Home Loans or Consumer
Finance Loan) is limited to amounts paid by the debtor under the pledged Loan;
however, a borrower also may assert the rule to set off remaining amounts due
under such a Loan as a defense against a claim brought by the assignee of the
Loan against the borrower. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending in connection
with one or more types of the Collateral, including the Truth in Lending Act,
the Federal Trade Commission Act, the Magnuson-Moss Warranty - Federal Trade
Commission Improvement Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. The failure of the originator of Collateral to have complied with
the provisions of some of these laws may result in liability of the related
Trust to the Borrower thereunder or in a reduction of the amount payable under
the Collateral. However, the Participant (a) will be required to represent and
warrant that each item of Collateral it sells to the Issuer complied, at the
time of its origination, with all requirements of law and (b) will be required
to make certain representations and warranties as to each item of Collateral
concerning the validity, existence, perfection and priority of its security
interest in each underlying item of Collateral as of the related Cut-off Date. A
breach of any such representation or warranty that materially and adversely
affects a Trustee's interest in any item of Collateral would create an
obligation on the part of the Participant to use its best efforts to cure the
breach to the satisfaction of the Trustee or to repurchase the item of
Collateral. Nevertheless, this requirement may not eliminate the Trustee's
liability to a Borrower.
Environmental Considerations
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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 or Real Property at a foreclosure sale
or operates Mortgaged Premises or Real Property 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 or Real Property. 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 or Real Property 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.
Enforceability of Certain Provisions
The standard forms of mortgage, deed of trust, Manufactured Home Loan,
Consumer Finance Loan or Note used by the originators of Loans may contain
provisions obligating the Borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain
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states, there are or may be specific limitations upon late charges that a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under each Series Supplement, late charges and prepayment
fees on the related Collateral (to the extent permitted by law and not waived by
the Servicer) will be retained by the Servicer as additional servicing
compensation.
THE ISSUER
The Issuer was incorporated in Virginia on August 19, 1994, as a
wholly-owned, limited- purpose financing subsidiary of IHC and an indirect
subsidiary of Resource Mortgage Capital, Inc., which is now Dynex Capital, Inc.
The Issuer's principal office is located at 10900 Nuckols Road, Glen Allen,
Virginia 23060, telephone (804) 217-5800. The Issuer exists solely for the
purpose of facilitating the financing and sale of loans involving residential
housing, such as the Mortgage Loans, Model Home Loans, Manufactured Home Loans
and Consumer Finance Loans. It does not intend to engage in any business or
investment activities other than issuing and selling securities secured
primarily by loans involving residential housing, and taking certain action with
respect thereto. Dynex and IHC have 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 Dynex 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.
IHC is a wholly-owned subsidiary of Dynex. IHC exists solely for the
purpose of holding the stock of one or more entities that issue securities.
Dynex is a self-managed real estate investment trust that purchases and
securitizes loans associated primarily with residential (including multifamily)
properties and invests in securities backed by such loans. Dynex was
incorporated in Virginia in December 1987. Dynex's principal office is located
at 10900 Nuckols Road, Glen Allen, Virginia 23060, telephone (804) 217-5800.
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
advice provided to the Issuer by Hunton & Williams. With respect to each Series
of Bonds, counsel to the Issuer will be identified in the related Prospectus
Supplement. See "Certain Federal Income Tax
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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 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
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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 Dynex, which
itself is a REIT, characterization of the Issuer as a TMP will result only in
the shareholders of Dynex 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 Dynex'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 Dynex 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
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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.
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 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
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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 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
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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
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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 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
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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 a Rate
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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 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)
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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). However, if the Variable Rate Bond provides for any
contingent payments (which do not include qualified stated interest), the Tax
Administrator 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 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 (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 would include a rate that is based on changes in
a general inflation index. In addition, a rate
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would not fail to be an objective rate merely because it is based on the credit
quality of the issuer.
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.
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.
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 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.
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
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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
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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 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 OID Regulations contain provisions (the "Contingent Payment
Regulations") that address the federal income tax treatment of debt obligations
with one or more contingent payments ("Contingent Payment Obligations"). Under
the Contingent Payment Regulations, any variable rate debt instrument that is
not a VRDI is classified as a Contingent Payment Obligation. However, the
Contingent Payment Regulations, by their terms, do not apply to debt instruments
that are subject to Section 1272(a)(6) of the Code. 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, however, there can be no
assurance that the Service will not assert successfully that a method less
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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 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
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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, amortized premium generally 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.
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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.
Under the 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
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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.
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
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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.
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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."
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
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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.
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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.
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.
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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
Neither Dynex nor IHC is obligated with respect to the Bonds.
Accordingly, the Issuer has determined that neither the financial statements of
Dynex nor those of IHC are 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
Capitalized terms used but not otherwise defined herein are defined
below, in some cases in abbreviated fashion. 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 or such other date
as may be specified in the related Prospectus Supplement.
"Accretion Class" or "Accretion Bonds" means a Class of Bonds comprised of Bonds
upon which interest is accrued 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 Collateral" means any Loan added to the Trust Estate for a Series of
Bonds (other than a Substitute Loan) after the initial closing for the Series of
Bonds.
"Adjustable Rate Loan" means an adjustable rate Loan, the Loan Rate of which is
subject to periodic adjustment in accordance with the terms of the related Note
or Contract.
"Adjustable Rate Mortgage Loan" means a Mortgage Loan that is an Adjustable Rate
Loan.
"Advance" means, as to any 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.
"Approved Sale" means, as to any Loan, (i) a sale of the related Mortgaged
Premises, Manufactured Home, Real Property or Facilities acquired by the Insured
because of a default by the Borrower if the related Pool Insurer has given prior
approval to such sale, (ii) a Foreclosure or trustee's sale of the related
Mortgaged Premises, Manufactured Home, Real Property or Facilities at a price
exceeding the maximum amount specified by the Pool Insurer, (ii) the acquisition
of the Mortgaged Premises under any related Primary Mortgage Insurance Policy by
the related Mortgage Insurer and (iv) the acquisition of the related Mortgaged
Premises, Manufactured Home, Real Property or Facilities by the Pool Insurer.
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"Balloon Payment Mortgage Loan" means a Mortgage Loan or Model Home Loan that
does not require any scheduled amortization of principal prior to its scheduled
maturity or the principal of which is amortized over a longer period that the
Loan's scheduled term to maturity.
"Bond Insurance" means, unless otherwise provided in the related Prospectus
Supplement, insurance guaranteeing timely or ultimate payment of principal and
interest on certain Classes of Bonds.
"Bond Register" means the register in which the Issuer shall provide for the
registration of Bonds of a Series and for the registration of transfers of Bonds
of the Series in certificated form.
"Bonds" means the Issuer's Collateralized 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 Loan. (In
the case of a Mortgage Loan or Model Home Loan the Borrower may be the
beneficiary or beneficiaries of an Illinois land trust if the Mortgaged Premises
or Model Home is 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 any class of the Bonds of a Series, as specified in the related
Prospectus Supplement.
"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 the
Class, as specified, or determined as specified, in the related Prospectus
Supplement.
"Closing Date" means the date, which shall be set forth in the Prospectus
Supplement, on which a Series of Bonds is issued.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Mortgage Loans, other Mortgage Collateral, Model Home
Loans, Manufactured Home Loans and Consumer Finance Loans pledged to secure a
Series.
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"Collateral Proceeds Account" means the account created and maintained by the
Trustee for each Series of Bonds.
"Collateral Value" unless otherwise defined in the related Prospectus
Supplement, means, with respect to any item of Collateral, an amount generally
equal to (i) the Scheduled Principal Balance of the item of Collateral (or of
the related Loan in the case of REO Property or Repo Property) or (ii) as
specified in the related Prospectus Supplement, the Scheduled Principal Balance
of such item of Collateral multiplied by a fraction the numerator of which is
the Net Rate of the Loan and the denominator of which is the Collateral Value
Discount Rate.
"Collateral Value Discount Rate" means the percentage rate that, multiplied by
the required payments on the Collateral securing a Series of Bonds, will assure
the availability of sufficient funds to pay on the Bonds.
"Compound Value" means, as to a Class of Accretion Bonds, (a) with respect to
any date prior to the first Payment Date, the original principal amount of the
Class and (b) with respect to any determination date thereafter, the original
principal amount of the Class, plus all interest accrued and added to the
principal amount thereof through the Accounting Date immediately preceding the
determination date, less all previous payments of principal of the Class. The
principal amount of any Accretion Bond at any time will be equal to its Compound
Value.
"Condemnation Award" means all awards, payments, proceeds or damages received
pursuant to any action or proceeding relating to any condemnation or other
taking, whether direct or indirect, of a Mortgaged Premises or for conveyances
in lieu of condemnation.
"Consumer Finance Loan" means an installment sales contract for the sale and
installation of heating or air-conditioning facilities, insulation facilities or
similar facilities, and in each case related equipment and materials, installed
in single family (one- to four-family) attached or detached residential housing,
and any security interest in any facilities, equipment and materials purchased
with the proceeds of the contract.
"Contract" means, with respect to a Manufactured Home Loan or a Consumer Finance
Loan, the installment sales contract for the sale of the related Manufactured
Home or Facilities.
"Converted Loan" means a Loan that, pursuant to the terms of the related Note or
Contract, has converted from an adjustable Loan Rate to a fixed Loan Rate or
from one fixed Loan Rate to a lower fixed Loan Rate.
"Converted Mortgage Loan" means a Converted Loan that is a Mortgage Loan.
"Current Interest Bond" means a Bond other than an Accretion Bond or a Principal
Only Bond.
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"Custodial P&I Account" means the account established by each Servicer into
which the Servicer deposits collections of principal and interest on the Loans.
"Cut-off Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement and used as a basis for identifying the payments
of principal of and interest due on the Loans that are for the benefit of the
Bondholders.
"Delinquency" means that all or part of the Borrower's Monthly Payment is not
paid on or before the related Due Date.
"Discount Bonds" means Bonds that have a purchase price lower than the Parity
Price.
"Due Date" means with respect to a Loan the day of each month on which the
Borrower's Monthly Payment is due as stated in the related Note or Contract.
"Due Period" means with respect to any Payment Date for a Mortgage Loan, the
period commencing on the second day of the calendar month preceding the calendar
month in which the Payment Date occurs and continuing through the first day of
the calendar month in which the Payment Date occurs. "Due Period" means for any
Loan other than a Mortgage a period that will be described in the related
Prospectus Supplement.
"Dynex" means Dynex Capital, Inc., a Virginia corporation.
"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.
"Facilities" means the facilities, equipment and materials purchased and
installed in a single family (one- to four-family) attached or detached
residential property with the proceeds of a Consumer Finance Loan.
"FHLMC" means Federal Home Loan Mortgage Corporation.
"Flood Insurance" means insurance against flood damage to the collateral
underlying a Loan, required for such collateral located in "flood hazard" areas
identified by the Secretary of HUD or the Director of the Federal Emergency
Management Agency.
"Flood Insurance Policy" means an Insurance Policy that provides Flood
Insurance.
"FNMA" means FNMA.
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"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 other comparable means.
"Garn-St. Germain Act" means the Garn-St. Germain Depository Institutions Act of
1982, as amended.
"Gross Margin" means, with respect to any Adjustable Rate Loan, the fixed
percentage per annum specified in the related Note or Contract, that is added to
the applicable Index on each related Interest Adjustment Date to determine the
new Loan Rate for the Adjustable Rate Loan.
"High Coupon Class" or "High Coupon Bonds" means a Class of Bonds that pays only
nominal principal and has a disproportionately high interest rate.
"HUD" means the United States Department of Housing and Urban Development.
"IHC" means Issuer Holding Corp., a Virginia corporation.
"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.
"Index" means, with respect to any Adjustable Rate Loan, the index specified in
the related Note or Contract that is added to the Gross Margin on each related
Interest Adjustment Date to determine the new Note Rate or Loan Rate for the
Adjustable Rate Loan.
"Insurance Policy" means any insurance policy covering Collateral, including
Primary Mortgage Insurance, Pool Insurance, Standard Hazard Insurance, Special
Hazard Insurance, Flood
Insurance and Title Insurance.
"Insurance Proceeds" means proceeds payable from an Insurance Policy.
"Insured" means, with respect to a Series, the Issuer or the related Trustee,
each as assignee of the Issuer or the Participant.
"Interest Adjustment Date" means, with respect to each Adjustable Rate Loan, the
date on which the related Loan Rate changes in accordance with the terms of the
related Note or Contract.
"Issuer" means MERIT Securities Corporation, a Virginia corporation.
"Land Secured Loan" means a Manufactured Home Loan secured at origination by a
Manufactured Home and a parcel of real estate.
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"Level Payment Mortgage Loan" means a Mortgage Loan the terms of which provide
for regular, level payments of principal and interest throughout its entire
term.
"Liquidation" means (i) application of a payment to Collateral that results in
the release of the lien of the Security Instrument on the Collateral, whether
through Foreclosure, condemnation, prepayment in full or otherwise or, with
respect to REO Property or Repo Property, an REO Disposition or Repo Disposition
or (ii) the sale of any defaulted Loan.
"Liquidation Proceeds" means the amount received by the Servicer or Special
Servicer in connection with any Liquidation of a Loan.
"Loan" means, with respect to a Series of Bonds, an item of Mortgage Collateral,
a Model Home Loan, a Manufactured Home Loan or a Consumer Finance Loan, as the
context may require, that constitutes part of the Collateral for the Series.
"Loan Rate" means, with respect to an item of Collateral, the interest rate
payable by the Borrower or other obligor according to the terms of the
Collateral.
"Loss" means and includes for any Prepayment Period (i) any Realized Loss on a
defaulted item of Collateral and (ii) any reduction by a bankruptcy court of
either the Unpaid Principal Balance or the Loan Rate of an item of Collateral
subject to a bankruptcy proceeding.
"Manufactured Home" means a unit of manufactured housing, including all
accessions thereto, securing the indebtedness of the Borrower under the related
Manufactured Home Loan.
"Manufactured Home Loan" means a manufactured home installment sales contract,
and any security interest in a Manufactured Home purchased with the proceeds of
the contract, and includes a Land Secured Loan.
"Master Servicer" means Dynex 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 Loans securing a related 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 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.
"Master Servicing Agreement" means, with respect to a Series of Bonds, the
master servicing agreement between the Issuer and the Master Servicer, as
amended and supplemented.
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"Maximum Rate" means, with respect to an Adjustable Rate Loan, the maximum
lifetime Loan Rate payable on the Loan.
"Model Home" means the Mortgaged Premises securing a Model Home Loan.
"Model Home Loan" means a mortgage loan that is (i) secured by a single family
(one- to four-family), attached or detached, residential property used as a
model home and (ii) pledged to the Trustee as an item of Collateral for a Series
of Bonds.
"Monthly Payment" means with respect to any Loan, the total monthly payment due
in the applicable month under the terms of the related Note or Contract.
"Mortgage Collateral" means Mortgage Loans, related REO Property and certain
other assets evidencing interests in mortgage loans, including without
limitation mortgage-backed certificates, pledged to secure a Series.
"Mortgage Insurer" means any insurance company or other entity that provides a
Primary Mortgage Insurance Policy.
"Mortgage Loan" means a mortgage loan secured by a single family (one- to
four-family), attached or detached residential property and evidenced by a Note
and Security Instrument that the Issuer has pledged to the Trustee as Collateral
for a Series of Bonds.
"Mortgaged Premises" means land and improvements thereon subject to the lien of
a Security Instrument in connection with a Mortgage Loan or a Model Home Loan.
"Net Rate" means, with respect to any Loan, the Note Rate or Loan Rate thereon
minus applicable servicing and administration fees, expressed as a percentage of
the applicable Loan.
"Non-Recoverable Advance" means any Advance previously made or proposed to be
made with respect to a Loan by the Servicer (or the Special Servicer or Master
Servicer) pursuant to the related Servicing Agreement that, in the good faith
judgment of the Servicer (or the Special Servicer or Master Servicer) will not
or, in the case of a proposed Advance, would not, be ultimately recoverable by
the Servicer (or the Special Servicer or Master Servicer) from future
collections with respect to the Loan (including collections of or from Insurance
Proceeds, Additional Collateral or Liquidation Proceeds relating to the Loan).
"Note" means a manually executed written instrument, delivered in connection
with a Mortgage Loan or Model Home Loan, 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 or Model Home Loan, the
interest rate payable by the Borrower according to the terms of the related
Note.
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"Offered Bonds" means the Bonds actually offered pursuant to a Prospectus
Supplement appended to this Prospectus.
"Originator" means with respect to a Loan, the person that originates it.
"Parity Price" is the price at which a Class has a yield to maturity equal to
its coupon, after giving effect to any payment delay.
"Participant" means IHC or an Affiliate thereof.
"Payment Date" means, as to a Series, a date specified in the related Prospectus
Supplement for payment on the Bonds of such Series.
"Periodic Rate Cap" means, with respect to any Adjustable Rate Loan, the limit
on the percentage increase or decrease that may be made in the related Loan Rate
on any Interest Adjustment Date.
"Person" means an individual corporation, partnership, joint venture, limited
liability company, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"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 the Servicer or
Special Servicer, by the Master Servicer or by another party specified in the
related Prospectus Supplement) on a 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" means insurance covering (subject to certain limitations)
losses, to the extent not covered by a Primary Mortgage Insurance Policy,
incurred with respect to a Loan by reason of the default of the related
Borrower.
"Pool Insurance Policy" mean an Insurance Policy that provides Pool Insurance.
"Premium Bonds" means a Class comprised of Bonds that have a purchase price
greater than the related Parity Price.
"Prepayment Period" means with respect to a Loan, as to any Payment Date, the
time period used to identify prepayments or other unscheduled payments of
principal or interest received with respect to the Loan that will be used to pay
Bondholders on that Payment Date.
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"Primary Mortgage Insurance" means insurance covering a Mortgage Loan against
loss of the insured portion of the Unpaid Principal Balance of the Mortgage Loan
together with accrued and unpaid interest thereon.
"Primary Mortgage Insurance Policy" means an Insurance Policy that provides
Primary Mortgage Insurance.
"Principal Distribution Amount" means, unless otherwise specified in the
Prospectus Supplement, with respect to any Payment Date for a Series of Bonds,
the amount, if any, by which (i) the aggregate Collateral Value, as of the
immediately preceding Payment Date (or, with respect to the first Payment Date,
as of the Cut-off Date), of the Collateral securing the Series exceeds (ii) the
aggregate Collateral Value of the Collateral securing the Series as of the
current Payment Date.
"Principal Only Class" or "Principal Only Bonds" means a Class of Bonds that
does not pay or accrue interest.
"Principal Prepayment" means, with respect to any Loan securing a Series, a
payment of principal on such Loan in excess of the scheduled principal payments.
"Property Protection Advance" means an Advance made by a Servicer or the Special
Servicer in connection with the protection of the collateral underlying a loan,
including, without limitation, expenses related to Foreclosure proceedings and
Servicing Fees.
"Rating Agency" means, for any Class of Bonds, any nationally recognized
statistical rating agency, or its successor, that on the Closing Date rated the
Class at the request of the Issuer. If such agency or a successor is no longer
in existence, "Rating Agency" will be a 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.
"Real Property" means a parcel of real estate securing a Land Secured Loan.
"Realized Loss" means (a) with respect to each defaulted Loan (or in the case of
any REO Property or Repo Property, the related Loan) as to which a Liquidation
has been made, an amount equal to (i) the sum of (A) the Unpaid Principal
Balance of the Loan as of the date of such Liquidation, (B) interest at the
applicable Note Rate or Loan Rate, from the date through which interest was last
paid through the end of the calendar month in which the Liquidation occurred, on
the Unpaid Principal Balance of such 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 Loan, minus (ii) the sum of (A) any funds received
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in connection with the Liquidation of the Loan prior to or during the month in
which such Liquidation occurred, and (B) any Insurance Proceeds received with
respect to the Loan and (b) with respect to each Loan modified in accordance
with the applicable Servicing Agreement, an amount equal to (i) the sum of (A)
the Unpaid Principal Balance of the Loan as of the date of modification, (B)
interest at the applicable Note Rate or Loan Rate, from the date through which
interest was last paid through the end of the calendar month in which the
modification occurred, on the Unpaid Principal Balance of the 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 Loan,
minus (ii) the product of (A) the ratio of the Monthly Payment (net of the
dollar equivalent of all ongoing servicing related fees on the first Due Date)
on the modified Loan divided by the Monthly Payment (net of the dollar
equivalent of all servicing related fees on such Due Date) on the prior Loan,
and (B) the Unpaid Principal Balance of the modified 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.
"Repo Disposition" means the receipt by the related Servicer in connection with
a Repo Property of Insurance Proceeds, Condemnation Awards and other payments
and recoveries that the Servicer recovers from the sale or other final
disposition thereof.
"Repo Property" means a Manufactured Home or Facilities (and any related Real
Property) acquired by a Servicer on behalf of the Trustee pursuant to a
repossession, Foreclosure or other similar proceeding in respect of a related
Loan.
"REO" or "REO Property" means Mortgaged Premises acquired by the Servicer or
Special Service on behalf of the Trusty 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 related Prospectus
Supplement, any fund in a Trust Estate other than the Collateral Proceeds
Account.
"Scheduled Principal Balance" means, with respect to each Loan, REO Property or
Repo Property as of a determination date, the scheduled principal balance of the
Loan (or of the related Loan, in the case of a REO Property or Repo Property) 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 Monthly
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
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unscheduled principal payments received on or before the last day of the
Prepayment Period preceding such date of determination, and (c) without
duplication, any Realized Loss with respect thereto.
"Second Lien Mortgage Loan" means a Mortgage Loan secured by a second mortgage
or deed of trust on Mortgaged Premises.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Instrument" means a written instrument creating a valid lien on the
collateral for a Loan, including any riders thereto. A Security Instrument may
be in a form of a mortgage, deed of trust, deed to secure debt, security deed or
security agreement.
"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 collateral securing such Series.
"Series" means the Bonds issued pursuant to a Series Supplement.
"Series Supplement" means an indenture that is supplemental to the Indenture and
that authorizes a particular Series.
"Servicer Remittance" means a Servicer's aggregate payment due each month to the
Master Servicer Custodial Account for Loans that have been pledged as security
for a Series of Bonds, which payment, 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
Collateral (including net Liquidation Proceeds 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 item of Collateral with respect to
such Payment Date;
(iii) any Monthly Payments due during, but collected prior to, the
related Due Period;
and
(iv) any fees relating to late charges, assumption fees, prepayment
premiums and similar charges and fees (but not default
interest);
less (B) the sum of the following:
119
<PAGE>
(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 Monthly Payments collected but due on a date
subsequent to the related Due Period; and
(iii) all amounts required to reimburse the Servicer for
Non-Recoverable Advances.
"Servicer" means an entity identified in the related Prospectus Supplement that
will perform servicing functions with respect to Collateral included in the
Trust Estate for a Series.
"Servicing Agreement" means, with respect to a Series of Bonds, each servicing
agreement, as amended and supplemented, pursuant to which the related servicer
of Collateral has agreed to perform all duties incident to the servicing of the
Collateral.
"Special Hazard Insurance" means, with respect to a Series of Bonds, insurance
covering (a) loss to Mortgaged Premises or Manufactured Homes underlying
defaulted Loans caused by reason of certain hazards not covered by Standard
Hazard Insurance on such Mortgaged Premises or Manufactured Homes and (b) loss
from partial damage to such Mortgaged Premises or Manufactured Homes caused by
reason of application of the co-insurance clause contained in the related
Standard Hazard Insurance Policies.
"Special Hazard Insurance Policy" means an Insurance Policy that provides
Special Hazard Insurance.
"Special Hazard Insurer" means, with respect to a Series, the issuer of the
Special Hazard Insurance Policy named in the related Series Supplement, or any
successor thereto, or the named Insurer in any replacement policy obtained by
the Master Servicer for the Series.
"Special Servicer" means an entity, as may be specified in the Prospectus
Supplement for a Series, that will service delinquent or defaulted Loans, REO
Property or Repo Property pledged as security for a Series pursuant to the terms
of a Special Servicing Agreement between the entity and the Servicer or Master
Servicer.
"Standard Hazard Insurance" means, with respect to a Loan, insurance against
physical damage to, or the destruction of, the related Mortgaged Premises or
Manufactured Home caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike or civil commotion.
"Standard Hazard Insurance Policy" means an Insurance Policy, issued by a
company authorized to issue such a policy in the state in which the collateral
for the related Loan is located, that provides Standard Hazard Insurance.
120
<PAGE>
"Stated Maturity Date" means, with respect to any Class of Bonds of a Series,
the date specified in the Bonds as the fixed date on which the final installment
of the principal of each 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 Collateral securing the 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 Collateral" means an item of Collateral pledged to the Trustee to
secure a Series of Bonds in substitution for an item of defective Collateral.
"Substitute Loan" means a Loan pledged to secure a Series of Bonds in
substitution for a defaulted Loan, REO Property or Repo Property securing a
Series of Bonds.
"Surplus" means an amount 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 Special Servicer of escrow
amounts for tax and insurance payments with respect to any Loan subject to a
Delinquency.
"Title Insurance" means the insurance provided by a Title Insurance Policy.
"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 a Series of Bonds as the trustee under the Indenture
pursuant to which the Series is issued.
"Trust Estate" means, with respect to each Series of Bonds, all right, title and
interest pledged or assigned to the Trustee for the Series pursuant to the
Series Supplement in and to benefits occurring to the Issuer from the Collateral
and from any debt service fund, Reserve Fund, Insurance Policy, Servicing
Agreement, Master Servicing Agreement, Additional Collateral and other credit
enhancement that constitutes security for the Series of Bonds.
"UCC" means the Uniform Commercial Code.
"UCC State" means a state in which a lien on a Manufactured Home is "perfected,"
pursuant to the provisions of the applicable UCC, by filing UCC-3 financing
statements or other appropriate transfer instruments with all appropriate UCC
filing offices.
"Underwriter" means any firm that underwrites a Series of Bonds.
"Unpaid Principal Balance" means with respect to any Loan, the outstanding
principal balance payable by the Borrower under the terms of the Note or
Contract.
121
<PAGE>
BLACKLINED CHANGED PAGES
------------------------
As filed with the Securities and Exchange Commission on May 13, 1997
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM S-3+
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
MERIT Securities Corporation
(Exact name of registrant as specified in its charter)
Virginia
(State of Incorporation)
-----------
54-1736551
(I.R.S. Employer I.D. No.)
10900 Nuckols Road
Glen Allen, Virginia 23060
(804) 217-5800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
Thomas H. Potts, President With a Copy to:
MERIT Securities Corporation Kevin J. Buckley, Esq.
10900 Nuckols Road Hunton & Williams
Glen Allen, Virginia 23060 Riverfront Plaza, East Tower
(804) 217-5800 951 East Byrd Street
(Name, address, including zip code Richmond, Virginia 23219-4074
and telephone number, including area
code, of agent for service)
--------------------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Proposed
Title of Each Class Amount Maximum Maximum
of Securities to be to be Offering Price Aggregate Amount of
Registered Registered* Per Unit* Offering Price* Registration Fee
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Collateralized Bonds $1,000,000 100% $1,000,000 $303
====================================================================================================================================
</TABLE>
* Estimated solely for calculating the registration fee.
+In addition, pursuant to Rule 429, this Registration Statement on Form S-3
constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-15539 on Form S-3 (filed by Registrant on November 5, 1996). With respect to
any offering of Collateralized Bonds under Registration Statement No. 333-15539,
the prospectus to be used in connection with such offering will utilize the
changed pages included with this filing.
The within Prospectus and related Prospectus Supplements cover the
$1,000,000 in principal amount of Collateralized Bonds being registered
hereunder, plus the $2,161,482,410 in principal amount of Collateralized Bonds
registered by the Registrant under Registration Statement No. 333-15539 on Form
S-3, which is being carried forward. The registration fees in respect to the
Collateralized Bonds registered under Registration Statement No. 333-15539 were
paid at the time of the filing of that Registration Statement.
--------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- - -------------------------------------------------------------------------------
<PAGE>
MERIT Securities Corporation
Collateralized 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 Bonds (the "Bonds"). Capitalized terms not
otherwise defined herein have the meanings specified in the Glossary.
Each Series of Bonds will be secured by collateral (the "Collateral")
consisting of one or more of the following: [(i)](A) one- to four-family,
residential mortgage loans ("Mortgage Loans"), which may include Second Lien
Mortgage Loans, Mortgage Loans that are past due or non-performing as of the
Cut-off Date and REO Properties, [(ii)]AND other assets evidencing interests in
mortgage loans (together with the Mortgage Loans, the "Mortgage Collateral"),
[(iii)](B) mortgage loans secured by model homes leased to homebuilders ("Model
Home Loans"), [(iv)](C) manufactured housing installment sales contracts
("Manufactured [Housing]HOME Loans") and (D) installment sales contracts secured
by heating, air conditioning and other facilities installed in one- to
four-family residential properties ("Consumer Finance Loans"); PROVIDED,
HOWEVER, THAT IN NO EVENT WILL THE AGGREGATE SCHEDULED PRINCIPAL BALANCE AS OF
THE CUT-OFF DATE OF THE MODEL HOME LOANS, MANUFACTURED HOME LOANS OR CONSUMER
FINANCE LOANS EXCEED 10% OF THE AGGREGATE SCHEDULED PRINCIPAL BALANCE AS OF THE
CUT-OFF DATE OF THE COLLATERAL. A Series of Bonds may also be secured by certain
debt service funds, Reserve Funds, Insurance Policies, Servicing Agreements,
Master Servicing Agreements, Additional Collateral and other credit enhancement
as specified in the related Prospectus Supplement (together with the Collateral,
the "Trust Estate"). Each item of the Collateral for a Series of Bonds may be
referred to herein as a "Loan."
The 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 or servicing residential mortgage loans
or installment sales contracts for manufactured housing and certain facilities
installed in residential properties. The Collateral may include fixed rate or
adjustable rate loans, as specified in the related Prospectus Supplement. See
"Security for the Bonds -- The Collateral" herein. The Mortgage Loans and
Manufactured Home Loans may be underwritten in accordance with underwriting
standards for "non-conforming credits," which include mortgagors whose
creditworthiness and repayment ability do not satisfy FNMA or FHLMC underwriting
guidelines. Mortgage Loans and Manufactured Home Loans underwritten pursuant to
underwriting standards 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 Loans may be higher than
losses on mortgage loans or installment sales contracts originated in accordance
with such guidelines. See "Risk Factors -- Credit Considerations -- Mortgage
Loans -- Underwriting Standards and Potential Delinquencies" herein. The
Collateral securing a Series will be serviced by one or more Servicers that are
subject to supervision by Dynex Capital, Inc. ("Dynex"), as Master Servicer. The
Master
<PAGE>
Principal Payments......................... To the extent specified in the
related Prospectus Supplement,
payments on the Collateral securing
a Series, together with withdrawals
from various debt service funds 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 Collateral securing the
Series as of the preceding Payment
Date (or, with respect to the first
Payment Date, as of the related
Cut-off Date) exceeds (ii) the
aggregate Collateral Value of the
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 a Trust Estate [consisting
primarily] THAT CONSISTS PRIMARILY
OF MORTGAGE COLLATERAL AND THAT MAY
ALSO INCLUDE, TO THE EXTENT
INDICATED BELOW, one or more of the
following [each of which]TYPES OF
COLLATERAL OTHER THAN MORTGAGE
COLLATERAL. THE TRUST ESTATE FOR
EACH SERIES OF BONDS will be more
specifically described in the
RELATED Prospectus Supplement [for
such Series:] .
A. Collateral............................. Mortgage Collateral: The Bonds of
[a]EACH Series [may]WILL be secured
by (i) fixed or adjustable rate,
conventional
6
<PAGE>
mortgage loans secured by mortgages
or deeds of trust on single family
(one- to four-family) attached or
detached residential property
("Mortgage Loans"), which may
include Second Lien Mortgage Loans
and Mortgage Loans that are past due
or non-performing as of the Cut-off
Date, and related REO Properties and
(ii) other assets evidencing
interests in mortgage loans.
Mortgage Loans and such other assets
are referred to herein collectively
as "Mortgage Collateral." IN NO
EVENT WILL THE AGGREGATE SCHEDULED
PRINCIPAL BALANCE OF MODEL HOME
LOANS, MANUFACTURED HOME LOANS AND
CONSUMER FINANCE LOANS EXCEED 30% OF
THE AGGREGATE SCHEDULED PRINCIPAL
BALANCE OF THE COLLATERAL AS OF THE
CUT-OFF DATE OF THE COLLATERAL.
Model Home Loans: The Bonds of a
Series may be secured IN PART by
fixed or adjustable rate,
conventional mortgage loans (the
"Model Home Loans") made by the
Participant or its Affiliate and, in
each case, secured by a single
family (one- to four-family)
attached or detached residential
property that the Borrower will
lease to a homebuilder for use as a
model home. MODEL HOME LOANS MAY
NOT CONSTITUTE MORE THAN 10% OF THE
AGGREGATE SCHEDULED PRINCIPAL
BALANCE AS OF THE CUT-OFF DATE OF
THE COLLATERAL SECURING A SERIES OF
BONDS.
Manufactured Home Loans: The Bonds
of a Series may be secured IN PART
by fixed or adjustable rate,
conventional manufactured housing
installment sales contracts (the
"Manufactured Home Loans"), each of
which will be secured by a new or
used Manufactured Home, or by a
Manufactured Home that has been
transferred from a previous owner to
a new Borrower, and may also be
secured by a lien on a parcel of
real estate. MANUFACTURED HOME
LOANS MAY NOT CONSTITUTE MORE THAN
10% OF THE AGGREGATE SCHEDULED
PRINCIPAL BALANCE AS OF THE CUT-OFF
DATE OF THE COLLATERAL SECURING A
SERIES OF BONDS.
Consumer Finance Loans: The Bonds
of a Series may be secured IN PART
by fixed or adjustable rate,
conventional facility installment
sales contracts (the "Consumer
Finance Loans"), each of which will
be secured by residential heating or
air conditioning facilities,
insulation facilities or other such
facilities and related materials
that will be installed in single
family (one- to four-family)
attached or
7
<PAGE>
detached residential property.
CONSUMER FINANCE LOANS MAY NOT
CONSTITUTE MORE THAN 10% OF THE
AGGREGATE SCHEDULED PRINCIPAL
BALANCE AS OF THE CUT-OFF DATE OF
THE COLLATERAL SECURING A SERIES OF
BONDS.
The Mortgage Collateral, [the]ANY
Model Home Loans, [the]ANY
Manufactured Home Loans and [the]ANY
Consumer Finance Loans securing a
Series of Bonds are herein referred
to collectively as "Collateral." The
Collateral securing the Bonds of a
Series will have an aggregate
Collateral Value 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 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 the Series and to pay the
principal of each Class of Bonds 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 Collateral 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. Insurance Policies..................... If specified in the Prospectus
Supplement for a Series of Bonds,
the Issuer may pledge to the Trustee
payments due under certain mortgage
insurance, hazard insurance and
other policies, if any
(collectively, "Insurance
Policies"), including (a) mortgage
Insurance Policies consisting of (i)
Primary Mortgage Insurance Policies
that will insure (subject to their
provisions and certain limitations)
Mortgage Loans and Model Home Loans
against all or a portion of any loss
sustained by reason of nonpayments
by the Borrowers, (ii) one or more
Pool Insurance Policies
8
<PAGE>
than accounts, sales of chattel paper are similarly governed by Article 9 of the
UCC. If, following a bankruptcy of the Participant, a court were to apply the
reasoning of the Tenth Circuit to chattel paper, then delays or reductions in
payments of collections on or in respect of the Manufactured Home Loans could
occur. To the extent the security for any Series of Bonds offered hereunder
contains a material concentration of Manufactured Home Loans secured by
Manufactured Homes located within the Tenth Circuit's jurisdiction, the related
Prospectus Supplement will disclose this concentration and will further describe
the impact the decision could have upon such Series.
Consumer Finance Loans
General. A Consumer Finance Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the Consumer
Finance Loan and upon the purchase price of the related Facilities and the
[cost]COSTS of installing the Facilities in a single family residential
property. The ability of a Borrower to make Monthly Payments will be dependent
on the availability of jobs and general economic conditions. Where a Borrower
defaults on a Consumer Finance Loan, realization is generally accomplished
through repossession and resale of the related Facilities. Facilities generally
decline in value over time, and so the Losses incurred upon repossession and
resale of Facilities securing Consumer Finance Loans generally may be expected
to be more severe than the Losses that would be incurred upon Foreclosure on
Mortgaged Premises securing Mortgage Loans (in each case, measured as a
percentage of the Unpaid Principal Balance of the related Loan). In addition,
experience with delinquencies and repossessions under manufactured housing
installment sale contracts indicates that recovery experience decreases with
downturns in regional or economic conditions, and such downturns are likely to
have the same effect on installment sales contracts like the Consumer Finance
Loans. Thus, if economic conditions decline in areas where Facilities are
located, the actual rates of Delinquencies, repossessions and Foreclosures are
likely to increase, and Losses on the Consumer Finance Loans are likely to
increase, perhaps substantially.
Security Interests in Facilities. Each Consumer Finance Loan is
secured by a security interest in Facilities. Perfection of security interests
in Facilities is subject to state laws, including the Uniform Commercial Code
(the "UCC") as adopted in such states. Because of the expense and administrative
inconvenience involved, neither the Issuer nor the Participant will file any
UCC-3 financing statements or other instruments evidencing the pledge to the
Trustee of the Issuer's security interest in any Facilities. In some states, in
the absence of the filing of an appropriate transfer instrument under the
applicable UCC, it is unclear whether the assignment to the Trustee of the
security interest created by a Consumer Finance Loan in the underlying
Facilities will be effective against creditors of the Participant or Issuer or a
trustee in bankruptcy of the Participant or the Issuer. Unless the related
Prospectus Supplement otherwise provides, the Issuer will make certain
warranties relating to the validity, perfection and priority of the security
interest created by each Consumer Finance Loan in the underlying Facilities in
favor of the Consumer Finance Loan's originator. A breach of any such warranty
that materially and adversely affects the Trust's interest in any Consumer
Finance Loan would create an obligation on the part of the Participant to
repurchase or substitute for the Consumer
21
<PAGE>
As a condition to any modification or forbearance related to any item
of Collateral or to the substitution of an item of Substitute Collateral, the
Master Servicer is required to determine, in its reasonable business judgment,
that such modification, forbearance or substitution will maximize the recovery
on such item of Collateral 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 an item of Substitute
Collateral (or in establishing the terms of any such modification or forbearance
agreement or the terms of such item of Substitute Collateral).
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,
mortgage-backed certificates, model home loans, manufactured housing installment
sales contracts or [facility]FACILITIES installment sales contracts ("Additional
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 Collateral may result in a variance of
plus or 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 the Class, and the characteristics of the Collateral may
vary within the parameters specified 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 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 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 Collateral will affect the
average life of each Class of Bonds. The Collateral 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 Collateral may be influenced by a
variety of economic, geographic, social, tax, legal and other factors, including
the difference between the interest rates on the Collateral and prevailing
interest rates for similar loans. In general, if the Collateral is not subject
to prepayment penalties and if prevailing interest rates for similar loans fall
below the interest rates on the Collateral, the rate of principal prepayments
would be expected to increase, especially if the Collateral carries fixed rates
of interest. If prevailing interest rates for similar loans rise above the
interest rates on the Collateral, the rate of principal prepayments would be
expected to decrease. See "Yield Considerations" herein.
26
<PAGE>
Investors should consider the risk that rapid rates of prepayment on
the Collateral, 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 a Bond may be lower than the
applicable Class Interest Rate. Slow rates of prepayments on the Collateral, 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 a Trust Estate consisting
of (i) 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 Property or Repo Property acquired in
respect of such Collateral through Foreclosure or repossession, (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 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, an interest rate agreement with a
third party. Scheduled payments of principal of and interest on the 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 the Series, are
intended to be sufficient to make the required payments of interest on the Bonds
of the Series and to pay the entire principal amount of each Class of Bonds of
the Series not later than the Stated Maturity Date of the Class of Bonds. Except
as otherwise specified in the related Prospectus Supplement, a Trust Estate
(other than certain credit enhancement items) will secure only one Series of
Bonds.
The Collateral
The Prospectus Supplement for a Series will describe in general the
type of Collateral that will secure the Series. The Collateral [may]WILL be
composed PRIMARILY of Mortgage Collateral AND MAY ALSO INCLUDE, TO THE EXTENT
INDICATED BELOW, Model Home Loans, Manufactured Home Loans, Consumer Finance
Loans or certain other assets evidencing interests in or related to loans
secured by residential property.
36
<PAGE>
The Mortgage Collateral
General
AT LEAST 70% OF THE AGGREGATE SCHEDULED PRINCIPAL BALANCE AS OF THE
CUT-OFF DATE OF THE COLLATERAL SECURING A SERIES OF BONDS WILL CONSIST OF
MORTGAGE COLLATERAL.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Collateral securing a Series will consist of Mortgage Loans. Generally,
Mortgage Loans will be secured by first liens on single-family (one-family or
two- to four-family) attached or detached residential property. If specified in
the related Prospectus Supplement, the Collateral securing a Series of Bonds may
include Mortgage Collateral consisting of Second Lien Mortgage Loans, 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 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,
including REO Properties or non-performing Mortgage Loans in the Trust Estate
for a Series of Bonds may increase the rate of defaults and prepayments on the
Collateral and, in turn, adversely 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 Mortgage Loans may consist of (i) detached homes,
(ii) attached homes (units having a common wall), (iii) units located in
condominiums (iv) manufactured homes and (v) other types of homes or units set
forth in 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 ("Adjustable Rate Mortgage Loans")
to equal the sum (which may be rounded) of a Gross Margin and an Index, all as
described in the related Prospectus Supplement; 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
37
<PAGE>
Liquidation expenses with respect to defaulted Second Lien Mortgage
Loans will not vary directly with the Unpaid Principal Balances of the Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon a defaulted Second Lien Mortgage Loan having a small remaining
Unpaid Principal Balance as it would in the case of a defaulted mortgage loan
having a large remaining principal balance, the amount realized after expenses
of Liquidation would be smaller as a percentage of the Unpaid Principal Balance
of the defaulted Second Lien Mortgage Loan than it would be the case with the
defaulted mortgage loan having a large Unpaid Principal Balance. Because the
average outstanding principal balance of the Second Lien Mortgage Loans
generally is 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 Unpaid
Principal Balance of a Second Lien Mortgage Loan than would be the case for a
typical conventional, first lien mortgage loan.
Repurchase of Converted Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by Adjustable Rate Mortgage Loans the Note Rates of which
are 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 may at its
option repurchase any such Adjustable Rate Mortgage Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Adjustable Rate Mortgage Loan, plus 30 days of interest
thereon at the applicable Note Rate. The purchase price will be treated as a
prepayment of the 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.
Other Mortgage Collateral
A Series of Bonds 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.
The Model Home Loans
IF SO SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, UP TO 10% OF THE
AGGREGATE SCHEDULED PRINCIPAL BALANCE AS OF THE CUT-OFF DATE OF THE COLLATERAL
SECURING A SERIES OF BONDS MAY CONSIST OF MODEL HOME LOANS.
Each Model Home Loan securing a Series of Bonds will be secured by a
first lien on a single family (one- to four- family) attached or detached
residential property that is used as a model home. The Borrower, which may be an
Affiliate of the Participant, will use the proceeds of the Model Home Loan to
purchase the related Mortgaged Premises from a
40
<PAGE>
homebuilder and will then lease the property back to the homebuilder, who will
use it as a model home. The homebuilder will agree pursuant to the lease
agreement to pay all taxes, insurance premiums, utility costs and maintenance
costs, and to make lease payments to the Borrower, during the term of the lease.
The Borrower is required to make interest payments during the life of
a Model Home Loan either at a fixed annual rate, an adjustable annual rate based
on a short-term Index or a combination of the two. Adjustable interest rates may
not be subject to a cap. The lease payments will be designed to enable the
Borrower to make Monthly Payments on the Model Home Loan during the period of
the lease. Typical lease terms for the leases will be shorter than the maturity
of the related Model Home Loans, which will usually have a shorter maturity than
conventional, first lien mortgage loans. Generally, the lessee will be permitted
to extend the lease on a month-to-month basis and may terminate at any time upon
notice to the Borrower and sale of the related Mortgaged Premises on the
Borrower's behalf.
If the Loan Rate applicable to the Model Home Loan and the lease
payments required by the lease agreement between the Borrower and the
homebuilder are adjustable and not subject to a cap, the rate of Delinquencies
on the lease agreement, and thus the default rate on the Model Home Loans, may
increase, particularly if the Loan Rates and required lease payments increase.
The Borrower may have no assets other than the Mortgaged Premises and
the lease payments received from lessees of the Mortgaged Premises. In that
event, its ability to make Monthly Payments on a Model Home Loan after the term
of the related lease expires, or in the event that the homebuilder defaults on
its lease, will depend on the ability of the Borrower to sell the related
Mortgaged Premises for an amount equal to or greater than the Unpaid Principal
Balance of the Model Home Loan.
The Prospectus Supplement applicable to a series of Bonds secured by
Model Home Loans will include for such Loans the information described herein
under "Security for the Bonds -- The Mortgage Collateral -- General."
The Manufactured Home Loans
General
If so specified in the RELATED Prospectus Supplement [for a Series of
Bonds, the related Series may be secured by], UP TO 10% OF THE AGGREGATE
SCHEDULED PRINCIPAL BALANCE AS OF THE CUT-OFF DATE OF THE COLLATERAL SECURING A
SERIES OF BONDS MAY CONSIST OF Manufactured Home Loans. This Collateral may
include any Manufactured Home or Real Property that initially secured a
Manufactured Home Loan and that is acquired by repossession, Foreclosure or
otherwise.
41
<PAGE>
Principal Balance of the Manufactured Home Loans, (iv) the weighted average Loan
Rate or the range of Loan Rates borne by the Manufactured Home Loans and (v) the
geographic distribution of the Manufactured Homes.
Types of Manufactured Home Loans
Manufactured Home Loans may be subject to various types of payment
provisions. In addition to other types of Manufactured Home Loans described in
the related Prospectus Supplement, the Manufactured Home Loans securing a Series
may consist of (1) "Level Payment Loans," which may provide for the payment of
interest and full repayment of principal in level Monthly Payments with a fixed
rate of interest computed on their declining principal balances; (2) "Life Floor
Adjustable Rate Loans," which may provide for fixed Loan Rates for a period of
years, followed by periodic adjustments that cause their Loan Rates to equal the
sum of a Gross Margin and an Index, subject to Periodic Rate Caps, a Maximum
Rate and a lifetime floor equal to the initial fixed Loan Rate; and (3)
"Convertible Loans," which are Life Floor Adjustable Rate Loans subject to
provisions pursuant to which, subject to certain limitations, the related
Borrowers may exercise an option to convert the adjustable Loan Rate to a fixed
Loan Rate.
Repurchase of Converted Manufactured Home Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by Manufactured Home Loans the Loan Rates of which are
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 may at its
option repurchase any adjustable rate Manufactured Home Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Loan, plus 30 days of interest thereon at the
applicable Loan Rate. The purchase price will be treated as a prepayment of the
Manufactured Home Loan. Until a Converted Manufactured Home Loan is purchased as
described above, it will remain in the Trust Estate with a fixed Loan Rate.
The Consumer Finance Loans
[A]IF SO SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, UP TO 10% OF
THE AGGREGATE SCHEDULED PRINCIPAL BALANCE AS OF THE CUT-OFF DATE OF THE
COLLATERAL SECURING A Series of Bonds may [be secured by]CONSIST OF Consumer
Finance Loans. [The]THIS Collateral [also]may include any Facilities that
initially secured a Consumer Finance Loan and that are acquired by repossession,
Foreclosure or otherwise.
The Issuer will acquire the underlying Consumer Finance Loans from the
Participant, which will have originated the Consumer Finance Loans or acquired
them from other originators. Specific information respecting the Consumer
Finance Loans included as security for a particular Series of Bonds will be
provided in the related Prospectus Supplement and, to
43
<PAGE>
the defaulted item of Collateral for which it is substituted or (B) a
loan-to-value ratio, in the case of a Mortgage Loan, 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 item of Collateral exceeds the Collateral Value of the Substitute
Collateral would constitute a Loss on the item of Collateral. Upon the pledge of
Substitute Collateral, the Trustee will release the defaulted item of Collateral
from the lien of the Indenture.
In addition, unless otherwise provided in the Prospectus Supplement,
the Issuer may pledge to the Trustee items of Collateral in substitution for
items of Collateral initially pledged (each, an "Original Loan") as security for
a Series of Bonds in the event of a breach of a representation or warranty by
the seller of the Original Loan or in the case of defective or incomplete
documentation with respect to the Original Loan. Any substitute items of
Collateral will have an interest rate within one percentage point in excess of
the Loan Rate of the Original Loan for which it is substituted, a principal
balance or value at least equal to the principal balance or value of the
Original Loan for which it is substituted and a maturity within 180 days of the
maturity of the Original Loan for which it is substituted. As more particularly
set forth in the Indenture, a substitute Loan must have characteristics
substantially similar to those of the Original Loan for which it is 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, mortgage certificates, model home
loans or manufactured home or facility installment sales contracts ("Additional
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
Collateral and the material terms of the Additional Bonds. Any pledge of
Additional 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 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 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 or minus 0.05 years from the weighted
average life disclosed in the Prospectus Supplement for the initial issuance of
the Bonds of such Series, [and](d) THE COLLATERAL MIX BASED ON THE SCHEDULED
PRINCIPAL BALANCES OF THE COLLATERAL AND THE ADDITIONAL COLLATERAL AS OF THE
CUT-OFF DATE FOR THE ADDITIONAL BONDS WILL SATISFY THE REQUIREMENTS SET FORTH ON
THE COVER OF THIS PROSPECTUS, AND (E) the characteristics of the Additional
Collateral and the Collateral as
45
<PAGE>
"Balloon Payment Mortgage Loan" means a Mortgage Loan or Model Home Loan that
does not require any scheduled amortization of principal prior to its scheduled
maturity or the principal of which is amortized over a longer period that the
Loan's scheduled term to maturity.
"Bond Insurance" means, unless otherwise provided in the related Prospectus
Supplement, insurance guaranteeing timely or ultimate payment of principal and
interest on certain Classes of Bonds.
"Bond Register" means the register in which the Issuer shall provide for the
registration of Bonds of a Series and for the registration of transfers of Bonds
of the Series in certificated form.
"Bonds" means the Issuer's Collateralized 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 Loan. (In
the case of a Mortgage Loan or Model Home Loan the Borrower may be the
beneficiary or beneficiaries of an Illinois land trust if the Mortgaged Premises
or Model Home is 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 any class of the Bonds of a Series, as specified in the related
Prospectus Supplement.
"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 the
Class, as specified, or determined as specified, in the related Prospectus
Supplement.
"Closing Date" means the date, which shall be set forth in the Prospectus
Supplement, on which a Series of Bonds is issued.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Mortgage Loans, AND, IF ANY, THE other Mortgage
Collateral, Model Home Loans, Manufactured Home Loans and Consumer Finance
Loans, pledged to secure a Series.
111
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
(Seller)
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the offering of $1,000,000 of the Collateralized Bonds being registered under
this Registration Statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC Registration.........................................................................................$303
Printing and Engraving................................................................................400,000
Legal Fees and Expenses.............................................................................1,400,000
Accounting Fees and Expenses..........................................................................600,000
Trustee Fees and Expenses.............................................................................300,000
Blue Sky Fees and Expenses.............................................................................20,000
Rating Agency Fees....................................................................................600,000
Miscellaneous.......................................................................................1,280,000
TOTAL...............................................................................$4,600,303
</TABLE>
Item 15. Indemnification of Directors and Officers.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and
the Company's Bylaws require, indemnification of the Company's directors and
officers in a variety of circumstances, which may include liabilities under the
Securities Act of 1933. Under Section 13.1-697 of the Virginia Act, a Virginia
corporation generally may indemnify its officers and directors in civil or
criminal actions if they acted in good faith and believed their conduct to be in
the best interests of the corporation and, in the case of criminal actions, had
no reasonable cause to believe that the conduct was unlawful. The Virginia Act
also permits a corporation to require, and the Company's Bylaws do require,
indemnification of officers and directors with respect to any action except in
the case of willful misconduct or knowing violation of the criminal law. In
addition, the Virginia Act limits the damages that may be assessed against a
director or officer of the Company in a shareholder or derivative proceeding to
the greater of (a) $100,000 or (b) the amount of cash compensation received by
him from the Company in the twelve months immediately preceding the act or
omission giving rise to liability. Since the directors and officers of the
Company will not be compensated, the maximum amount for which they may be held
liable is $100,000. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws.
Reference is made to the Underwriting Agreement Standard Provisions filed as
an exhibit hereto for provisions relating to the indemnification of directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Item 16. Exhibits.
1.1 Underwriting Agreement Standard Provisions,
dated August 1994(1)
1.2 Underwriting Agreement Standard Provisions,
dated April 1995(5)
1.3 Underwriting Agreement Standard Provisions,
dated July 1995(7)
3.1 Amended and Restated Articles of Incorporation
of Registrant, effective April 19, 1995(5)
3.2 By-Laws of Registrant(1)
4.1 Indenture between Registrant and Trustee,
dated as of August 1, 1994(1)
4.2 Form of Supplemental Indenture between
Registrant and Trustee(1)
4.3 Indenture between Registrant and Trustee,
dated as of November 1, 1994(3)
2
<PAGE>
4.4 Series 1 Indenture Supplement,
dated as of November 1, 1994,
by and between Registrant and Trustee (3)
4.5 Series 2 Indenture Supplement,
dated as of February 1, 1995,
by and between Registrant and Trustee(4)
4.6 Series 3 Indenture Supplement,
dated as of March 1, 1995,
by and between Registrant and Trustee(5)
4.7 Series 4 Indenture Supplement,
dated as of June 1, 1995,
by and between Registrant and Trustee(6)
4.8 Series 5 Indenture Supplement, dated as of
October 1, 1995, by and between
Registrant and Trustee(8)
4.9 Series 6 Indenture Supplement, dated as of
February 1, 1996, by and between
Registrant and Trustee(9)
4.10 Series 7 Indenture Supplement, dated as of
May 1, 1996, by and between
Registrant and Trustee(10)
4.11 Series 8 Indenture Supplement, dated as of
September 1, 1996, by and between
Registrant and Trustee(11)
5.1 Opinion of Hunton & Williams....................
8.1 Tax Opinion of Hunton & Williams re: Debt
Securities................................
23.1 Consent of Hunton & Williams is contained in their
opinions filed as Exhibits 5.1 and 8.1
25.1 Form T-1........................................
99.1 Standard Provisions to Servicing Agreement(1)
99.2 Form of Servicing Agreement(1)
99.3 Standard Terms to Master Servicing Agreement,
dated as of August 1, 1994(1)
99.4 Form of Master Servicing Agreement(1)
99.5 Form of Prospectus Supplement for Bonds
secured by adjustable-rate mortgage loans(7)
99.6 Form of Financial Guaranty Assurance Policy(1)
99.7 Form of GEMICO Mortgage Pool Insurance Policy(1)
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy(1)
99.9 Form of Prospectus Supplement for Bonds
secured by fixed-rate mortgage loans(7)
3
<PAGE>
99.10 Copy of Series 2 Bond Insurance Policy issued
by Financial Guaranty Insurance Company(4)
99.11 Saxon Mortgage Funding Corporation Servicing
Guide for Credit Sensitive Loans,
dated February 1, 1995(4)
99.12 Copy of Series 3 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(5)
99.13 Copy of Series 4 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(6)
99.14 Standard Terms to Master Servicing Agreement,
dated as of June 1, 1995(6)
99.15 Copy of Series 5 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(8)
99.16 Copy of Series 6 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(9)
99.17 Copy of Series 7 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(10)
99.18 Copy of Series 8 Financial Guaranty Insurance
Policy issued by Financial Security Assurance
Inc.(11)
- - ------------------------
(1) Incorporated herein by reference to Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-83524) filed August 31, 1994.
(2) Incorporated herein by reference to Exhibit to the Registrant's
Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524) filed October 6, 1994.
(3) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed December 19, 1994.
(4) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 8, 1995.
(5) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed April 21, 1995.
(6) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed July 10, 1995.
(7) Incorporated herein by reference to Exhibit to the Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524) filed August 4, 1995.
(8) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed November 15, 1995.
(9) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 21, 1996.
(10) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed June 19, 1996.
(11) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed October 9, 1996.
4
<PAGE>
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not
exceed that which was registered) and any deviation from
the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement,
provided, however, that paragraphs (a) (1) (i) and (a) (1) (ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Henrico, Commonwealth of Virginia, on May 12, 1997.
MERIT SECURITIES CORPORATION
By: /s/ Thomas H. Potts
----------------------------
Thomas H. Potts
Chairman of the Board
and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Principal Executive Officer:
/s/ Thomas H. Potts
- - --------------------------------
Thomas H. Potts
Chairman of the Board
and President May 12, 1997
Principal Financial and Accounting Officer:
/s/ Lynn K. Geurin
- - --------------------------------
Lynn K. Geurin
Treasurer and Chief
Financial Officer May 12, 1997
Majority of the Board of Directors:
Thomas H. Potts, J. Thomas O'Brien, Jr.,
John C. Stevenson, Jr.
By: /s/ Thomas H. Potts
- - --------------------------------
Thomas H. Potts May 12, 1997
By: /s/ J. Thomas O'Brien, Jr.
- - --------------------------------
J. Thomas O'Brien, Jr. May 12, 1997
By: /s/ John C. Stevenson, Jr.
- - --------------------------------
John C. Stevenson, Jr. May 12, 1997
6
<PAGE>
May 12, 1997
INDEX TO EXHIBITS
Number Description Page
1.1 Underwriting Agreement Standard Provisions,
dated August 1994(1)
1.2 Underwriting Agreement Standard Provisions,
dated April 1995(5)
1.3 Underwriting Agreement Standard Provisions,
dated July 1995(7)
3.1 Amended and Restated Articles of Incorporation
of Registrant, effective April 19, 1995(5)
3.2 Bylaws of Registrant(1)
4.1 Indenture between Registrant and Trustee,
dated as of August 1, 1994(1)
4.2 Form of Supplemental Indenture between
Registrant and Trustee(1)
4.3 Indenture between Registrant and Trustee,
dated as of November 1, 1994(3)
4.4 Series 1 Indenture Supplement, dated as of
November 1, 1994, by and between
Registrant and Trustee(3)
4.5 Series 2 Indenture Supplement, dated as of
February 1, 1995, by and between
Registrant and Trustee(4)
4.6 Series 3 Indenture Supplement, dated as of
March 1, 1995, by and between
Registrant and Trustee(5)
4.7 Series 4 Indenture Supplement, dated as of
June 1, 1995, by and between
Registrant and Trustee(6)
<PAGE>
4.8 Series 5 Indenture Supplement, dated as of
October 1, 1995, by and between
Registrant and Trustee(8)
4.9 Series 6 Indenture Supplement, dated as of
February 1, 1996, by and between
Registrant and Trustee(9)
4.10 Series 7 Indenture Supplement, dated as of
May 1, 1996, by and between
Registrant and Trustee(10)
4.11 Series 8 Indenture Supplement, dated as of
September 1, 1996, by and between
Registrant and Trustee(11)
5.1 Opinion of Hunton & Williams.......................
8.1 Tax Opinion of Hunton & Williams re: Debt
Securities....................................
23.1 Consent of Hunton & Williams is contained in their
opinions filed as Exhibits 5.1 and 8.1
25.1 Form T-1...........................................
99.1 Standard Provisions to Servicing Agreement(1)
99.2 Form of Servicing Agreement(1)
99.3 Standard Terms to Master Servicing Agreement
dated as of August 1, 1994(1)
99.4 Form of Master Servicing Agreement(1)
99.5 Form of Prospectus Supplement for Bonds
secured by adjustable-rate mortgage loans(7)
99.6 Form of Financial Guaranty Assurance Policy(1)
99.7 Form of GEMICO Mortgage Pool Insurance Policy(1)
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy(1)
99.9 Form of Prospectus Supplement for Bonds
secured by fixed-rate mortgage loans(7)
<PAGE>
99.10 Copy of Series 2 Bond Insurance Policy
issued by Financial Guaranty Insurance Company(4)
99.11 Saxon Mortgage Funding Corporation Servicing
Guide for Credit Sensitive Loans, dated
February 1, 1995(4)
99.12 Copy of Series 3 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(5)
99.13 Copy of Series 4 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(6)
99.14 Standard Terms to Master Servicing Agreement,
dated as of June 1, 1995(6)
99.15 Copy of Series 5 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(8)
99.16 Copy of Series 6 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(9)
99.17 Copy of Series 7 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(10)
99.18 Copy of Series 8 Financial Guaranty Insurance
Policy issued by Financial Security Assurance Inc.(11)
- - ----------------
(1) Incorporated herein by reference to Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-83524), filed August 31, 1994.
(2) Incorporated herein by reference to Exhibit to the Registrant's
Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524), filed October 6, 1994.
(3) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed December 19, 1994.
(4) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 8, 1995.
(5) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed April 21, 1995.
<PAGE>
(6) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed July 10, 1995.
(7) Incorporated herein by reference to Exhibit to the Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524), filed August 4, 1995.
(8) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed November 15, 1995.
(9) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 21, 1996.
(10) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed June 19, 1996.
(11) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed October 9, 1996.
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
EXHIBITS
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
MERIT Securities Corporation
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Exhibit 5.1
May 12, 1997
MERIT Securities Corporation
10900 Nuckols Road
Glen Allen, Virginia 23060
Ladies and Gentlemen:
We have acted as counsel to MERIT Securities Corporation, a Virginia
corporation (the "Company"), in connection with the Company's registration of
$1,000,000 in principal amount of Collateralized Mortgage Bonds on Form S-3
(the "Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and the Trust Indenture Act of
1939, as amended, with respect to the proposed sale of $1,000,000 in
principal amount of the Company's Collateralized Mortgage Bonds, issuable in one
or more series (the "Bonds"). In this capacity, we have examined the
Registration Statement, the Company's Articles of Incorporation and By-laws, the
records of corporate proceedings of the Company, the form of indenture between
the Company and Texas Commerce Bank National Association, as Trustee (the
"Indenture") and such other materials as we have deemed necessary to the
issuance of this opinion.
On the basis of the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of Virginia.
2. When executed and authenticated in accordance with the provisions of
the Indenture and delivered to and paid for by the purchasers thereof, the Bonds
will have been duly authorized by the Company and will constitute valid and
binding obligations of the Company in accordance with and subject to the terms
of the Indenture.
<PAGE>
MERIT Securities Corporation
May 12, 1997
Page 2
We hereby consent to the references to our name in the Prospectus
contained in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement. In giving this consent, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the Securities Act of 1933 or the rules and regulations promulgated
thereunder by the Securities and Exchange Commission.
Very truly yours,
HUNTON & WILLIAMS
Exhibit 8.1
May 12, 1997
MERIT Securities Corporation
10900 Nuckols Road
Glen Allen, Virginia 23060
Federal Income Tax Matters
Dear Sirs:
We have acted as counsel to MERIT Securities Corporation, a
Virginia corporation (the "Issuer"), in connection with the preparation of the
Registration Statement to which this opinion is attached (the "Registration
Statement"), which is being filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"), for the registration
under the Act of $1,000,000 aggregate principal amount of Collateralized Bonds
(the "Bonds") to be issued by the Issuer. The Bonds will be issued pursuant to
an indenture, as supplemented and amended from time to time, and an indenture
supplement with respect to each series of Bonds (collectively, the "Indenture"),
between the Issuer and Texas Commerce Bank National Association, as trustee (the
"Trustee").
We have reviewed the originals or copies of (i) the Articles
of Incorporation, by-laws, and other corporate documents of the Issuer; (ii)
certain resolutions of the Board of Directors of the Issuer; (iii) the form of
an indenture; (iv) the Registration Statement and the prospectus included
therein; and (v) such other documents as we have deemed necessary or appropriate
as a basis for the opinion set forth below.
Based on the foregoing, we are of the opinion that the
statements and legal conclusions contained in the Registration Statement under
the caption "Certain Federal Income Tax Consequences" are correct in all
respects that are material to the holders of the Bonds, and the discussion
thereunder does not omit any material provision with respect to the matters
covered. Subject to the qualifications stated herein, we also are of the opinion
that, with respect to each series of Bonds issued pursuant to the Registration
Statement, if (i) the Issuer, the
<PAGE>
MERIT Securities Corporation
May 12, 1997
Page 2
Trustee, and certain other parties to the issuance transaction comply with all
of the provisions of the related Indenture and certain other documents to be
prepared and executed in connection with the issuance of such series of Bonds
and (ii) the Issuer issues and sells the Bonds as described in the Registration
Statement and the related prospectus supplement, the Bonds of such series will
be treated for federal income tax purposes as evidences of indebtedness and not
as an ownership interest in the collateral securing them or an equity interest
in the Issuer or in a separate association taxable as a corporation.
Although section 385 of the Internal Revenue Code of 1986, as
amended, authorizes the Department of the Treasury to issue regulations defining
instruments as equity or indebtedness for federal income tax purposes, no such
regulations have been issued. Furthermore, there are no controlling regulations,
published rulings, or judicial decisions involving securities with terms
substantially the same as the Bonds that discuss, for federal income tax
purposes, (i) whether the securities constitute equity or indebtedness or (ii)
whether the collateral relating to the securities has been pledged or sold to
the holders of the securities. Therefore, counsel will analyze all of the facts
and circumstances surrounding the issuance and sale of each series of Bonds and
will provide at closing a separate opinion with respect to each such series to
which this opinion applies. Our opinion regarding the characterization of the
Bonds of a given series as evidences of indebtedness will be based upon facts
and circumstances and upon rulings and judicial decisions involving situations
that we consider to be analogous.
You should be aware that this opinion and the discussion
contained in the Registration Statement under the caption "Certain Federal
Income Tax Consequences" represent conclusions as to the application to the
Bonds of existing law, regulations, administrative rules and practices, and
legislative history, including, but not limited to, the official explanation of
the Tax Reform Act of 1986. There can be no assurance, however, that contrary
positions will not be taken by the Internal Revenue Service or that existing law
will not change.
We hereby consent to the reference to our firm under the
caption "Certain Federal Income Tax Consequences" and to the filing of this
opinion as an Exhibit to the Registration Statement. In giving this consent, we
do not admit that we are in the category of persons whose consent is required by
Section 7 of the Act or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
<PAGE>
MERIT Securities Corporation
May 12, 1997
Page 3
No opinion has been sought and none has been given concerning
the tax treatment of the issuance and sale of the Bonds under the laws of
Virginia or any other state.
Very truly yours,
HUNTON & WILLIAMS
Exhibit 25.1
***************************************************************
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Statement of Eligibility Under the Trust Indenture
Act of 1939 of a Corporation Designated to Act as Trustee
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2) [Not Applicable.]
--------
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
Not applicable
(Jurisdiction of incorporation or organization
if not a U.S. national bank)
74-0800980
(I.R.S. Employer Identification No.)
712 Main Street, Houston, Texas 77002
(Address of principal executive offices) (Zip code)
Carol Kirkland, 712 Main Street, 26th Floor,
Houston, Texas 77002, (713) 216-2449
(Name, address and telephone number of agent for service)
MERIT Securities Corporation
(Exact name of obligor as specified in its charter)
Virginia Taxpayer I.D. Number
(State or other jurisdiction of 54-1736551
incorporation or organization)
10900 Nuckols Road
Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
Collateralized Bonds
(Title of the indenture securities)
****************************************************************
1
<PAGE>
Item 1. General Information.
Furnish the following information as to the trustee--
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency, Washington, D. C.
Federal Deposit Insurance Corporation,
Washington, D. C.
The Board of Governors of the Federal Reserve System,
Washington, D. C.
(b) Whether it is authorized to exercise corporate trust
powers.
The trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with the obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
As of May 8, 1997
No such affiliation exists.
See Note, Page 9 hereof.
Item 3. Voting Securities of the trustee.
Furnish the following information as to each class of voting securities
of the trustee.
As of May 8, 1997
H1995A/363-2
2
<PAGE>
Column A Column B
Title of Class Amount Outstanding
1Texas Commerce Bank National Association 5,000,000
Common Stock
===============================================================================
Item 4. Trusteeships under other indentures.
If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following information:
As of May 8, 1997
(c) Title of the securities outstanding under each such
other indenture.
A total of eight series of Collateralized Bonds have
been issued under eight supplemental indentures to the
Indenture dated as of November 1, 1994. As of the date hereof,
the following are outstanding and unpaid: Collateralized
Mortgage Bonds, Series 3 through and including Collateralized
Mortgage Bonds, Series 8.
(d) A brief statement of the facts relied upon as a basis for the
claim that no conflicting interest within the meaning of
Section 310(b)(1) of the Act arises as a result of the
trusteeship under any such other indenture, including a
statement as to how the indenture securities will rank as
compared with the securities issued under such other
indenture.
Each series of Collateralized Bonds is secured by
separate and distinct parcels of collateral and each series of
Collateralized Bonds ranks equally with each other series of
Collateralized Bonds. See Interpretative Letter dated
September 9, 1985 from
- - --------
1 Texas Commerce Equity Holdings, Inc., a Delaware corporation,
owns all of such shares, except for directors' qualifying
shares.
3
<PAGE>
William E. Morley, Chief Counsel, Securities and
Exchange Commission, to Donna S. Burnett, Liddell,
Sapp, Zivley & LaBoon.
Item 5. Interlocking directorates and similar relationships with obligor or
underwriters.
If the trustee or any of the directors or executive officers of the
trustee is a director, officer, partner, employee, appointee, or representative
of the obligor or of any underwriter for the obligor, identify each such person
having any such connection and state the nature of each such connection.
As of May 8, 1997
No such relationship exists.
See Note, Page 9 hereof.
Item 6. Voting securities of the trustee owned by the obligor or its
officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by the obligor and each director, partner and
executive officer of the obligor.
As of May 8, 1997
Based upon an examination of the books and records of
the trustee, inquiries made by the trustee and information
furnished to the trustee by the obligor, voting securities of
the trustee, owned beneficially, directly or indirectly, by
the obligor and its directors, partners and executive
officers, taken as a group, do not exceed 1% of the
outstanding voting securities of the trustee.
Item 7. Voting securities of the trustee owned by underwriters or their
officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by each underwriter for the obligor and each
director, partner, and executive officer of each such underwriter.
As of May 8, 1997
4
<PAGE>
No single underwriter, its directors, partners and executive
officers, taken as a group, owned beneficially, directly or
indirectly, in excess of 1% of the outstanding voting
securities of the trustee.
See Note, Page 9 hereof.
Item 8. Securities of the obligor owned or held by the trustee.
Furnish the following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in default by the
trustee.
As of May 8, 1997
No such securities were so owned or held.
See Note, Page 9 hereof.
Item 9. Securities of underwriters owned or held by the
trustee.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the obligor, furnish
the following information as to each class of securities of such underwriter any
of which are so owned or held by the trustee.
As of May 8, 1997
The trustee did not so own or hold in excess of 1% of any
class of security outstanding of any such person.
See Note, Page 9 hereof.
Item 10. Ownership or holdings by the trustee of voting securities
of certain affiliates or security holders of the obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the knowledge of
the trustee (1) owns 10% or more of the voting securities of the obligor or (2)
is an affiliate, other than a subsidiary, of the obligor, furnish the following
information as to the voting securities of such person.
5
<PAGE>
As of May 8, 1997
No such securities were so owned or held.
See Note, Page 9 hereof.
Item 11. Ownership or holdings by the trustee of any securities of
a person owning 50% or more of the voting securities of the
obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the knowledge of the
trustee, owns 50% or more of the voting securities of the obligor, furnish the
following information as to each class of securities of such person any of which
are so owned or held by the trustee.
As of May 8, 1997
No such securities were so owned or held.
See Note, Page 9 hereof.
Item 12. Indebtedness of the Obligor to the Trustee.
Except as noted in the instructions to the Form T-1, if the obligor is
indebted to the trustee, furnish the following information: nature of
indebtedness, amount outstanding and date due.
As of May 8, 1997
No such indebtedness exists.
See Note, Page 9 hereof.
Item 13. Defaults by the Obligor.
(e) State whether there is or has been a default with
respect to the securities under this indenture.
Explain the nature of any such default.
As of May 8, 1997
No such default exists or has existed.
6
<PAGE>
(f) If the trustee is a trustee under another indenture
under which any other securities, or certificates of
interest or participation in any other securities, of
the obligor are outstanding, or is trustee for more
than one outstanding series of securities under the
indenture, state whether there has been a default under
any such indenture or series, identify the indenture or
series affected, and explain the nature of any such
default.
As of May 8, 1997
There has been no default either under the Indenture
generally or under any series of securities outstanding under
the Indenture of which Texas Commerce Bank National
Association has knowledge.
Item 14. Affiliations with the Underwriters.
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
As of May 8, 1997
No such affiliation exists.
See Note, Page 9 hereof.
Item 15. Foreign Trustee.
Identify the order or rule pursuant to which the foreign trustee is
authorized to act as sole trustee under indentures qualified or to be qualified
under the Act.
Not applicable.
Item 16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
* 1. A copy of the articles of association of the
trustee as now in effect.
** 2. A copy of the certificate of authority of
the trustee to commence business.
7
<PAGE>
** 3. A copy of the certificate of authorization of the
trustee to exercise corporate trust powers issued by the Board
of Governors of the Federal Reserve System under date of
January 21, 1948.
*** 4. A copy of the existing bylaws of the trustee.
5. A copy of each indenture referred to in Item 4,
if the obligor is in default. Not Applicable.
6. The consent of the United States institutional
trustees required by Section 321(b) of the Act.
7. A copy of the latest report of condition of
the trustee published pursuant to law or the
requirements of its supervising or examining authority.
8. A copy of any order pursuant to which the foreign
trustee is authorized to act as sole trustee under indentures
qualified or to be qualified under the Act. Not applicable.
9. Foreign trustees are required to file a
consent to service of process on Form F-X. Not
applicable.
- - ------------------------
* Incorporated by reference to Exhibit bearing the same Exhibit
number submitted with the Form T-1 of Texas Commerce Bank
National Association with respect to File
No. 33-51417.
** Incorporated by reference to Exhibit bearing the same
Exhibit number submitted with the Form T-1 of Texas
National Bank of Commerce of Houston with respect to
File No. 2-24599.
*** Incorporated by reference to Exhibit bearing the same Exhibit
number submitted with the Form T-1 of Texas Commerce Bank
National Association with respect to File
No. 333-15539.
[Remainder of Page Intentionally Left Blank]
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
trustee, Texas Commerce Bank National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Houston, and State of Texas, on the 8th day of May, 1997.
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
(Trustee)
By: /s/ Mary Jo Davis
----------------------
Name: Mary Jo Davis
Title: Vice President and Trust Officer
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement or will be the underwriters for
the indenture securities, or are owners of 10% or more of the voting securities
of the obligor, or are owners of 50% or more of the voting securities of the
obligor or are affiliates, and the amounts and percentages of such securities,
if any, owned by each of the foregoing, respectively, are based upon information
furnished to the trustee by the obligor and the underwriter. While the trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor. Accordingly, the trustee disclaims responsibility
as to the accuracy and completeness of the information received from the obligor
and the underwriter relating to the answers to items 2, 5, 7, 8, 9, 10, 11, 12
and 14.
Inasmuch as this statement is filed prior to the final determination of
all underwriters of the indenture securities, the answers to items 5, 7, 9 and
14 are based on incomplete information, but may be considered as correct unless
additional information is furnished by amendment.
9
<PAGE>
Exhibit 6
Securities & Exchange Commission
Washington, D.C. 20549
Gentlemen:
The undersigned is trustee under an Indenture dated as of November 1, 1994,
as the same may be supplemented from time to time by supplemental indentures
thereto, between MERIT Securities Corporation and Texas Commerce Bank National
Association, as Trustee, entered into in connection with the issuance of its
Collateralized Mortgage Bonds.
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned hereby consents that reports of examinations of the undersigned,
made by Federal or State authorities authorized to make such examinations, may
be furnished by such authorities to the Securities & Exchange Commission upon
its request therefor.
Very truly yours,
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By: /s/ Mary Jo Davis
--------------------
Name: Mary Jo Davis
Title: Vice President and Trust Officer
10
<PAGE>
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 51-2430 FFIEC 031
Page RI-1
Consolidated Report of Income
for the period January 1, 1997 - Houston, TX 77252-2558
All Report of Income schedules are to be reported on a calendar year-to-date
basis in thousands of dollars.
Schedule RI--Income Statement
<TABLE>
<CAPTION>
1480
Dollar Amounts in Thousands RIAD Bill Mil Thou
<S> <C> <C> <C>
1. Interest Income:
a. Interest and fee income on loans:
(1) In domestic offices:
(a) Loans secured by real estate 4011 54,089 1.a.(1)(a)
(b) Loans to depository institutions 4019 193 1.a.(1)(b)
(c) Loans to finance agricultural production and other loans to farmers 4024 733 1.a.(1)(c)
(d) Commercial and industrial loans 4012 107,688 1.a.(1)(d)
(e) Acceptances of other banks 4026 0 1.a.(1)(e)
(f) Loans to individuals for household, family, and other personal
expenditures:
(1) Credit cards and related plans 4054 4,368 1.a.(1)(f)(1)
(2) Other 4055 50,306 1.a.(1)(f)(2)
(g) Loans to foreign governments and official institutions 4056 2,686 1.a.(1)(g)
(h) Obligations (other than securities and leases) of states and political
subdivisions in the U.S.:
(1) Taxable obligations 4503 0 1.a.(1)(h)(1)
(2) Tax-exempt obligations 4504 103 1.a.(1)(h)(2)
(i) All other loans in domestic offices 4058 20,135 1.a.(1)(i)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs 4059 2,253 1.a.(2)
b. Income from lease financing receivables:
(1) Taxable leases 4505 2,442 1.b.(1)
(2) Tax-exempt leases 4307 0 1.b.(2)
c. Interest income on balances due from depository institutions: (1)
(1) In domestic offices 4105 0 1.c.(1)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs 4106 0 1.c.(2)
d. Interest and dividend income on securities:
(1) U.S. Treasury securities and U.S. Government agency obligations 4027 66,886 1.d.(1)
(2) Securities issued by states and political subdivisions in the U.S.:
(a) Taxable securities 4506 1 1.d.(2)(a)
(b) Tax-exempt securities 4507 4 1.d.(2)(b)
(3) Other domestic debt securities 3657 45 1.d.(3)
(4) Foreign debt securities 3658 0 1.d.(4)
(5) Equity securities (including investments in mutual funds) 3659 692 1.d.(5)
e. Interest income from trading assets 4069 0 1.e.
</TABLE>
__________
(1) Includes interest income on time certificates of deposit not held for
trading.
3
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-2
Schedule RI--Continued
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Interest income (continued)
f. Interest income on federal funds sold and securities purchased under
agreements to resell 4020 15,222 1.f.
g. Total interest income (sum of items 1.a through 1.f) 4107 327,846 1.g.
2. Interest expense:
a. Interest on deposits:
(1) Interest on deposits in domestic offices:
(a) Transaction accounts (NOW accounts, ATS accounts, and telephone and
preauthorized transfer accounts) 4508 1,415 2.a.(1)(a)
(b) Nontransaction accounts:
(1) Money market deposit accounts (MMDAs) 4509 10,159 2.a.(1)(b)(1)
(2) Other savings deposits 4511 26,781 2.a.(1)(b)(2)
(3) Time deposits of $100,000 or more 4174 10,971 2.a.(1)(b)(3)
(4) Time deposits of less than $100,000 4518 31,148 2.a.(1)(b)(4)
(2) Interest on deposits in foreign offices, Edge and
Agreement subsidiaries, and IBFs 4172 4,703 2.a.(2)
b. Expense of federal funds purchased and securities sold under agreements to
repurchase 4180 23,690 2.b.
c. Interest on demand notes issued to the U.S. Treasury, trading
liabilities, and other borrowed money 4185 9,089 2.c.
d. Not applicable
e. Interest on subordinated notes and debentures 4200 7,058 2.e.
f. Total interest expense (sum of items 2.a through 2.e) 4073 125,014 2.f.
3. Net interest income (item 1.g minus 2.f) RIAD 4074 202,832 3.
4. Provisions:
a. Provision for loan and lease losses RIAD 4230 0 4.a.
b. Provision for allocated transfer risk RIAD 4243 0 4.b.
5. Noninterest income:
a. Income from fiduciary activities 4070 29,730 5.a.
b. Service charges on deposit accounts in domestic offices 4080 39,142 5.b.
c. Trading revenue (must equal Schedule RI, sum of Memorandum
items 8.a through 8.d) A220 4,128 5.c.
d.-e. Not applicable
f. Other noninterest income:
(1) Other fee income 5407 18,168 5.f.(1)
(2) All other noninterest income* 5408 14,577 5.f.(2)
g. Total noninterest income (sum of items 5.a through 5.f) RIAD 4079 105,745 5.g.
6. a. Realized gains (losses) on held-to-maturity securities RIAD 3521 0 6.a.
b. Realized gains (losses) on available-for-sale securities RIAD 3196 734 6.b.
7. Noninterest expense:
a. Salaries and employee benefits 4135 111,727 7.a.
b. Expenses of premises and fixed assets (net of rental income)
(excluding salaries and employee benefits and mortgage interest) 4217 41,487 7.b.
c. Other noninterest expense* 4092 53,469 7.c.
d. Total noninterest expense (sum of items 7.a through 7.c) RIAD 4093 206,683 7.d.
8. Income (loss) before income taxes and extraordinary items and other
adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6.a, 6.b, and
7.d) RIAD 4301 102,628 8.
9. Applicable income taxes (on item 8) RIAD 4302 37,782 9.
10. Income (loss) before extraordinary items and other adjustments (item 8
minus 9) RIAD 4300 64,846 10.
11. Extraordinary items and other adjustments, net of income taxes* RIAD 4320 0 11.
12. Net income (loss) (sum of items 10 and 11.c) RIAD 4340 64,846 12.
__________
*Describe on Schedule RI-E--Explanations.
4
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-3
Schedule RI--Continued
</TABLE>
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
I481
Memoranda Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Interest expense incurred to carry tax-exempt securities, loans, and leases
acquired after August 7, 1986, that is not deductible for federal income tax
purposes 4513 50 M.1.
2. Income from the sale and servicing of mutual funds and annuities in domestic
offices (included in Schedule RI, item 8) 8431 1,769 M.2.
3.-4. Not applicable
5. Number of full-time equivalent employees at end of current period Number
(round to nearest whole number) 4150 8,658 M.5.
6. Not applicable
7. If the reporting bank has restated its balance sheet as a result of applying
push down accounting this calendar year, report the date of the bank's MM/DD/YY
acquisition 9106 00/00/00 M.7.
8. Trading revenue (from cash instruments and off-balance sheet derivative
instruments) (sum of Memorandum items 8.a through 8.d must equal
Schedule RI, item 5.c): Bill Mil Thou
a. Interest rate exposures 8757 561 M.8.a.
b. Foreign exchange exposures 8758 3,567 M.8.b.
c. Equity security and index exposures 8759 0 M.8.c.
d. Commodity and other exposures 8760 0 M.8.d.
9. Impact on income of off-balance sheet derivatives held for purposes other
than trading:
a. Net increase (decrease) to interest income 8761 128 M.9.a.
b. Net (increase) decrease to interest expense 8762 58 M.9.b.
c. Other (noninterest) allocations 8763 0 M.9.c.
10. Credit losses on off-balance sheet derivatives (see instructions) A251 0 M.10.
11. Does the reporting bank have a Subchapter S election in effect for federal YES NO
income tax purposes for the current tax year? A530 X M.11.
Bil Mil Thou
12. Deferred portion of total applicable income taxes included in Schedule RI,
items 9 and 11 (to be reported with the December Report of Income) 4772 N/A M.12.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
5
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-4
Schedule RI-A--Changes in Equity Capital
Indicate decreases and losses in parentheses.
<TABLE>
<CAPTION>
I483
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Total equity capital originally reported in the December 31, 1996, Reports
of Condition and Income 3215 1,746,010 1.
2. Equity capital adjustments from amended Reports of Income, net* 3216 0 2.
3. Amended balance end of previous calendar year (sum of items 1 and 2) 3217 1,746,010 3.
4. Net income (loss)(must equal Schedule RI, item 12) 4340 64,846 4.
5. Sale, conversion, acquisition, or retirement of capital stock, net 4346 0 5.
6. Changes incident to business combinations, net 4356 0 6.
7. LESS: Cash dividends declared on preferred stock 4470 0 7.
8. LESS: Cash dividends declared on common stock 4460 0 8.
9. Cumulative effect of changes in accounting principles from prior years* (see
instructions for this schedule) 4411 0 9.
10. Corrections of material accounting errors from prior years* (see
instructions for this schedule) 4412 0 10.
11. Change in net unrealized holding gains (losses) on available-for-sale
securities 8433 (33,382) 11.
12. Foreign currency transaction adjustments 4414 0 12.
13. Other transactions with parent holding company* (not included in items 5, 7
or 8 above) 4415 0 13.
14. Total equity capital end of current period (sum of items 3 through 13) (must
equal Schedule RC, item 28) 3210 1,777,474 14.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
Schedule RI-B--Charge-offs and Recoveries and Changes
in Allowance for Loan and Lease Losses
Part I. Charge-offs and Recoveries on Loans and Leases
Part I excludes charge-offs and recoveries through
the allocated transfer risk reserve.
<TABLE>
<CAPTION>
I486
(Column A) (Column B)
Charge-offs Recoveries
Calendar year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Loans secured by real estate:
a. To U.S. addressees (domicile) 4651 1,311 4661 3,325 1.a.
b. To non-U.S. addressees (domicile) 4652 0 4662 0 1.b.
2. Loans to depository institutions and acceptances of the banks:
a. To U.S. banks and other U.S. depository institutions 4653 0 4663 2 2.a.
b. To foreign banks 4654 0 4664 0 2.b.
3. Loans to finance agricultural production and other loans to farmers 4655 0 4665 3 3.
4. Commercial and industrial loans;
a. To U.S. addressees (domicile) 4645 1,307 4617 1,295 4.a.
b. To non-U.S. addressees (domicile) 4646 0 4618 0 4.b.
5. Loans to individuals for household, family, and other personal
expenditures:
a. Credit cards and related plans 4656 769 4666 65 5.a.
b. Other (includes single payment, installment, and all student loans) 4657 9,893 4667 2,239 5.b.
6. Loans to foreign governments and official institutions 4643 0 4627 13 6.
7. All other loans 4644 8 4628 469 7.
8. Lease financing receivables:
a. Of U.S. addressees (domicile) 4658 0 4668 0 8.a.
b. Of non-U.S. addressees (domicile) 4659 0 4669 0 8.b.
9. Total (sum of items 1 through 8) 4635 13,288 4605 7,411 9.
</TABLE>
6
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-5
Schedule RI-B--Continued
Part I. Continued
<TABLE>
<CAPTION>
(Column A) (Column B)
Charge-offs Recoveries
Memoranda Calendar year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1-3. Not applicable
4. Loans to finance commercial real estate, construction, and land
development activities (not secured by real estate) included in
Schedule RI-B, part I, items 4 and 7, above 5409 0 5410 37 M.4.
5. Loans secured by real estate in domestic offices (included in
Schedule RI-B, part I, item 1, above):
a. Construction and land development 3582 0 3583 3,019 M.5.a.
b. Secured by farmland 3584 0 3585 0 M.5.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit 5411 0 5412 0 M.5.c.(1)
(2) All other loans secured by 1-4 family residential properties 5413 713 5414 102 M.5.c.(2)
d. Secured by multifamily (5 or more) residential properties 3588 0 3589 1 M.5.d.
e. Secured by nonfarm nonresidential properties 3590 598 3591 203 M.5.e.
</TABLE>
Part II. Changes in Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Balance originally reported in the December 31, 1995, Reports of Condition
and Income 3124 250,613 1.
2. Recoveries (must equal part I, item 9, column B above) 4605 7,411 2.
3. LESS: Charge-offs (must equal part I, item 9, column A above) 4635 13,288 3.
4. Provision for loan and lease losses (must equal Schedule RI, item 4.a) 4230 0 4.
5. Adjustments* (see instructions for this schedule) 4815 (18) 5.
6. Balance end of current period (sum of items 1 through 5)(must equal Schedule RC,
item 4.b) 3213 244,718 6.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
7
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-6
Schedule RI-D--Income from International Operations
For all banks with foreign offices, Edge or Agreement subsidiaries, or IBFs
where international operations account for more than 10 percent of total
revenues, total assets, or net income.
Part I. Estimated Income from International Operations
<TABLE>
<CAPTION>
I492
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Interest income and expense booked at foreign offices, Edge and Agreement
subsidiaries, and IBFs:
a. Interest income booked 4837 N/A 1.a.
b. Interest expense booked 4838 N/A 1.b.
c. Net interest income booked at foreign offices, Edge and Agreement
subsidiaries, and IBFs (item 1.a minus 1.b) 4839 N/A 1.c.
2. Adjustments for booking location of international operations:
a. Net interest income attributable to international operations booked at
domestic offices 4840 N/A 2.a.
b. Net interest income attributable to domestic business booked at foreign
offices 4841 N/A 2.b.
c. Net booking location adjustment (item 2.a minus 2.b) 4842 N/A 2.c.
3. Noninterest income and expense attributable to international operations:
a. Noninterest income attributable to international operations 4097 N/A 3.a.
b. Provision for loan and lease losses attributable to international operations 4235 N/A 3.b.
c. Other noninterest expense attributable to international operations 4239 N/A 3.c.
d. Net non-interest income (expense) attributable to international operations (item
3.a minus 3.b and 3.c) 4843 N/A 3.d.
4. Estimated pretax income attributable to international operations before
capital allocation adjustment (sum of items 1.c, 2.c, and 3.d) 4844 N/A 4.
5. Adjustment to pretax income for internal allocations to international
operations to reflect the effects of equity capital on overall bank funding
costs 4845 N/A 5.
6. Estimated pretax income attributable to international operations after
capital allocation adjustment (sum of items 4 and 5) 4846 N/A 6.
7. Income taxes attributable to income from international operations as
estimated in item 6 4797 N/A 7.
8. Estimated net income attributable to international operations (item 6 minus 7) 4341 N/A 8.
<CAPTION>
Memoranda
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Intracompany interest income included in item 1.a above 4847 N/A M.1.
2. Intracompany interest expense included in item 1.b above 4848 N/A M.2.
</TABLE>
Part II. Supplementary Details on Income from International Operations
Required by the Departments of Commerce and Treasury for Purposes of the U.S.
International Accounts and the U.S. National Income and Product Accounts
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Interest income booked at IBFs 4849 N/A 1.
2. Interest expense booked at IBFs 4850 N/A 2.
3. Noninterest income attributable to international operations booked at
domestic offices (excluding IBFs):
a. Gains (losses) and extraordinary items 5491 N/A 3.a.
b. Fees and other noninterest income 5492 N/A 3.b.
4. Provision for loan and lease losses attributable to international operations
booked at domestic offices (excluding IBFs) 4852 N/A 4.
5. Other noninterest expense attributable to international operations booked at
domestic offices (excluding IBFs) 4853 N/A 5.
</TABLE>
8
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-7
Schedule RI-E--Explanations
Schedule RI-E is to be completed each quarter on a calendar year-to-date basis.
Detail all adjustments in Schedule RI-A and RI-B, all
extraordinary items and other adjustments in Schedule RI, and all
significant items of other noninterest income and other noninterest
expense in Schedule RI. (See instructions for details.)
<TABLE>
<CAPTION>
1495
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. All other noninterest income (from Schedule RI, item 5.f.(2))
Report amounts that exceed 10% of Schedule RI, item 5.f.(2):
a. Net gains (losses) on other real estate owned 5415 0 1.a.
b. Net gains (losses) on sales of loans 5416 0 1.b.
c. Net gains (losses) on sales of premises and fixed assets 5417 0 1.c.
Itemize and describe the three largest other amounts that exceed 10% of
Schedule RI, item 5.f.(2):
d. Text 4461 Check Printing Income 4461 2,395 1.d.
e. Text 4462 Interbank Contracts 4462 9,288 1.e.
f. Text 4463 Sale of Business Units 4463 1,880 1.f.
2. Other noninterest expense (from Schedule RI, item 7.c):
a. Amortization expense of intangible assets 4531 10,790 2.a.
Report amounts that exceed 10% of Schedule RI, item 7.c:
b. Net (gains) losses on other real estate owned 5418 0 2.b.
c. Net (gains) losses on sales of loans 5419 0 2.c.
d. Net (gains) losses on sales of premises and fixed assets 5420 0 2.d.
Itemize and describe the three largest amounts that exceed 10% of Schedule RI,
item 7.c.:
e. Text 4464 4464 2.e.
f. Text 4467 4467 2.f.
g. Text 4468 4468 2.g.
3. Extraordinary items and other adjustments and applicable income tax effect
(from Schedule RI, item 11) (itemize and describe all extraordinary
items and other adjustments):
a. (1) Text 4469 4469 3.a.(1)
(2) Applicable income tax effect RIAD 4486 3.a.(2)
b. (1) Text 4487 4487 3.b.(1)
(2) Applicable income tax effect RIAD 4488 3.b.(2)
c. (1) Text 4489 4489 3.c.(1)
(2) Applicable income tax effect RIAD 4491 3.c.(2)
4. Equity capital adjustments from amended Reports of Income (from Schedule
RI-A, item 2) (itemize and describe all adjustments):
a. Text 4492 4492 4.a.
b. Text 4493 4493 4.b.
5. Cumulative effect of changes in accounting principles from prior years (from
Schedule RI-A, item 9) (itemize and describe all changes in accounting
principles):
a. Text A546 Effect of change to GAAP from previous non-GAAP instructions A546 0 5.a.
b. Text 4495 4495 5.b.
6. Corrections of material accounting errors from prior years (from Schedule
RI-A, item 10 (itemize and describe all corrections):
a. Text 4496 4496 6.a.
b. Text 4497 4497 6.b.
</TABLE>
9
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RI-8
Schedule RI-E--Continued
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
7. Other transactions with parent holding company (from Schedule RI-A,
item 13) (itemize and describe all such transactions):
a. Text 4498 4498 7.a.
b. Text 4499 4499 7.b.
8. Adjustments to allowance for loan and lease losses (from Schedule RI-B,
part II, item 5) (itemize and describe all adjustments):
a. Text 4521 Sale of Business Units 4521 (18) 8.a.
b. Text 4522 Sale of Loans 4522 8.b.
9. Other explanations (the space below is provided for the bank to briefly
describe, at its option, any other significant items affecting the Report
of Income): I498 I499
No comment __ (RIAD 4769)
Other explanations (please type or print clearly):
(Text 4769)
</TABLE>
10
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-1
Consolidated Report of Condition for Insured Commercial
and State-Chartered Savings Banks for March 31, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
Schedule RC--Balance Sheet
<TABLE>
<CAPTION>
C400
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin(1) 0081 2,370,922 1.a.
b. Interest-bearing balances(2) 0071 101 1.b.
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 516,727 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D) 1773 3,507,368 2.b.
3. Federal funds sold and securities purchased under agreements to resell 1350 1,839,163 3.
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 12,953,211 4.a.
b. LESS: Allowance for loan and lease losses RCFD 3123 244,718 4.b.
c. LESS: Allocated transfer risk reserve RCFD 3128 0 4.c.
d. Loans and leases, net of unearned income, allowance,
and reserve (item 4.a. minus 4.b. and 4.c.) 2125 12,708,493 4.d.
5. Trading assets (from Schedule RC-D) 3545 27,185 5.
6. Premises and fixed assets (including capitalized leases) 2145 562,006 6.
7. Other real estate owned (from Schedule RC-M) 2150 248 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding 2155 9,516 9.
10. Intangible assets (from Schedule RC-M) 2143 411,400 10.
11. Other assets (from Schedule RC-F) 2160 416,394 11.
12. Total assets (sum of items 1 through 11) 2170 22,369,523 12.
</TABLE>
__________
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
11
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-2
Schedule RC--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E,
part I) RCON 2200 16,564,686 13.a.
(1) Noninterest-bearing(1) RCON 6631 7,289,585 13.a.(1)
(2) Interest-bearing RCON 6636 9,275,101 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule
RC-E, part II) RCFN 2200 303,068 13.b.
(1) Noninterest-bearing RCFN 6631 0 13.b.(1)
(2) Interest-bearing RCFN 6636 303,068 13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase RCFD 2800 2,058,013 14.
15. a. Demand notes issued to the U.S. Treasury RCON 2840 969,510 15.a.
b. Trading liabilities (from Schedule RC-D) RCFD 3548 19,948 15.b.
16. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
a. With a remaining maturity of one year or less RCFD 2332 47,990 16.a.
b. With a remaining maturity of more than one year RCFD 2333 27,377 16.b.
17. Not applicable
18. Bank's liability on acceptances executed and outstanding RCFD 2920 9,516 18.
19. Subordinated notes and debentures (2) RCFD 3200 345,000 19.
20. Other liabilities (from Schedule RC-G) RCFD 2930 246,941 20.
21. Total liabilities (sum of items 13 through 20) RCFD 2948 20,592,049 21.
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus RCFD 3838 0 23.
24. Common Stock RCFD 3230 612,893 24.
25. Surplus (exclude all surplus related to preferred stock) RCFD 3839 924,675 25.
26. a. Undivided profits and capital reserves RCFD 3632 296,161 26.a.
b. Net unrealized gains (losses) on available-for-sale securities RCFD 8434 (56,255) 26.b.
27. Cumulative foreign currency translation adjustments RCFD 3284 0 27.
28. Total equity capital (sum of items 23 through 27) RCFD 3210 1,777,474 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of
items 21, 22, and 28) RCFD 3300 22,369,523 29.
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the Number
bank by independent external auditors as of any date during 1996 RCFD 6724 2 M.1.
</TABLE>
1 = Independent audit of the bank conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm which submits a report on the bank.
2 = Independent audit of the bank's parent holding company conducted
in accordance with generally accepted auditing standards by a
certified public accounting firm which submits a report on the
consolidated holding company (but not on a bank separately).
3 = Directors' examination of the bank conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm (may be required by state chartering authority).
4 = Directors' examination of the bank performed by other external
auditors (may be required by state chartering authority).
5 = Review of the bank's financial statements by external auditors.
6 = Compilation of the bank's financial statements by external
auditors.
7 = Other audit procedures (excluding tax preparation work).
8 = no external audit work.
__________
(1) Includes total demand deposits and noninterest-bearing time and
savings deposits.
(2) Includes limited-life preferred stock and related surplus.
12
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-3
Schedule RC-A--Cash and Balances Due From Depository Institutions
Exclude assets held for trading.
<TABLE>
<CAPTION>
C405
(Column A) (Column B)
Consolidated Domestic
Bank Offices
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Cash items in process of collection, unposted debits, and
currency and coin 0022 759,070 1.
a. Cash items in process of collection and unposted debits 0020 602,561 1.a.
b. Currency and coin 0080 156,509 1.b.
2. Balances due from depository institutions in the U.S. 0082 16,599 2.
a. U.S. branches and agencies of foreign banks
(including their IBFs) 0083 0 2.a.
b. Other commercial banks in the U.S. and other depository
institutions in the U.S. (including their IBFs) 0085 16,599 2.b.
3. Balances due from banks in foreign countries and foreign
central banks 0070 1,463 3.
a. Foreign branches of other U.S. banks 0073 0 3.a.
b. Other banks in foreign countries and foreign central banks 0074 1,463 3.b.
4. Balances due from Federal Reserve Banks 0090 9,955 0090 9,955 4.
5. Total (sum of items 1 through 4) (total of column A must
equal Schedule RC, sum of items 1.a. and 1.b.) 0010 787,087 0010 787,087 5.
</TABLE>
<TABLE>
<CAPTION>
Memorandum RCON Bil Mil Thou
Dollar Amounts in Thousands
<S> <C> <C> <C>
1. Noninterest-bearing balances due from commercial banks
in the U.S. (included in items 2, column B above) 0050 16,599 M.1.
</TABLE>
Schedule RC-B--Securities
Exclude assets held for trading.
<TABLE>
<CAPTION>
C410
Held-to-maturity Available-for-sale
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. U.S. Treasury securities 0211 0 0213 0 1286 199,623 1287 196,228 1.
2. U.S. Government agency and
corporation obligations
(exclude mortgage-backed
securities):
a. Issued by U.S. Government
agencies(2) 1289 0 1290 0 1291 0 1293 0 2.a.
b. Issued by U.S. Government-
sponsored agencies(3) 1294 0 1295 0 1297 66,519 1298 64,497 2.b.
</TABLE>
__________
(1) Includes equity securities without readily determinable
fair values at historical cost in item 6.c., column D.
(2) Includes Small Business Administration "Guaranteed Loan
Pool Certificates," U.S. Maritime Administration obligations,
and Export-Import Bank participation certificates.
(3) Includes obligations (other than mortgage-backed securities)
issued by the Farm Credit System, the Federal Home Loan Bank,
System, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Financing Corporation,
Resolution Funding Corporation, the Student Loan Marketing
Association, and the Tennessee Valley Authority.
13
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-4
Schedule RC-B--Continued
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3. Securities issued by states
and political subdivisions
in the U.S.
a. General obligations 1676 229 1677 230 1678 0 1679 0 3.a.
b. Revenue obligations 1681 30 1686 30 1690 0 1691 0 3.b.
c. Industrial development
and similar obligations 1694 0 1695 0 1696 0 1697 0 3.c.
4. Mortgage-backed securities
(MBS):
a. Pass-through securities:
(1) Guaranteed by GNMA 1698 0 1699 0 1701 1,172,866 1702 1,165,465 4.a.(1)
(2) Issued by FNMA and FHLMC 1703 498,456 1705 492,730 1706 1,210,647 1707 1,190,566 4.a.(2)
(3) Other pass-through
securities 1709 0 1710 0 1711 0 1713 0 4.a.(3)
b. Other mortgage-backed
securities (include CMOs,
REMICs, and stripped MBS):
(1) Issued or guaranteed by
FNMA, FHLMC, or GNMA 1714 0 1715 0 1716 286,714 1717 284,789 4.b.(1)
(2) Collateralized by MBS
issued or guaranteed
by FNMA, FHLMC, or GNMA 1718 0 1719 0 1731 2,740 1732 2,778 4.b.(2)
(3) All other mortgage-backed
securities 1733 0 1734 0 1735 0 1736 0 4.b.(3)
5. Other debt securities:
a. Other domestic debt
securities 1737 0 1738 0 1739 0 1741 0 5.a.
b. Foreign debt securities 1742 0 1743 0 1744 0 1746 0 5.b.
6. Equity securities:
a. Investments in mutual
funds and other equity
securities with readily
determinable fair values A510 0 A511 0 6.a.
c. All other equity
securities(1) 1752 46,127 1753 46,127 6.b.
7. Total (sum of items 1 through
6) (total of column A must
equal Schedule RC, item 2.a)
(total of column D must equal
Schedule RC, item 2.b.) 1754 516,727 1771 511,068 1772 3,554,824 1773 3,507,368 7.
</TABLE>
__________
(1) Includes equity securities without readily determinable fair values at
historical cost in item 6.b., column D.
14
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-5
Schedule RC-B--Continued
<TABLE>
<CAPTION>
Memoranda C412
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Pledged securities(2) 0416 1,818,043 M.1.
2. Maturity and repricing data for debt securities(2),(3),(4) (excluding those in
nonaccrual status):
a. Fixed rate debt securities with a remaining maturity of:
(1) Three months or less 0343 19,260 M.2.a.(1)
(2) Over three months through 12 months 0344 138,518 M.2.a.(2)
(3) Over one year through five years 0345 932,526 M.2.a.(3)
(4) Over five years 0346 2,598,629 M.2.a.(4)
(5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1) through
2.a.(4) 0347 3,688,933 M.2.a.(5)
b. Floating rate debt securities with a repricing frequency of:
(1) Quarterly or more frequently 4544 289,035 M.2.b.(1)
(2) Annually or more frequently, but less frequently than quarterly 4545 0 M.2.b.(2)
(3) Every five years or more frequently, but less frequently than annually 4551 0 M.2.b.(3)
(4) Less frequently than every five years 4552 0 M.2.b.(4)
(5) Total floating rate debt securities (sum of Memorandum items 2.b.(1)
through 2.b.(4)) 4553 289,035 M.2.b.(5)
c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must
equal total debt securities from Schedule RC-B, sum of items 1 through 5,
columns A and D, minus nonaccrual debt securities included in Schedule RC-N,
item 9, column C) 0393 3,977,968 M.2.c.
3.-5. Not applicable
6. Floating rate debt securities with a remaining maturity of one year or less
(2),(4) (included in Memorandum items 2.b.(1) through 2.b.(4) above) 5519 0 M.6.
7. Amortized cost of held-to-maturity securities sold or transferred to
available-for-sale or trading securities during the calendar year-to-date
(report the amortized cost at date of sale or transfer) 1778 0 M.7.
8. High-risk mortgage securities (included in the held-to-maturity and
available-for-sale accounts in Schedule RC-B, item 4.b.):
a. Amortized cost 8780 0 M.8.a.
b. Fair value 8781 0 M.8.b.
9. Structured notes (included in the held-to-maturity and available-for-sale
accounts in Schedule RC-B, items 2, 3, and 5):
a. Amortized cost 8782 0 M.9.a.
b. Fair value 8783 0 M.9.b.
</TABLE>
__________
(2) Includes held-to-maturity securities at amortized cost and
available-for-sale securities at fair value.
(3) Exclude equity securities, e.g., investments in mutual funds, Federal
Reserve stock, common stock, and preferred stock.
(4) Memorandum item 2 and 6 is not applicable to savings banks that must
complete supplemental Schedule RC-J.
15
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-6
Schedule RC-C--Loans and Lease Financing Receivables
Part I. Loans and Leases
Do not deduct the allowance for loan and lease losses from amounts reported in
this schedule. Report total loans and leases, net of unearned income. Exclude
assets held for trading and commercial paper.
<TABLE>
<CAPTION>
C415
(Column A) (Column B)
Consolidated Domestic
Bank Offices
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Loans secured by real estate 1410 2,557,835 1.
a. Construction and land development 1415 512,968 1.a.
b. Secured by farmland (including farm residential and other improvements) 1420 17,896 1.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential properties
and extended under lines of credit 1797 0 1.c.(1)
(2) All other loans secured by 1-4 family residential properties:
(a) Secured by first liens 5367 819,802 1.c.(2)(a)
(b) Secured by junior liens 5368 308,931 1.c.(2)(b)
d. Secured by multifamily (5 or more) residential properties 1460 150,360 1.d.
e. Secured by nonfarm nonresidential properties 1480 747,878 1.e.
2. Loans to depository institutions:
a. To commercial banks in the U.S. 1505 15,126 2.a.
(1) To U.S. branches and agencies of foreign banks 1506 0 2.a.(1)
(2) To other commercial banks in the U.S. 1507 15,126 2.a.(2)
b. To other depository institutions in the U.S. 1517 8 1517 8 2.b.
c. To banks in foreign countries 1510 9,560 2.c.
(1) To foreign branches of other U.S. banks 1513 0 2.c.(1)
(2) To other banks in foreign countries 1516 12,029 2.c.(2)
3. Loans to finance agricultural production and other loans to farmers 1590 46,887 1590 46,887 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile) 1763 6,273,248 1763 6,248,453 4.a.
b. To non-U.S. addressees (domicile) 1764 262,964 1764 132,843 4.b.
5. Acceptances of other banks:
a. Of U.S. banks 1756 0 1756 0 5.a.
b. Of foreign banks 1757 0 1757 0 5.b.
6. Loans to individuals for household, family, and other personal expenditures
(i.e., consumer loans) (includes purchased paper) 1975 2,325,658 6.
a. Credit cards and related plans (includes check credit and other revolving
credit plans) 2008 132,002 6.a.
b. Other (includes single payment, installment, and all student loans) 2011 2,193,656 6.b.
7. Loans to foreign governments and official institutions (including foreign
central banks) 2081 112,840 2081 108,535 7.
8. Obligations (other than securities and leases) of states and political
subdivisions in the U.S. (includes nonrated industrial development
obligations) 2107 19,694 2107 19,694 8.
9. Other loans 1563 1,187,201 9.
a. Loans for purchasing or carrying securities (secured and unsecured) 1545 87,601 9.a.
b. All other loans (exclude consumer loans) 1564 1,099,600 9.b.
10. Lease financing receivables (net of unearned income) 2165 139,721 10.
a. Of U.S. addressees (domicile) 2182 127,665 10.a.
b. Of non-U.S. addressees (domicile) 2183 12,056 10.b.
11. LESS: Any unearned income on loans reflected in items 1-9 above 2123 0 2123 0 11.
12. Total loans and leases, net of unearned income (sum of items 1 through 10
minus item 11) (total of column A must equal Schedule RC, item 4.a.) 2122 12,953,211 2122 12,791,521 12.
</TABLE>
16
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-7
Schedule RC-C--Continued
Part I. Continued
<TABLE>
<CAPTION>
(Column A) (Column B)
Memoranda Consolidated Domestic
Bank Offices
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Not applicable
2. Loans and leases restructured and in compliance with modified terms (included
in Schedule RC-C, part I, above and not reported as past due or nonaccrual in
Schedule RC-N, Memorandum item 1):
a. Loans secured by real estate:
(1) To U.S. addressees (domicile) 1687 0 M.2.a.(1)
(2) To non U.S. addressees (domicile) 1689 0 M.2.a.(2)
b. All other loans and all lease financing receivables (exclude loans to
individuals for household, family, and other personal expenditures) 8691 147,859 M.2.b.
c. Commercial and industrial loans to and lease financing receivables of
non-U.S. addressees (domicile) included in Memorandum item 2.b. above 8692 0 M.2.c.
3. Maturity and repricing data for loans and leases(1) (excluding those in
nonaccrual status):
a. Fixed rate loans and leases with a remaining maturity of:
(1) Three months or less 0348 956,183 M.3.a.(1)
(2) Over three months through 12 months 0349 997,550 M.3.a.(2)
(3) Over one year through five years 0356 2,134,192 M.3.a.(3)
(4) Over five years 0357 834,270 M.3.a.(4)
(5) Total fixed rate loans and leases (sum of Memorandum items 3.a.(1)
through 3.a.(4)) 0358 4,922,195 M.3.a.(5)
b. Floating rate loans with a repricing frequency of:
(1) Quarterly or more frequently 4554 7,640,820 M.3.b.(1)
(2) Annually or more frequently, but less frequently than quarterly 4555 295,379 M.3.b.(2)
(3) Every five years or more frequently, but less frequently than annually 4561 2,997 M.3.b.(3)
(4) Less frequently than every five years 4564 790 M.3.b.(4)
(5) Total floating rate loans (sum of Memorandum items 3.b.(1)
through 3.b.(4)) 4567 7,939,986 M.3.b.(5)
c. Total loans and leases (sum of Memorandum items 3.a.(5) and 3.b.(5)) (must
equal the sum of total loans and leases, net, from Schedule RC-C, part I,
item 12, plus unearned income from Schedule RC-C, part I, item 11, minus
total nonaccrual loans and leases from Schedule RC-N, sum of items 1 through
8, column C) 1479 12,862,181 M.3.c.
d. Floating rate loans with a remaining maturity of one year or less
(included in Memorandum items 3.b.(1) through 3.b.(4) above) A246 3,044,972 M.3.d.
4. Loans to finance commercial real estate, construction, and land development
activities (not secured by real estate) included in Schedule RC-C, part I,
items 4 and 9, column A, page RC-6(2) 2746 406,659 M.4.
5. Loans and leases held for sale (included in Schedule RC-C, part I, above) 5369 250,981 M.5.
6. Adjustable rate closed-end loans secured by first liens on 1-4 family
residential properties (included in Schedule RC-C, part I, item 1.c.(2)(a), RCON Bil Mil Thou
column B, page RC-6) 5370 185,863 M.6.
</TABLE>
__________
(1) Memorandum item 3 is not applicable to savings banks that must complete
supplemental Schedule RC-J.
(2) Exclude loans secured by real estate that are included in Schedule RC-C,
part I, item 1, column A.
17
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-8
Schedule RC-D--Trading Assets and Liabilities
Schedule RC-D is to be completed only by banks with $1 billion or more in total
assets or with $2 billion or more in par/notional amount of off-balance sheet
derivative contracts (as reported in Schedule RC-L, items 14.a. through 14.e.,
columns A through D).
<TABLE>
<CAPTION>
C420
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
Assets
1. U.S. Treasury securities in domestic offices RCON 3531 0 1.
2. U.S. Government agency and corporation obligations in domestic offices
(exclude mortgage-backed securities) RCON 3532 0 2.
3. Securities issued by states and political subdivisions in the U.S. in
domestic offices RCON 3533 0 3.
4. Mortgage-backed securities (MBS) in domestic offices:
a. Pass-through securities issued or guaranteed by FNMA, FHLMC, or GNMA RCON 3534 0 4.a.
b. Other mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or
GNMA (include CMOs, REMICs, and stripped MBS) RCON 3535 0 4.b.
c. All other mortgage-backed securities RCON 3536 0 4.c.
5. Other debt securities in domestic offices RCON 3537 0 5.
6. Certificates of deposit in domestic offices RCON 3538 0 6.
7. Commercial paper in domestic offices RCON 3539 0 7.
8. Bankers acceptances in domestic offices RCON 3540 0 8.
9. Other trading assets in domestic offices RCON 3541 0 9.
10. Trading assets in foreign offices RCFN 3542 0 10.
11. Revaluation gains on interest rate, foreign exchange rate, and other
commodity and equity contracts:
a. In domestic offices RCON 3543 26,394 11.a.
b. In foreign offices RCFN 3544 791 11.b.
12. Total trading assets (sum of items 1 through 11) (must equal Schedule RC,
item 5) RCFD 3545 27,185 12.
</TABLE>
<TABLE>
<CAPTION>
Liabilities Bil Mil Thou
<S> <C> <C> <C>
13. Liability for short positions RCFD 3546 0 13.
14. Revaluation losses on interest rate, foreign exchange rate, and other
commodity and equity contracts RCFD 3547 19,948 14.
15. Total trading liabilities (sum of items 13 and 14) (must equal Schedule
RC, item 15.b.) RCFD 3548 19,948 15.
18
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-9
Schedule RC-E--Deposit Liabilities
Part I. Deposits in Domestic Offices
</TABLE>
<TABLE>
<CAPTION>
C425
Nontransaction
Transaction Accounts Accounts
(Column A) (Column B) (Column C)
Total transaction Memo: Total Total
accounts (including demand deposits nontransaction
total demand (included in accounts
deposits) column A) (including MMDAs)
Dollar Amounts in Thousands RCON BIL Mil Thou RCON Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits of:
1. Individuals, partnerships,
and corporations 2201 5,878,376 2240 5,469,703 2346 9,783,590 1.
2. U.S. Government 2202 34,364 2280 32,901 2520 1,027 2.
3. States and political subdivisions
in the U.S. 2203 137,828 2290 64,945 2530 110,789 3.
4. Commercial banks in the U.S. 2206 478,556 2310 478,556 2550 0 4.
5. Other depository institutions
in the U.S. 2207 40,103 2312 40,103 2349 0 5.
6. Banks in foreign countries 2213 24,684 2320 24,684 2236 0 6.
7. Foreign governments and
official institutions
(including foreign central banks) 2216 1,120 2300 1,120 2377 0 7.
8. Certified and official checks 2330 74,249 2330 74,249 8.
9. Total (sum of items 1 through 8)
(sum of columns A and C must
equal Schedule RC, item 13.a) 2215 6,669,280 2210 6,186,261 2385 9,895,406 9.
</TABLE>
<TABLE>
<CAPTION>
Memoranda
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Selected components of total deposits (i.e., sum of item 9, columns A and C):
a. Total Individual Retirement Accounts (IRAs) and Keogh Plan accounts 6835 739,985 M.1.a.
b. Total brokered deposits 2365 0 M.1.b.
c. Fully insured brokered deposits (included in Memorandum item 1.b above):
(1) Issued in denominations of less than $100,000 2343 0 M.1.c.(1)
(2) Issued either in denominations of $100,000 or in denominations greater than
$100,000 and participated out by the broker in shares of $100,000 or less 2344 0 M.1.c.(2)
d. Maturity data for brokered deposits:
(1) Brokered deposits issued in denominations of less than $100,000 with
a remaining maturity of one year or less (included in Memorandum item
1.c.(1) above) A243 0 M.1.d.(1)
(2) Brokered deposits issued in denominations of $100,000 or more with a
remaining maturity of one year or less (included in Memorandum
item 1.b above) A244 0 M.1.d.(2)
e. Preferred deposits (uninsured deposits of states and political subdivisions
in the U.S. reported in item 3 above which are secured or collateralized as
required under state law) 5590 220,373 M.1.e.
2. Components of total nontransaction accounts (sum of Memorandum items 2.a
through 2.d must equal item 9, column C above):
a. Savings deposits:
(1) Money market deposit accounts (MMDAs) 6810 3,418,960 M.2.a.(1)
(2) Other savings deposits (excludes MMDAs) 0352 3,043,363 M.2.a.(2)
b. Total time deposits of less than $100,000 6648 2,547,365 M.2.b.
c. Total time deposits of $100,000 or more 2604 885,718 M.2.c.
3. All NOW accounts (included in column A above) 2398 483,019 M.3.
4. Not applicable
</TABLE>
19
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-10
Schedule RC-E--Continued
Part I. Continued
Memoranda (continued)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
5. Maturity and repricing data for time deposits of less than $100,000
(sum of Memorandum items 5.a.(1) through 5.b.(3) must equal Memorandum
item 2.b above): (1)
a. Fixed rate time deposits of less than $100,000 with a remaining maturity
of:
(1) Three months or less A225 766,436 M.5.a.(1)
(2) Over three months through 12 months A226 990,448 M.5.a.(2)
(3) Over one year A227 739,990 M.5.a.(3)
b. Floating rate time deposits of less than $100,000 with a repricing
frequency of:
(1) Quarterly or more frequently A228 22,108 M.5.b.(1)
(2) Annually or more frequently, but less frequently than quarterly A229 27,010 M.5.b.(2)
(3) Less frequently than annually A230 1,373 M.5.b.(3)
c. Floating rate time deposits of less than $100,000 with a remaining
maturity of one year or less (included in Memorandum items 5.b.(1)
through 5.b.(3) above) A231 25,443 M.5.c.
6. Maturity and repricing data for time deposits of $100,000 or more (i.e., time
certificates of deposit of $100,000 or more and open-account time deposits
of $100,000 or more) (sum of Memorandum items 6.a.(1) through 6.b.(4) must
equal Memorandum items 2.c above): (1)
a. Fixed rate time deposits of $100,000 or more with a remaining
maturity of:
(1) Three months or less A232 479,850 M.6.a.(1)
(2) Over three months through 12 months A233 334,923 M.6.a.(2)
(3) Over one year through five years A234 58,956 M.6.a.(3)
(4) Over five years A235 1,437 M.6.a.(4)
b. Floating rate time deposits of $100,000 or more with a
repricing frequency of:
(1) Quarterly or more frequently A236 9,317 M.6.b.(1)
(2) Annually or more frequently, but less frequently than quarterly A237 1,235 M.6.b.(2)
(3) Every five years or more frequently, but less frequently than annually A238 0 M.6.b.(3)
(4) Less frequently than every five years A239 0 M.6.b.(4)
c. Floating rate time deposits of $100,000 or more with a remaining maturity
of one year or less (included in Memorandum items 6.b.(1) through
6.b.(4) above) A240 7,216 M.6.c.
</TABLE>
__________
(1) Memorandum items 5 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
20
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-11
Schedule RC-E--Continued
Part II. Deposits in Foreign Offices (including Edge and Agreement subsidiaries
and IBFs)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCFN Bil Mil Thou
<S> <C> <C> <C>
Deposits of:
1. Individuals, partnerships, and corporations 2621 300,870 1.
2. U.S. banks (including IBFs and foreign branches of U.S. banks) 2623 2,186 2.
3. Foreign banks (including U.S. branches and agencies of foreign banks,
including their IBFs) 2625 12 3.
4. Foreign governments and official institutions (including foreign central
banks) 2650 0 4.
5. Certified and official checks 2330 0 5.
6. All other deposits 2668 0 6.
7. Total (sum of items 1 through 6)(must equal Schedule RC, item 13.b) 2200 303,068 7.
</TABLE>
<TABLE>
<CAPTION>
Memorandum
Dollar Amounts in Thousands RCFN Bil Mil Thou
<S> <C>
1. Time deposits with a remaining maturity of one year or less (included in
Part II, item 7 above) A245 303,068 M.1.
</TABLE>
Schedule RC-F--Other Assets
<TABLE>
<CAPTION> C430
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
1. Income earned, not collected on loans RCFD 2164 82,923 1.
2. Net deferred tax assets (1) RCFD 2148 68,041 2.
3. Interest-only strips receivable (not in the form of a security)
(2) on:
a. Mortgage loans RCFD A519 0
b. Other financial assets RCFD A520 0
4. Other (itemize and describe amounts that exceed 25% of this item) RCFD 2168 265,430 4.
a. Text 3549 A/R Cust. Investment Settlement RCFD 3549 89,583 4.a.
b. Text 3550 RCFD 3550 4.b.
c. Text 3551 RCFD 3551 4.c.
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 11) RCFD 2160 416,394 5.
</TABLE>
<TABLE>
<CAPTION>
Memorandum
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
1. Deferred tax assets disallowed for regulatory capital purposes RCFD 5610 0 M.1.
</TABLE>
Schedule RC-G--Other Liabilities
<TABLE>
<CAPTION> C435
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
1. a. Interest accrued and unpaid on deposits in domestic offices (3) RCON 3645 23,333 1.a.
b. Other expenses accrued and unpaid (includes accrued income taxes payable) RCFD 3646 206,733 1.b.
2. Net deferred tax liabilities (1) RCFD 3049 0 2.
3. Minority interest in consolidated subsidiaries RCFD 3000 0 3.
4. Other (itemize and describe amounts that exceed 25% of this item) RCFD 2938 16,875 4.
a. Text 3552 A/P Failed Sec. Purchased-AFS RCFD 3552 4,835 4.a.
b. Text 3553 RCFD 3553 4.b.
c. Text 3554 RCFD 3554 4.c.
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 20) RCFD 2930 246,941 5.
</TABLE>
__________
(1) See discussion of deferred income taxes in Glossary entry on "income taxes."
(2) Report interest-only strips receivable in the form of a security as
available-for-sale securities in Schedule RC, item 2.b., or as trading
assets in Schedule RC, item 5, as appropriate.
(3) For savings banks, including "dividends" accrued and unpaid on deposits.
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 00832
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-12
Schedule RC-H--Selected Balance Sheet Items for Domestic Offices
<TABLE>
<CAPTION>
C440
Domestic Offices
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Customers' liability to this bank on acceptances outstanding 2155 9,516 1.
2. Bank's liability on acceptances executed and outstanding 2920 9,516 2.
3. Federal funds sold and securities purchased under agreements to resell 1350 1,839,163 3.
4. Federal funds purchased and securities sold under agreements to repurchase 2800 2,058,013 4.
5. Other borrowed money 3190 75,367 5.
EITHER
6. Net due from own foreign offices, Edge and Agreement subsidiaries, and IBFs 2163 N/A 6.
OR
7. Net due to own foreign offices, Edge and Agreement subsidiaries, and IBFs 2941 139,553 7.
8. Total assets (excludes net due from foreign offices, Edge and Agreement
subsidiaries, and IBFs) 2192 22,205,653 8.
9. Total liabilities (excludes net due to foreign offices, Edge and Agreement
subsidiaries, and IBFs) 3129 20,288,626 9.
</TABLE>
Items 10-17 include held-to-maturity and available-for-sale securities in
domestic offices.
<TABLE>
<CAPTION>
RCON Bil Mil Thou
<S> <C> <C> <C>
10. U.S. Treasury securities 1779 835,619 10.
11. U.S. Government agency and corporation obligations (exclude mortgage-backed
securities) 1785 36 11.
12. Securities issued by states and political subdivisions in the U.S. 1786 259 12.
13. Mortgage-backed securities (MBS):
a. Pass-through securities:
(1) Issued or guaranteed by FNMA, FHLMC, or GNMA 1787 2,854,487 13.a.(1)
(2) Other pass-through securities 1869 0 13.a.(2)
b. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS):
(1) Issued or guaranteed by FNMA, FHLMC, or GNMA 1877 284,789 13.b.(1)
(2) All other mortgage-backed securities 2253 2,778 13.b.(2)
14. Other domestic debt securities 3159 0 14.
15. Foreign debt securities 3160 0 15.
16. Equity securities:
a. Investments in mutual funds and other A513 0 16.a.
equity securities with readily determinable fair values
b. All other equity securities 3169 11,784 16.b.
17. Total held-to-maturity and available-for-sale securities (sum of items 10
through 16) 3170 4,024,095 17.
</TABLE>
<TABLE>
<CAPTION>
Memorandum (to be completed only by banks with IBFs and other "foreign" offices)
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
EITHER
1. Net due from the IBF of the domestic offices of the reporting bank 3051 N/A M.1.
OR
2. Net due to the IBF of the domestic offices of the reporting bank 3059 N/A M.2.
</TABLE>
22
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-13
Schedule RC-I--Selected Assets and Liabilities of IBFs
To be completed only by banks with IBFs and other "foreign" offices.
<TABLE>
<CAPTION>
C445
Dollar Amounts in Thousands RCFN Bil Mil Thou
<S> <C> <C> <C>
1. Total IBF assets of the consolidated bank (component of Schedule RC,
item 12) 2133 N/A 1.
2. Total IBF loans and lease financing receivables (component of Schedule RC-C,
part I, item 12, column A) 2076 N/A 2.
3. IBF commercial and industrial loans (component of Schedule RC-C, part I,
item 4, column A) 2077 N/A 3.
4. Total IBF liabilities (component of Schedule RC, item 21) 2898 N/A 4.
5. IBF deposit liabilities due to banks, including other IBFs (component of
Schedule RC-E, part II, items 2 and 3) 2379 N/A 5.
6. Other IBF deposit liabilities (component of Schedule RC-E, part II, items 1,
4, 5, and 6 2381 N/A 6.
</TABLE>
Schedule RC-K-Quarterly Averages (1)
<TABLE>
<CAPTION> C455
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
ASSETS
1. Interest-bearing balances due from depository institutions RCFD 3381 101 1.
2. U.S. Treasury securities and U.S. Government agency and corporation
obligations(2) RCFD 3382 3,943,745 2.
3. Securities issued by states and political subdivisions in the U.S.(2) RCFD 3383 259 3.
4. a. Other debt securities(2) RCFD 3647 2,780 4.a.
b. Equity securities(3) (includes investments in mutual funds and Federal
Reserve stock) RCFD 3648 46,127 4.b.
5. Federal funds sold and securities purchased under agreements to resell RCFD 3365 1,136,591 5.
6. Loans:
a. Loans in domestic offices:
(1) Total loans RCON 3360 12,373,386 6.a.(1)
(2) Loans secured by real estate RCON 3385 2,604,049 6.a.(2)
(3) Loans to finance agricultural production and other loans to farmers RCON 3386 42,646 6.a.(3)
(4) Commercial and industrial loans RCON 3387 6,240,543 6.a.(4)
(5) Loans to individuals for household, family, and other personal expenditures RCON 3388 2,364,819 6.a.(5)
b. Total loans in foreign offices, Edge and Agreement subsidiaries, and IBFs RCFN 3360 130,583 6.b.
7. Trading assets RCFD 3401 29,805 7.
8. Lease financing receivables (net of unearned income) RCFD 3484 139,463 8.
9. Total assets(4) RCFD 3368 20,919,613 9.
LIABILITIES
10. Interest-bearing transaction accounts in domestic offices (NOW accounts,
ATS accounts, and telephone and preauthorized transfer accounts) (exclude
demand deposits) RCON 3485 442,380 10.
11. Nontransaction accounts in domestic offices:
a. Money market deposit accounts (MMDAs) RCON 3486 3,415,342 11.a.
b. Other savings deposits RCON 3487 2,993,671 11.b.
c. Time deposits of $100,000 or more RCON A514 885,489 11.c.
d. Time deposits of less than $100,000 RCON A529 2,603,067 11.d.
12. Interest-bearing deposits in foreign offices, Edge and Agreement
subsidiaries, and IBFs RCFN 3404 386,443 12.
13. Federal funds purchased and securities sold under agreements to repurchase RCFD 3353 1,894,646 13.
14. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases) RCFD 3355 58,585 14.
</TABLE>
__________
(1) For all items, banks have the option of reporting either (1) an
average of daily figures for the quarter, or (2) an average of weekly
figures (i.e., the Wednesday of each week of the quarter).
(2) Quarterly averages for all debt securities should be based on
amortized cost.
(3) Quarterly averages for all equity securities should be based on
historical cost.
(4) The quarterly average for total assets should reflect all debt
securities (not held for trading) at amortized cost, equity securities
with readily determinable fair values at the lower of cost or fair
value, and equity securities without readily determinable fair values
at historical cost.
23
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-14
Schedule RC-L-Off-Balance Sheet Items
Please read carefully the instructions for the preparation of Schedule
RC-L. Some of the amounts reported in Schedule RC-L are regarded as
volume indicators and not necessarily as measures of risk.
<TABLE>
<CAPTION>
C460
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Unused commitments:
a. Revolving, open-end lines secured by 1-4 family residential properties,
e.g., home equity lines 3814 0 1.a.
b. Credit card lines 3815 0 1.b.
c. Commercial real estate, construction, and land development:
(1) Commitments to fund loans secured by real estate 3816 562,959 1.c.(1)
(2) Commitments to fund loans not secured by real estate 6550 389,528 1.c.(2)
d. Securities underwriting 3817 0 1.d.
e. Other unused commitments 3818 8,179,256 1.e.
2. Financial standby letters of credit and foreign office guarantees 3819 1,017,245 2.
a. Amount of financial standby letters of credit conveyed to others RCFD 3820 98,741 2.a.
3. Performance standby letters of credit and foreign office guarantees 3821 149,631 3.
a. Amount of performance standby letters of credit conveyed to others RCFD 3822 2,713 3.a.
4. Commercial and similar letters of credit 3411 137,368 4.
5. Participations in acceptances (as described in the instructions) conveyed to
others by the reporting bank 3428 0 5.
6. Participations in acceptances (as described in the instructions) acquired by
the reporting (nonaccepting) bank 3429 0 6.
7. Securities borrowed 3432 28,936 7.
8. Securities lent (including customers' securities lent where the customer is
indemnified against loss by the reporting bank) 3433 17,975 8.
9. Financial assets transferred with recourse that have been
treated as sold for Call Report purposes:
a. First lien 1-to-4 family residential mortgage loans:
(1) Outstanding principal balance of mortgages transferred as of the report
date A521 0 9.a.(1)
(2) Amount of recourse exposure on these mortgages as of the report date A522 0 9.a.(2)
b. Other financial assets (excluding small business obligations reported in item
9.c):
(1) Outstanding principal balance of assets transferred as of the report
date A523 0 9.b.(1)
(2) Amount of recourse exposure on these assets as of the report date A524 0 9.b.(2)
c. Small business obligations transferred with recourse under Section 208 of the
Reigle Community Development and Regulatory Improvement Act of 1994:
(1) Outstanding principal balance of small business obligations transferred
as of the report date A549 0 9.c.(1)
(2) Amount of retained recourse on these obligations as of the report date A550 0 9.c.(2)
10. When-issued securities:
a. Gross commitments to purchase A534 0 10.a.
b. Gross commitments to sell A535 0 10.b.
11. Spot foreign exchange contracts 8765 816,274 11.
12. All other off-balance sheet liabilities (exclude off-balance sheet
derivatives) (itemize and describe each component of this item over 25% of
Schedule RC, item 28, "Total equity capital") 3430 0 12.
a. TEXT 3555 Mortgage servicing with recourse RCFD 3555 12.a.
b. TEXT 3556 RCFD 3556 12.b.
c. TEXT 3557 RCFD 3557 12.c.
d. TEXT 3558 RCFD 3558 12.d.
</TABLE>
24
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-15
Schedule RC-L--Continued
<TABLE>
<S> <C>
13. All other off-balance sheet assets (exclude off-balance sheet derivatives)
(itemize and describe each component of this item over 25% of Schedule RC,
item 28, "Total equity capital") 5591 0 13.
a. Text 5592 RCFD 5592 13.a.
b. Text 5593 RCFD 5593 13.b.
c. Text 5594 RCFD 5594 13.c.
d. Text 5595 RCFD 5595 13.d.
</TABLE>
<TABLE>
<CAPTION>
C461
(Column A) (Column B) (Column C) (Column D)
Dollar Amounts in Thousands Interest Rate Foreign Exchange Equity Derivative Commodity and
Off-balance Sheet Derivatives Contracts Contracts Contracts Other Contracts
Position Indicators Tril Bil Mil Thou Tril Bil Mil Thou Tril Bil Mil Thou Tril Bil Mil Thou
<S> <C> <C> <C> <C> <C>
14. Gross amounts (e.g., notional amounts)
(for each column, sum of items 14.a
through 14.e must equal sum of items
15,16.a, and 16.b):
a. Future contracts 1,950,000 0 0 0 14.a.
RCFD 8693 RCFD 8694 RCFD 8695 RCFD 8696
b. Forward contracts 0 702,398 0 0 14.b.
RCFD 8697 RCFD 8698 RCFD 8699 RCFD 8700
c. Exchange-traded option contracts:
(1) Written options 500,000 0 0 0 14.c.(1)
RCFD 8701 RCFD 8702 RCFD 8703 RCFD 8704
(2) Purchased options 1,000,000 0 0 0 14.c.(2)
RCFD 8705 RCFD 8706 RCFD 8707 RCFD 8708
d. Over-the-counter option contracts:
(1) Written options 756,751 7,213 0 0 14.d.(1)
RCFD 8709 RCFD 8710 RCFD 8711 RCFD 8712
(2) Purchased options 1,776,751 7,231 0 0 14.d.(2)
RCFD 8713 RCFD 8714 RCFD 8715 RCFD 8716
e. Swaps 5,442,678 0 0 0 14.e.
RCFD 3450 RCFD 3826 RCFD 8719 RCFD 8720
15. Total gross notional amount of derivative
contracts held for trading 4,127,524 716,824 0 0 15.
RCFD A126 RCFD A127 RCFD 8723 RCFD 8724
16. Total gross notional amount of derivative
contracts held for purposes other
than trading:
a. Contracts marked to market 2,145,000 0 0 0 16.a.
RCFD 8725 RCFD 8726 RCFD 8727 RCFD 8728
b. Contracts not marked to market 5,133,656 0 0 0 16.b.
RCFD 8729 RCFD 8730 RCFD 8731 RCFD 8732
</TABLE>
25
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-16
Schedule RC-L--Continued
<TABLE>
<CAPTION>
(Column A) (Column B) (Column C) (Column D)
Dollar Amounts in Thousands Interest Rate Foreign Exchange Equity Derivative Commodity and
Off-balance Sheet Derivatives Contracts Contracts Contracts Other Contracts
Position Indicators RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
17. Gross fair values of
derivative contracts:
a. Contracts held for trading:
(1) Gross positive fair value 8733 24,164 8734 8,584 8735 0 8736 0 17.a.(1)
(2) Gross negative fair value 8737 18,525 8738 7,426 8739 0 8740 0 17.a.(2)
b. Contracts held for purposes
other than trading that
are marked to market:
(1) Gross positive fair value 8741 3,265 8742 0 8743 0 8744 0 17.b.(1)
(2) Gross negative fair value 8745 991 8746 0 8747 0 8748 0 17.b.(2)
c. Contracts held for purposes
other than trading that are
not marked to market:
(1) Gross positive fair value 8749 12,044 8750 0 8751 0 8752 0 17.c.(1)
(2) Gross negative fair value 8753 1,459 8754 0 8755 0 8756 0 17.c.(2)
</TABLE>
<TABLE>
<CAPTION>
Memoranda Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1.-2. Not applicable
3. Unused commitments with an original maturity exceeding one year that are
reported in Schedule RC-L, items 1.a through 1.e, above (report only the
unused portions of commitments that are fee paid or otherwise legally
binding) 3833 5,365,303 M.3.
a. Participations in commitments with an original maturity
exceeding one year conveyed to others RCFD 3834 44,878 M.3.a.
4. To be completed only by banks with $1 billion or more in total assets:
Standby letters of credit and foreign office guarantees (both financial and
performance) issued to non-U.S. addresses (domicile) included in Schedule
RC-L, items 2 and 3, above 3377 47,933 M.4.
5. Installment loans to individuals for household, family, and other personal
expenditures that have been securitized and sold without recourse (with
servicing retained), amounts outstanding by type of loan:
a. Loans to purchase private passenger automobiles (to be completed
for the September report only) 2741 N/A M.5.a.
b. Credit cards and related plans (TO BE COMPLETED QUARTERLY) 2742 0 M.5.b.
c. All other consumer installment credit (including mobile home loans) 2743 N/A M.5.c.
(to be completed for the September report only)
</TABLE>
26
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-17
Schedule RC-M--Memoranda
<TABLE>
<CAPTION>
C465
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Extensions of credit by the reporting bank to its executive officers,
directors, principal shareholders, and their related interests as of the
report date:
a. Aggregate amount of all extensions of credit to all executive officers,
directors, principal shareholders, and their related interests. 6164 22,793 1.a.
b. Number of executive officers, directors, and principal shareholders to whom
the amount of all extensions of credit by the reporting bank (including
extensions of credit to related interests) equals or exceeds the lesser of
$500,000 or 5 percent of total capital as defined for this Number
purpose in agency regulations. RCFD 6165 4 1.b.
2. Federal funds sold and securities purchased under agreements to resell with
U.S. branches and agencies of foreign banks(1) (included in Schedule RC,
items 3.) 3405 0 2.
3. Not applicable.
4. Outstanding principal balance of 1-4 family residential mortgage loans
serviced for others (include both retained servicing and purchased
servicing):
a. Mortgages serviced under a GNMA contract 5500 0 4.a.
b. Mortgages serviced under a FHLMC contract:
(1) Serviced with recourse to servicer 5501 0 4.b.(1)
(2) Serviced without recourse to servicer 5502 0 4.b.(2)
c. Mortgages serviced under a FNMA contract:
(1) Serviced under a regular option contract 5503 0 4.c.(1)
(2) Serviced under a special option contract 5504 0 4.c.(2)
d. Mortgages serviced under other servicing contracts 5505 0 4.d.
5. To be completed only by banks with $1 billion or more in total assets:
Customers' liability to this bank on acceptances outstanding (sum of items
5.a and 5.b must equal Schedule RC, item 9):
a. U.S. addresses (domicile) 2103 5,491 5.a.
b. Non-U.S. addresses (domicile) 2104 4,025 5.b.
6. Intangible assets:
a. Mortgage servicing rights 3164 0 6.a.
b. Other identifiable intangible assets:
(1) Purchased credit card relationships 5506 0 6.b.(1)
(2) All other identifiable intangible assets 5507 90,720 6.b.(2)
c. Goodwill 3163 320,680 6.c.
d. Total (sum of items 6.a through 6.c) (must equal Schedule RC, item 10) 2143 411,400 6.d.
e. Amount of intangible assets (included in item 6.b.(2) above) that have been
grandfathered or are otherwise qualifying for regulatory capital purposes 6442 0 6.e.
7. Mandatory convertible debt, net of common or perpetual preferred stock
dedicated to redeem the debt 3295 0 7.
</TABLE>
__________
(1) Do not report federal funds sold and securities purchased under agreements
to resell with other commercial banks in the U.S. in this item.
27
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-18
Schedule RC-M--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
8. a. Other real estate owned:
(1) Direct and indirect investments in real estate ventures RCFD 5372 0 8.a.(1)
(2) All other real estate owned:
(a) Construction and land development in domestic offices RCON 5508 0 8.a.(2)(a)
(b) Farmland in domestic offices RCON 5509 0 8.a.(2)(b)
(c) 1-4 family residential properties in domestic offices RCON 5510 0 8.a.(2)(c)
(d) Multifamily (5 or more) residential properties in domestic offices RCON 5511 0 8.a.(2)(d)
(e) Nonfarm nonresidential properties in domestic offices RCON 5512 248 8.a.(2)(e)
(f) In foreign offices RCFN 5513 0 8.a.(2)(f)
(3) Total (sum of items 8.a.(1) and 8.a.(2)) (must equal Schedule RC, item 7) RCFD 2150 248 8.a.(3)
b. Investments in unconsolidated subsidiaries and associated companies:
(1) Direct and indirect investments in real estate ventures RCFD 5374 0 8.b.(1)
(2) All other investments in unconsolidated subsidiaries and associated
companies RCFD 5375 0 8.b.(2)
(3) Total (sum of items 8.b.(1) and 8.b.(2)) (must equal Schedule RC, item 8) RCFD 2130 0 8.b.(3)
9. Noncumulative perpetual preferred stock and related surplus included in
Schedule RC, item 23, "Perpetual preferred stock and related surplus" RCFD 3778 0 9.
10. Mutual fund and annuity sales in domestic offices during the quarter
(include proprietary, private label, and third party products):
a. Money market funds RCON 6441 9,683,348 10.a.
b. Equity securities funds RCON 8427 26,129 10.b.
c. Debt securities funds RCON 8428 5,825 10.c.
d. Other mutual funds RCON 8429 79,956 10.d.
e. Annuities RCON 8430 10,658 10.e.
f. Sales of proprietary mutual funds and annuities (included in items 10.a
through 10.e above) RCON 8784 3,872,449 10.f.
11. Net unamortized realized deferred gains (losses) on off-balance sheet derivative
contracts included in assets and liabilities reported in Schedule RC RCFD A525 2,256 11.
12. Amount of assets netted against nondeposit liabilities and deposits in foreign
offices (other than insured branches in Puerto Rico and U.S. territories and
possessions) on the balance sheet (Schedule RC) in accordance with generally
accepted accounting principles (1) RCFD A526 0 12.
</TABLE>
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
Memorandum RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Reciprocal holdings of banking organizations' capital instruments
(to be completed for the December report only) 3836 N/A M.1.
</TABLE>
28
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 00832
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-19
Schedule RC-N--Past Due and Nonaccrual Loans, Leases, and Other Assets
The FFIEC regards the information reported in all of Memorandum item 1, in
items 1 through 10, column A, and in Memorandum items 2 through 4, column A,
as confidential.
<TABLE>
<CAPTION>
C470
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
1. Loans secured by real estate:
a. To U.S. addresses (domicile) 1245 76,203 1246 4,860 1247 25,247 1.a.
b. To non-U.S. addresses (domicile) 1248 0 1249 0 1250 0 1.b.
2. Loans to depository institutions and
acceptances of other banks:
a. To U.S. banks and other U.S. depository
institutions 5377 0 5378 0 5379 0 2.a.
b. To foreign banks 5380 0 5381 0 5382 0 2.b.
3. Loans to finance agricultural production
and other loans to farmers 1594 250 1597 0 1583 1,991 3.
4. Commercial and industrial loans:
a. To U.S. addresses (domicile) 1251 148,447 1252 44,919 1253 59,627 4.a.
b. To non-U.S. addresses (domicile) 1254 453 1255 0 1256 1 4.b.
5. Loans to individuals for household, family,
and other personal expenditures:
a. Credit cards and related plans 5383 1,310 5384 971 5385 0 5.a.
b. Other (includes single payment,
installment and all student loans) 5386 41,725 5387 8,816 5388 2,426 5.b.
6. Loans to foreign governments and official
institutions 5389 0 5390 0 5391 0 6.
7. All other loans 5459 6,287 5460 3,265 5461 1,738 7.
8. Lease financing receivables:
a. Of U.S. addresses (domicile) 1257 0 1258 0 1259 0 8.a.
b. Of non-U.S. addresses (domicile) 1271 0 1272 0 1791 0 8.b.
9. Debt securities and other assets (exclude
other real estate owned and other
repossessed assets) 3505 42 3506 0 3507 0 9.
</TABLE>
Amounts reported in items 1 through 8 above include guaranteed and unguaranteed
portions of past due and nonaccrual loans and leases. Report in item 10 below
certain guaranteed loans and leases that have already been included in the
amounts reported in items 1 through 8.
<TABLE>
<CAPTION>
RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
10. Loans and leases reported in items 1
through 8 above which are wholly or
partially guaranteed by the U.S.
Government. 5612 3,568 5613 2,979 5614 3,770 10.
a. Guaranteed portion of loans and leases
included in item 10 above. 5615 2,876 5616 2,903 5617 3,016 10.a.
</TABLE>
29
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-20
Schedule RC-N--Continued
<TABLE>
<CAPTION> C473
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
Memoranda
Dollar Amounts in Thousands RCFD Bil Mil Tho RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
1. Restructured loans and leases included
in Schedule RC-N, items 1 through 8,
above (and not reported in Schedule RC-C,
part I, Memorandum item 2) 1658 0 1659 0 1661 2,303 M.1.
2. Loans to finance commercial real estate,
construction, and land development
activities (not secured by real estate)
included in Schedule RC-N, items 4
and 7, above 6558 62,264 6559 3,182 6560 954 M.2.
<CAPTION>
RCON Bil Mil Thou RCON Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
3. Loans secured by real estate in domestic
offices
(included in Schedule RC-N, item 1, above):
a. Construction and land development 2759 23,840 2769 0 3492 1,906 M.3.a.
b. Secured by farmland 3493 0 3494 0 3495 411 M.3.b.
c. Secured by 1-4 family residential
properties:
(1) Revolving, open-end loans secured by
1-4 family residential properties and
extended under lines of credit 5398 0 5399 0 5400 0 M.3.c.(1)
(2) All other loans secured by 1-4 family
residential properties 5401 20,724 5402 1,262 5403 10,519 M.3.c.(2)
d. Secured by multifamily (5 or more)
residential properties 3499 7,061 3500 48 3501 900 M.3.d.
e. Secured by nonfarm nonresidential
properties 3502 24,578 3503 3,550 3504 11,511 M.3.e.
</TABLE>
<TABLE>
<CAPTION>
(Column A) (Column B)
Past due 30 Past due 90
through 89 days days or more
RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
4. Interest rate, foreign exchange rate, and
other commodity and equity contracts:
a. Book value of amounts carried as assets 3522 0 3528 0 M.4.a.
b. Replacement cost of contracts with a
positive replacement cost 3529 0 3530 0 M.4.b.
</TABLE>
Person to whom questions about the Reports of Condition and Income should be
directed: C477
Karen Gatenby, Vice President (713)216-5263
Name and Title (TEXT 8901) Area code/phone number/extension
(TEXT 8902)
30
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-21
Schedule RC-O--Other Data for Deposit Insurance Assessments
<TABLE>
<CAPTION> C475
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Unposted debits (see instructions):
a. Actual amount of all unposted debits 0030 N/A 1.a.
or
b. Separate amount of unposted debits:
(1) Actual amount of unposted debits to demand deposits 0031 0 1.b.(1)
(2) Actual amount of unposted debits to time and savings deposits (1) 0032 0 1.b.(2)
2. Unposted credits (see instructions):
a. Actual amount of all unposted credits 3510 N/A 2.a.
or
b. Separate amount of unposted credits:
(1) Actual amount of unposted credits to demand deposits 3512 0 2.b.(1)
(2) Actual amount of unposted credits to time and savings deposits (1) 3514 0 2.b.(2)
3. Uninvested trust funds (cash) held in bank's own trust department (not
included in total deposits in domestic offices) 3520 44,395 3.
4. Deposits of consolidated subsidiaries in domestic offices and in insured
branches in Puerto Rico and U.S. territories and possessions (not included
in total deposits):
a. Demand deposits of consolidated subsidiaries 2211 2,509 4.a.
b. Time and savings deposits (1) of consolidated subsidiaries 2351 17 4.b.
c. Interest accrued and unpaid on deposits of consolidated subsidiaries 5514 0 4.c.
5. Deposits in insured branches in Puerto Rico and U.S. territories and
possessions:
a. Demand deposits in insured branches (included in Schedule RC-E, Part II) 2229 0 5.a.
b. Time and savings deposits (1) in insured branches (included in Schedule
RC-E, Part II) 2383 0 5.b.
c. Interest accrued and unpaid on deposits in insured branches (included in
Schedule RC-G, item 1.b) 5515 0 5.c.
6. Reserve balances actually passed through to the Federal Reserve by the
reporting bank on behalf of its respondent depository institutions that are
also reflected as deposit liabilities of the reporting bank:
a. Amount reflected in demand deposits (included in Schedule RC-E, Part I, item 4 or 5,
column B) 2314 1,473 6.a.
b. Amount reflected in time and savings deposits (1) (included in Schedule
RC-E, Part I, item 4 or 5, column A or C, but not column B) 2315 0 6.b.
7. Unamortized premiums and discounts on time and savings deposits:(1),(2)
a. Unamortized premiums 5516 817 7.a.
b. Unamortized discounts 5517 0 7.b.
8. To be completed by banks with "Oakar deposits."
a. Deposits purchased or acquired from other FDIC-insured institutions during
the quarter (exclude deposits purchased or acquired from foreign offices other
than insured branches in Puerto Rico and U.S. territories and possessions):
(1) Total deposits purchased or acquired from other FDIC-insured institutions
during the quarter A531 N/A 8.a.(1)
(2) Amount of purchased or acquired deposits reported in item 8.a.(1) above
attributable to a secondary fund (i.e., BIF members report deposits
attributable to SAIF; SAIF members report deposits attributable to BIF) A532 N/A 8.a.(2)
b. Total deposits sold or transferred to other FDIC-insured institutions during
the quarter (exclude sales or transfers by the reporting bank of deposits in
foreign offices other than insured branches in Puerto Rico and U.S. territories
and possessions) A533 N/A 8.b.
</TABLE>
__________
(1) For FDIC insurance assessment purposes, "time and savings deposits"
consists of nontransaction accounts and all transaction accounts other than
demand deposits.
(2) Exclude Core deposit intangibles.
31
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-22
Schedule RC-O--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
9. Deposits in lifeline accounts 5596 9.
10. Benefit-responsive "Depository Institution Investment Contracts" (included
in total deposits in domestic offices) 8432 0 10.
11. Adjustments to demand deposits in domestic offices and in insured branches in
Puerto Rico and U.S. territories and possessions reported in Schedule RC-E for
certain reciprocal demand balances:
a. Amount by which demand deposits would be reduced if the reporting bank's
reciprocal demand balances with the domestic offices of U.S. banks and
savings associations and insured branches in Puerto Rico and U.S. territories
and possessions that were reported on a gross basis in Schedule RC-E had
been reported on a net basis 8785 0 11.a.
b. Amount by which demand deposits would be increased if the reporting bank's
reciprocal and the U.S. branches and agencies of foreign banks were reported
on a gross basis rather than a net basis in Schedule RC-E A181 0 11.b.
c. Amount by which demand deposits would be reduced if cash items in process of
collection were included in the calculation of net reciprocal demand
balances between the reporting bank and the domestic offices of U.S. banks
and savings associations in Schedule RC-E A182 0 11.c.
12. Amount of assets netted against deposit liabilities in domestic offices and in
insured branches in Puerto Rico and U.S. territories and possessions on the balance
sheet (Schedule RC) in accordance with generally accepted accounting principles
(exclude amounts related to reciprocal demand balances):
a. Amount of assets netted against demand deposits A527 0 12.a.
b. Amount of assets netted against time and savings deposits A528 0 12.b.
</TABLE>
Memoranda (to be completed each quarter except as noted)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Total deposits in domestic offices of the bank (sum of Memorandum items 1a.
(1) and 1.b.(1) must equal schedule RC, item 13.a):
a. Deposit accounts of $100,000 or less:
(1) Amount of deposit accounts of $100,000 or less 2702 8,482,407 M.1.a.(1)
(2) Number of deposit accounts of $100,000 or less (to be completed for the
June report only) Number
RCON 3779 N/A M.1.a.(2)
b. Deposit accounts of more than $100,000:
(1) Amount of deposit accounts of more than $100,000 2710 8,082,279 M.1.b.(1)
Number
(2) Number of deposit accounts of more than $100,000 RCON 2722 18,642 M.1.b.(2)
2. Estimated amount of uninsured deposits in domestic offices of the bank:
a. An estimate of your bank's uninsured deposits can be determined by
multiplying the number of deposit accounts of more than $100,000 reported
in Memorandum item 1.b.(2) above by $100,000 and subtracting the result from
the amount of deposit accounts of more than $100,000 reported in Memorandum
item 1.b.(1) above.
Indicate in the appropriate box at the right whether your bank has a method or
procedure for determining a better estimate of uninsured deposits than the
estimate described above Yes No
6861 X M.2.a.
b. If the box marked Yes has been checked, report the estimate of uninsured RCON Bil Mil Thou
deposits determined by using your bank's method or procedure 5597 N/A M.2.b.
3. Has the reporting institution been consolidated with a parent bank or savings
association in that parent bank's or parent savings assocation's
Call Report or Thrift Financial Report?
If so, report the legal title and FDIC Certificate Number of the parent bank or
parent savings association: FDIC Cert No.
TEXT A545 N/A RCON A545 N/A M.3.
</TABLE>
32
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-23
Schedule RC-R--Regulatory Capital
This schedule must be completed by all banks as follows: Banks that
reported total assets of $1 billion or more in Schedule RC, item 12,
for June 30, 1996, must complete items 2 through 9 and Memoranda items
1 and 2. Banks with assets of less than $1 billion must complete
items 1 through 3 below or Schedule RC-R in its entirety, depending on
their response to item 1 below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Test for determining the extent to which Schedule RC-R must be completed.
To be completed only by banks with total assets of less than $1 billion. C480
Indicate in the appropriate box at the right whether the bank has total capital Yes No
greater than or equal to eight percent of adjusted total assets. RCFD 6056 1.
</TABLE>
For purposes of this test, adjusted total assets equals total assets
less cash, U.S. Treasuries, U.S. Government agency obligations, and 80
percent of U.S. Government-sponsored agency obligations plus the
allowance for loan and lease losses and selected off-balance sheet
items as reported on Schedule RC-L (see instructions).
If the box marked YES has been checked, then the bank only has to complete
items 2 and 3 below. If the box marked NO has been checked, the bank must
complete the remainder of this schedule.
A NO response to item 1 does not necessarily mean that the bank's actual
risk-based capital ratio is less than eight percent or that the bank is not
in compliance with the risk-based capital guidelines.
NOTE: All banks are required to complete items 2 and 3 below. See optional
worksheet for items 3.a through 3.f.
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C>
2. Portion of qualifying limited-life capital instruments
(original weighted average maturity of at least five
years) that is includible in Tier 2 capital:
a. Subordinated debit(1) and intermediate term preferred stock A515 345,000 2.a.
b. Other limited-life capital instruments A516 0 2.b.
3. Amounts used in calculating regulatory capital ratios
(report amounts determined by the bank for its own
internal regulatory capital analyses consistent with applicable
capital standards):
a. Tier 1 capital 8274 1,422,330 3.a.
b. Tier 2 capital 8275 569,007 3.b.
c. Total risk-based capital 3792 1,991,337 3.c.
d. Excess allowance for loan and lease losses (amount that exceeds
1.25% of gross risk-weighted assets) A222 20,711 3.d.
e. Net risk-weighted assets (gross risk-weighted assets less excess
allowance reported in item 3.d above and all other deductions) A223 17,899,862 3.e.
f. "Average total assets" (quarterly average reported in Schedule RC-K,
item 9, less all assets deducted from Tier 1 capital)(2) A224 20,919,613 3.f.
</TABLE>
Items 4-9 and Memoranda items 1 and 2 are to be completed by banks that
answered NO to item 1 above and by banks with total assets of $1 billion or
more.
<TABLE>
<CAPTION>
(Column A) (Column B)
Assets Credit Equiv-
Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items(2)
RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
4. Assets and credit equivalent amounts of off-balance sheet items
assigned to the Zero percent risk category:
a. Assets recorded on the balance sheet 5163 2,901,114 4.a.
b. Credit equivalent amount of off-balance sheet items 3796 1,350 4.b.
</TABLE>
__________
(1) Exclude mandatory convertible debt reported in Schedule RC-M, item 7.
(2) Do not deduct excess allowance for loan and lease losses.
(3) Do not report in column B the risk-weighted amount of assets reported in
column A.
33
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-24
Schedule RC-R--Continued
<TABLE>
<CAPTION>
(Column A) (Column B)
Assets Credit Equiv-
Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items (1)
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
5. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 20 percent risk category:
a. Assets recorded on the balance sheet 5165 5,874,315 5.a.
b. Credit equivalent amount of off-balance sheet items 3801 161,526 5.b.
6. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 50 percent risk category:
a. Assets recorded on the balance sheet 3802 831,725 6.a.
b. Credit equivalent amount of off-balance sheet items 3803 74,193 6.b.
7. Assets and credit equivalent amounts of off-balance sheet
items assigned to the 100 percent risk category:
a. Assets recorded on the balance sheet 3804 12,608,706 7.a.
b. Credit equivalent amount of off-balance sheet items 3805 3,651,739 7.b.
8. On-balance sheet asset values excluded from and deducted in
the calculation of the risk-based capital ratio (2) 3806 398,381 8.
9. Total assets recorded on the balance sheet (sum of items
4.a, 5.a, 6.a, 7.a, and 8, column A)(must equal Schedule RC,
item 12 plus items 4.b and 4.c) 3807 22,614,241 9.
</TABLE>
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Current credit exposure across all off-balance sheet derivative contracts
covered by the risk-based capital standards 8764 38,506 M.1.
</TABLE>
<TABLE>
<CAPTION>
With a remaining maturity of
(Column A) (Column B) (Column C)
One year or less Over one year Over five years
through five years
RCFD Tril Bil Mil Thou RCFD Tril Bil Mil Thou RCFD Tril Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
2. Notional principal amounts of
off-balance sheet derivative
contracts (3):
a. Interest rate contracts 3809 4,576,413 8766 3,049,237 8767 573,778 M.2.a.
b. Foreign exchange contracts 3812 657,818 8769 9,494 8770 42,299 M.2.b.
c. Gold contracts 8771 0 8772 0 8773 0 M.2.c.
d. Other precious metals contracts 8774 0 8775 0 8776 0 M.2.d.
e. Other commodity contracts 8777 0 8778 0 8779 0 M.2.e.
f. Equity derivative contracts A000 0 A001 0 A002 0 M.2.f.
</TABLE>
__________
(1) Do not report in column B the risk-weighted amount of assets
reported in column A.
(2) Include the difference between the fair value and the amortized
cost of available-for-sale securities in item 8 and report the
amortized cost of these debt securities in items 4 through 7 above.
For available-for-sale equity securities, if fair value exceeds cost,
include the difference between the fair value and the cost in items 8
and report the cost of these equity securities in items 5 through 7
above; if cost exceeds fair value, report the fair value of these
equity securities in items 5 through 7 above and include no amount
in item 8. Item 8 also includes on-balance sheet asset values (or
portions thereof) of off-balance sheet interest rate, foreign exchange
rate, and commodity contracts and those contracts (e.g., futures contracts)
not subject to risk-based capital. Exclude from item 8 margin accounts and
accrued receivables not included in the calculation of credit equivalent
amounts of off-balance sheet derivatives as well as any portion of the
allowance for loan and lease losses in excess of the amount that may be
included in Tier 2 capital.
(3) Exclude foreign exchange contracts with an original maturity of 14
days or less and all futures contracts.
34
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926 FFIEC 031
Page RC-25
Optional Narrative Statement Concerning the Amounts Reported in the
Reports of Condition and Income at close of business on June 30, 1996
Texas Commerce Bank National Association Richmond, Virginia
Legal Title of Bank City State
The management of the reporting bank may, if it wishes, submit a brief
narrative statement on the amounts reported in the Reports of
Condition and Income. This optional statement will be made available
to the public, along with the publicly available data in the Reports
of Condition and Income, in response to any request for individual
bank report data. However, the information reported in column A and
in all of Memorandum item 1 of Schedule RC-N is regarded as
confidential and will not be released to the public. BANKS CHOOSING
TO SUBMIT THE NARRATIVE STATEMENT SHOULD ENSURE THAT THE STATEMENT
DOES NOT CONTAIN THE NAMES OR OTHER IDENTIFICATIONS OF INDIVIDUAL BANK
CUSTOMERS, REFERENCES TO THE AMOUNTS REPORTED IN THE CONFIDENTIAL
ITEMS IN SCHEDULE RC-N, OR ANY OTHER INFORMATION THAT THEY ARE NOT
WILLING TO HAVE MADE PUBLIC OR THAT WOULD COMPROMISE THE PRIVACY OF
THEIR CUSTOMERS. Banks choosing not to make a statement may check the
"No comment" box below and should make no entries of any kind in the
space provided for the narrative statement; i.e., DO NOT enter in this
space such phrases as "No statement," "Not applicable," "N/A," "No
comment," and "None."
The optional statement must be entered on this sheet. The statement
should not exceed 100 words. Further, regardless of the number of
words, the statement must not exceed 750 characters, including
punctuation, indentation, and standard spacing between words and
sentences. If any submission should exceed 750 characters, as
defined, it will be truncated at 750 characters with no notice to the
submitting bank and the truncated statement will appear as the bank's
statement both on agency computerized records and in computer-file
releases to the public.
All information furnished by the bank in the narrative statement must
be accurate and not misleading. Appropriate efforts shall be taken by
the submitting bank to ensure the statement's accuracy. The statement
must be signed, in the space provided below, by a senior officer of
the bank who thereby attests to its accuracy.
If, subsequent to the original submission, material changes are
submitted for the data reported in the Reports of Condition and
Income, the existing narrative statement will be deleted from the
files, and from disclosure; the bank, at its option, may replace it
with a statement, under signature, appropriate to the amended data.
The optional narrative statement will appear in agency records and in
release to the public exactly as submitted (or amended as described in
the preceding paragraph) by the management of the bank (except for the
truncation of statements exceeding the 750-character limit described
above). THE STATEMENT WILL NOT BE EDITED OR SCREENED IN ANY WAY BY
THE SUPERVISORY AGENCIES FOR ACCURACY OR RELEVANCE. DISCLOSURE OF THE
STATEMENT SHALL NOT SIGNIFY THAT ANY FEDERAL SUPERVISORY AGENCY
HAS VERIFIED OR CONFIRMED THE ACCURACY OF THE INFORMATION CONTAINED
THEREIN. A STATEMENT TO THIS EFFECT WILL APPEAR ON ANY PUBLIC RELEASE
OF THE OPTIONAL STATEMENT SUBMITTED BY THE MANAGEMENT OF THE REPORTING
BANK.
No comment [] (RCON 6979) C471 C472
BANK MANAGEMENT STATEMENT (please type or print clearly):
(TEXT 6980)
_____________________________________ _________________
Signature of Executive Officer of Bank Date of Signature
35
Legal Title of Bank: Texas Commerce Bank National Association
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 3/31/97 ST-BK: 48-3926
THIS PAGE IS TO BE COMPLETED BY ALL BANKS
<TABLE>
<S> <C>
CALL NO. 199 31 03-31-97 OMB No. for OCC: 1557-0081
STBK: 48-3926 00373 STCERT: 48-03263 OMB No. For FDIC: 3064-0052
OMB No. For Federal Reserve: 7100-0036
TEXAS COMMERCE BANK NATIONAL ASSOCIATION Expiration Date: 3/31/99
712 MAIN STREET
HOUSTON, TX 77001 SPECIAL REPORT
(Dollar Amounts in Thousands)
Close of Business FDIC Certificate Number
Date
3/31/97 03263 C-700
LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date)
The following information is required by Public Laws 90-44 and 102-
242, but does not constitute a part of the Report of Condition. With
each Report of Condition, these Laws require all banks to furnish a
report of all loans or other extensions of credit to their executive
officers made since the date of the previous Report of Condition.
Data regarding individual loans or other extensions of credit are not
required. If no such loans or other extensions of credit were made
during the period, insert "none" against subitem (a). (Exclude the
first $15,000 of indebtedness of each executive officer under bank
credit card plan.) See Sections 215.2 and 215.3 of Title 12 of the
Code of Federal Regulations (Federal Reserve Board Regulation O) for
the definitions of "executive officer" and "extension of credit,"
respectively. Exclude loans and other extensions of credit to
directors and principal shareholders who are not executive officers.
</TABLE>
<TABLE>
<S> <C> <C> <C>
a. Number of loans made to executive officers since the
previous Call Report date RCFD 3561 0 a.
b. Total dollar amount of above loans (in thousands of
dollars) RCFD 3562 0 b.
c. Range of interest charged on above loans
(example: 9 3/4% = 9.75) RCFD 7701 0.00% to
RCFD 7702 0.00% c.
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE AND TITLE OF OFFICER AUTHORIZED TO SIGN REPORT DATE (Month, Day, Year)
<S> <C>
</TABLE>
<TABLE>
<S> <C>
NAME AND TITLE OF PERSON TO WHOM INQUIRIES MAY BE DIRECTED (TEXT 8903) AREA CODE/PHONE NUMBER/EXTENSION
(TEXT 8904)
Karen Gatenby, Vice President (713)216-5263
</TABLE>
FDIC 8040/53 (6/95)
36
