Filed Pursuant to Rule 424(b)(4)
File Number 333-64385
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 11, 1999)
$341,250,000 (APPROXIMATE)
MERIT SECURITIES CORPORATION
COLLATERALIZED BONDS, SERIES 13
Principal and interest on your bonds are payable on or about the 28th day of
each month, beginning September 1999.
The bonds will be non-recourse. The principal collateral for the bonds will be
approximately $303,975,556 in aggregate unpaid principal balance (as of August
10, 1999) of manufactured housing installment sales contracts, having a weighted
average remaining term to stated maturity of approximately 318 months, and
$75,000,000 of funds intended to be used to acquire more manufactured housing
installment sales contracts that will be pledged to secure the bonds.
The bonds offered by this prospectus are listed below.
MERIT will make one or more REMIC elections with respect to the contracts and
certain other assets securing the bonds. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" on page S-27.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THE PROSPECTUS AND ON
PAGE S-3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE BONDS OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------- ------------- -------------- ----------------- -------------- --------------------- ----------------
Original Weighted Ratings
Principal Class Average Life at Moody's/ Stated Maturity CUSIP
Amount (1) Interest Pricing Speed Fitch (4) Date (5) Number
Rate (2) (3)
- ---------------- ------------- -------------- ----------------- -------------- --------------------- ----------------
<S> <C>
Class A1...... $75,000,000 ____7.04% 0.9/0.9 years Aaa/AAA December 28, 2033 589962 CR8
Class A2...... $35,000,000 ____7.39% 2.2/2.2 years Aaa/AAA December 28, 2030 589962 CS6
Class A3...... $47,000,000 ____7.63% 3.2/3.2 years Aaa/AAA December 28, 2033 589962 CT4
Class A4...... $116,000,000 ____7.88% 4.8/7.9 years Aaa/AAA December 28, 2033 589962 CU1
Class M1...... $41,364,000 ____7.88% 5.0/9.0 years Aa2/AA December 28, 2033 589962 CV9
Class M2...... $26,886,000 ____7.88% 5.0/7.9 years A2/A December 28, 2033 589962 CW7
</TABLE>
(1) Plus or minus 5% depending on the collateral actually pledged to secure the
bonds. After the end of the funding period described herein, the class A1,
class A2, class A3, class A4 and class M1 bonds will be "mortgage related
securities" for SMMEA purposes. The class M2 bonds will not be "mortgage
related securities" for SMMEA purposes. See "LEGAL INVESTMENT
CONSIDERATIONS" on page S-31 and in the Prospectus. All classes of offered
bonds are "ERISA eligible". See "ERISA CONSIDERATIONS" on page S-31.
(2) Subject to a cap described on page S-1 with respect to the class A2, class
A3, class A4, class M1 and class M2 bonds. If MERIT does not exercise its
option to redeem or effect a mandatory purchase of the bonds on the payment
date after the first optional redemption date, the class interest rates
will increase, subject to the cap, by the following amounts per annum:
class A1, class A2, class A3 and class A4, 0.50%; class M1, 0.75%; and
class M2, 1.00%.
(3) At the pricing speed to the first optional redemption date/maturity date.
See "MATURITY AND PREPAYMENT CONSIDERATIONS" on page S-21.
(4) See "RATINGS" on page S-30.
(5) Determined as described under "MATURITY AND PREPAYMENT CONSIDERATIONS" on
page S-21.
The underwriters for the offered bonds (other than $11,000,000 of the Class M2
bonds) will be Lehman Brothers Inc. and Greenwich Capital Markets, Inc. The
underwriters will offer such bonds from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. MERIT expects to deliver such bonds to the underwriters only in book-entry
form through the book-entry facilities of The Depository Trust Company, CEDEL
and Euroclear on or about September 2, 1999. An affiliate of MERIT will purchase
the remainder of the Class M2 bonds and may offer such bonds from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale.
LEHMAN BROTHERS GREENWICH CAPITAL MARKETS
The date of this Prospectus Supplement is August 31, 1999
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
TERMS OF THE BONDS AND THE COLLATERAL.............S-1
RISK FACTORS......................................S-3
DESCRIPTION OF THE BONDS..........................S-5
General........................................S-5
Book-Entry Bonds...............................S-6
The Trustee....................................S-6
Payments of Principal and Interest.............S-6
Collateralization Fund.........................S-8
Pre-Funding Account and Capitalized
Interest Account.............................S-8
Definitions....................................S-8
Events of Default.............................S-12
Losses........................................S-13
Stated Maturity Dates.........................S-13
Optional Redemption...........................S-13
SECURITY FOR THE BONDS...........................S-14
The Collateral................................S-14
The Initial Contracts.........................S-14
Selected Initial Contract Data................S-15
Year 2000 Readiness Disclosure................S-17
Additional Information........................S-17
Subsequent Contracts..........................S-18
Substitution of Contracts.....................S-18
SERVICING OF THE COLLATERAL......................S-18
General.......................................S-18
Advances......................................S-20
Forbearance and Modification Agreements.......S-20
Events of Default.............................S-20
Servicing and Other Compensation and
Expenses......................................S-21
Special Servicer..............................S-21
MATURITY AND PREPAYMENT CONSIDERATIONS...........S-21
Weighted Average Life of the Bonds............S-21
Factors Affecting Prepayments on the
Contracts...................................S-22
Mandatory Prepayment..........................S-22
Modeling Assumptions..........................S-23
YIELD CONSIDERATIONS.............................S-26
General.......................................S-26
Subordination.................................S-27
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..........S-27
Credit Enhancement Provided by
Collateralization Fund and Sale of
Call Right..................................S-28
USE OF PROCEEDS..................................S-29
UNDERWRITING.....................................S-29
LEGAL MATTERS....................................S-30
RATINGS..........................................S-30
ERISA CONSIDERATIONS.............................S-31
LEGAL INVESTMENT CONSIDERATIONS..................S-31
SUMMARY
THE ISSUER. MERIT Securities Corporation is a limited purpose financing company.
THE BONDS. The bonds are non-recourse obligations of MERIT payable only from
payments received with respect to the collateral and do not represent the
obligation of any other entity, nor has any other entity guaranteed payments on
the bonds.
COLLATERAL. The collateral consists principally of manufactured housing
installment sales contracts which MERIT acquired from an affiliate.
TRUSTEE AND CUSTODIAN. Chase Bank of Texas, National Association, will act as
trustee and custodian.
INTEREST PAYMENTS. The trustee will pay interest on the bonds monthly, in order
of seniority.
PRINCIPAL PAYMENTS. The trustee will make principal payments on the bonds
monthly, generally in order of seniority.
SURPLUS. The trustee will release any amounts remaining in the collateral
proceeds account after monthly payments on the bonds to MERIT.
LOSSES. MERIT will incur losses on the collateral if there are defaults and
resulting losses upon disposition of the manufactured homes. Losses will be
borne initially by MERIT to the extent that the collateral value exceeds the
principal balance of the bonds and thereafter by the bonds in reverse order of
seniority.
----------------------------------
This summary provides a very broad overview of the bonds; it does not, however,
contain the specific information you will need to consider in making a decision
whether to invest in the bonds.
If you are considering an investment in the bonds, you should next review the
section "Terms of the Bonds and the Collateral" on page S-1. Before making a
final investment decision, you should review:
o this prospectus supplement -- for more detailed information on the bonds and
the collateral.
o the prospectus -- for general information, some of which may not apply to
the collateral.
<PAGE>
MERIT has included "forward-looking statements" in this Prospectus Supplement.
Section 27A of the Securities Act of 1933 defines "forward looking statements"
to include statements containing projections of various financial items. Such
statements are qualified by important factors discussed in connection therewith
that could cause actual results to differ materially from those in the
forward-looking statements.
<PAGE>
TERMS OF THE BONDS AND THE COLLATERAL
This term sheet provides an overview. It does not contain all the information
that you need to consider in making your investment decision. To understand the
terms of the bonds and the characteristics of the manufactured housing
installment sales contracts and the additional security for the bonds, read
carefully the entire prospectus supplement and the accompanying prospectus.
THE BONDS
The bonds consist of the offered bonds listed on the cover page and the class B1
bonds, which are not offered hereby.
PAYMENT DATES The 28th day of each month (or, if not a business day, then the
next business day).
INTEREST
CLASS INTEREST RATES. The class interest rates per annum for the offered bonds
are set forth on the cover page, except that on any payment date the class
interest rates on the class A2, class A3, class A4, class M1 and class M2 bonds
will be capped at the weighted average net interest rate on the contracts.
COMPUTATION. Interest will be computed on the basis of a 360-day year consisting
of twelve 30-day months.
ACCRUAL PERIOD. Interest is payable on each payment date for the period
commencing on the 1st day of the preceding month through the last day of such
month.
PRINCIPAL
On each payment date, the trustee will apply the PRINCIPAL PAYMENT AMOUNT,
derived generally from principal payments on the manufactured housing
installment sales contracts, to pay principal to the bonds.
See "DESCRIPTION OF THE BONDS -- Payments of Principal and Interest" on page
S-6.
REDEMPTION
MERIT may, at its option, redeem the bonds in whole, but not in part, or an
affiliate of MERIT may effect a mandatory purchase of any class of the bonds in
whole, but not in part, on any payment date on or after the earlier of (1) the
payment date in August 2004 and (2) the payment date on which, after taking into
account payments of principal to be made on such payment date, the aggregate
outstanding principal balance of the bonds is less than 35% of the initial
aggregate principal balance of the bonds.
The redemption price will be 100% of the aggregate outstanding principal balance
of the bonds redeemed, plus accrued and unpaid interest.
See "DESCRIPTION OF THE BONDS -- Optional Redemption" on page S-13 and
"DESCRIPTION OF THE BONDs -- Redemption" in the Prospectus.
DENOMINATIONS
MERIT will issue the bonds in book-entry form in minimum denominations of
$100,000 and in integral multiples of $1,000 in excess thereof. See "DESCRIPTION
OF THE BONDS -- Book-Entry Bonds" on page S-6 and "DESCRIPTION OF THe BONDS --
Book-Entry Procedures" in the Prospectus.
THE COLLATERAL
The collateral for the bonds is approximately $303,975,556 principal amount of
initial manufactured housing installment sales contracts (as of August 10, 1999)
and $75,000,000 of funds which are intended to be used to acquire up to
approximately $85,714,000 of manufactured housing installment sales contracts
before November 26, 1999. The contracts will consist of the initial contracts
and any subsequent contracts purchased by MERIT. The purchase of subsequent
contracts will increase the aggregate principal balance of the contracts and
decrease the amount in the pre-funding account by an offsetting amount.
To the extent MERIT does not use the entire $75,000,000 to purchase additional
contracts, the remaining amount will be applied to pay down principal of the
bonds not later than the November 1999 payment date.
A. INITIAL CONTRACTS
WHENEVER THERE IS A REFERENCE IN THIS PROSPECTUS SUPPLEMENT TO A PERCENTAGE OF,
OR TO THE CHARACTERISTICS OF, THE INITIAL CONTRACTS, THE CALCULATIONS ARE
APPROXIMATE AND ARE BASED ON THE UNPAID PRINCIPAL BALANCES OF THE INITIAL
CONTRACTS AS OF AUGUST 10, 1999, WHEN THE AGGREGATE UNPAID PRINCIPAL BALANCE OF
THE INTIAL CONTRACTS WAS EXPECTED TO BE $303,975,556. HOWEVER, THE CONTRACTS ON
WHICH THOSE CALCULATIONS ARE BASED DO NOT INCLUDE INITIAL CONTRACTS PLEDGED TO
SECURE THE BONDS AND ACQUIRED BY MERIT PRIOR TO THE CLOSING DATE BUT AFTER THOSE
CALCULATIONS WERE MADE. IN ADDITION, CERTAIN CONTRACTS ON WHICH THOSE
CALCULATIONS ARE BASED MAY BE INCLUDED AMONG THE
S-1
<PAGE>
INITIAL CONTRACTS PLEDGED TO SECURE THE BONDS AS OF THE CLOSING DATE. THE
INITIAL CONTRACTS ARE NOW EXPECTED TO HAVE AN AGGREGATE UNPAID PRINCIPAL
BALANCE OF APPROXIMATELY $322,453,213 AS OF AUGUST 10, 1999. SEE "SECURITY FOR
THE BONDS" -- Additional Information" ON PAGE S-17.
THE INITIAL CONTRACTS WILL HAVE THE CHARACTERISTICS SET FORTH BELOW.
Aggregate unpaid principal balances: $303,975,556
Average unpaid principal balance: $44,617
Range of unpaid principal balances: $773 to $165,506
Weighted average loan-to-value ratio: 87.27%
Range of interest rates: 5.75 % to 14.25%
Weighted average interest rate: 8.88%
Weighted average remaining amortization term: 318 months
Range of remaining amortization terms: 23 to 360 months
Administrative cost rate (including the servicing fee): 1.02%
Administrative cost rate (excluding the servicing fee): 0.02%
ADMINISTRATIVE COST RATE
The administrative cost rate per annum with respect to each contract equals the
sum of (1) the servicing fee rate (if Dynex Services is no longer the Servicer)
(2) master servicing fee rate, (3) the rate used to calculate certain
administrative expenses applicable to such contract and (4) the fees of any
special servicer.
B. COLLATERAL PROCEEDS ACCOUNT
The servicer of the contracts must remit collections and advances on the
contracts monthly to the master servicer, who in turn must remit collections and
advances to the collateral proceeds account held by the trustee. The trustee
will apply collections and advances to the payment of interest and principal due
on the bonds and certain administrative fees and expenses. After making required
payments on each payment date, the trustee will release any remaining amounts to
MERIT. See "SECURITY FOR THE BONDS -- Collateral Proceeds Account" in the
Prospectus.
C. CREDIT ENHANCEMENT; SUBORDINATION
Credit enhancement for the class A1, class A2, class A3 and class A4 bonds will
be provided through (1) limited overcollateralization, I.E., the pledge of
collateral having a principal amount in excess of the original principal balance
of the bonds and the deposit of other assets in the collateralization fund as
described below, (2) the excess of interest received on the collateral over
interest paid on the bonds on any payment date and (3) the subordination of the
class B1, class M2 and class M1 bonds. Credit enhancement for the class M1 and
class M2 bonds will be provided through (1) the limited overcollateralization
and excess interest described above and (2) in the case of the class M1 bonds,
the subordination of the class B1 and class M2 bonds and (3) in the case of the
class M2 bonds, the subordination of the class B1 bonds. Losses borne by the
bonds will be borne in reverse order of seniority.
On the closing date, MERIT expects to deposit in the collateralization fund
(which will not be part of the REMIC), as additional security for the bonds,
manufactured housing installment sales contracts with an unpaid principal
balance as of August 10, 1999, equal to approximately $15,104,304 (of which
approximately $5,064,894 are nonperforming). For purposes of calculating the
value of the fund, the contracts initially deposited will be deemed to have a
balance equal to 34.97% of their principal balances. On that basis, the initial
balance in this fund is deemed to be approximately $5,281,975. MERIT may
substitute eligible investments (as defined in the indenture) for the assets
initially deposited in the collateralization fund. MERIT will not have any other
obligation to make deposits to the collateralization fund.
The collateralization fund balance and actual percentages may be lower or higher
depending on the final requirements of the rating agencies. See "DESCRIPTION OF
THE BONDS -- Collateralization Fund" on page S-8.
SERVICERS AND MASTER SERVICER
Dynex Financial, Inc., doing business as Dynex Services, an affiliate of MERIT,
services all the contracts; GreenPoint Credit Corp. is the stand-by servicer for
the contracts.
Dynex Capital, Inc., an affiliate of MERIT, serves as master servicer and
Norwest Bank Minnesota, National Association, serves as stand-by master
servicer.
The servicer (and the stand-by servicer) will be entitled to a servicing fee and
the master servicer (and the stand-by master servicer) will be entitled to a
master servicing fee from interest collected on the contracts.
ADVANCES
On or before each payment date, the servicer must (subject to the
limitations provided in its servicing agreement) make a cash advance with
respect to any delinquent contract in an amount equal to the sum of (1) the
scheduled payment (the interest portion only in the case of simple interest
contracts and, in any case, without deduction for the servicing fee so long
S-2
<PAGE>
as Dynex Services is the servicer of the contracts), (2) amounts for the payment
of assessments, insurance premiums and property protection expenses and (3)
amounts to cover expenses relating to foreclosure and liquidation. The master
servicer and the trustee (in that order) must make any required advance if it
has not otherwise been made. Norwest, as stand-by master servicer, will not be
obligated to pay any advances. In addition, neither the master servicer nor the
trustee must make any advance if it has determined in its good faith business
judgment that such advance would not be recoverable from proceeds of the
collateral. See "SERVICING OF THE COLLATERAL" in the Prospectus.
S-3
<PAGE>
RISK FACTORS
Prospective bondholders should consider the following factors (as well as the
factors set forth under "RISK FACTORS" in the Prospectus) in connection with a
purchase of the bonds.
<TABLE>
<S> <C>
YOU MAY HAVE Manufactured housing generally depreciates in value. If it does, the market values of the
LOSSES ON YOUR manufactured homes could be less than the principal balances of the contracts that they
BONDS IF THE secure. This may cause more defaults and may increase the amount of loss following default.
LOSSES AND In such event, MERIT may not be able to recover the full amount owed, which may result in a
DELINQUENCIES ON loss on your bonds. See "RISK FACTORS-- Manufactured Housing Loans" in the Prospectus for a
CONTRACTS EXCEED discussion of other risk factors relating to manufactured housing contracts.
CERTAIN LEVELS
SUBORDINATION Under the cash flow mechanics of the indenture:
MECHANICS PLACE o the class M1 bonds will receive payments only after required payments are made to
RISK OF LOSS ON the class A1, class A2, class A3 and class A4 bonds; and
THE CLASS M1 AND o the class M2 bonds will receive payments only after required payments are made to
CLASS M2 the class A1, class A2, class A3, class A4 and the class M1 bonds.
If the trustee does not have sufficient funds to pay
interest to all classes of bonds, the shortfall will be
borne by the bonds in reverse order of seniority (beginning
with the class B1 bonds). If the servicer disposes of a
contract at a loss, the aggregate principal balances of the
bonds may exceed the aggregate unpaid principal balances of
the contracts. You should fully consider the subordination
risks associated with an investment in the class M1 or
class M2 bonds, including the possibility that you may not
fully recover your initial investment if losses on the
contracts exceed the principal balances of subordinated
classes of bonds that are not offered hereby.
UNCERTAIN TIMING Unlike standard corporate bonds, principal payments on the bonds are not fixed and will be
OF PRINCIPAL determined by, among other things:
PAYMENTS MAY o the timing and amount of principal payments (including prepayments, defaults,
RESULT IN liquidations and repurchases) on the contracts, which are subject to a variety of
REINVESTMENT RISK economic, geographic, legal, tax, and social factors primarily because the contracts are
generally prepayable by the borrowers at any time; and
o the principal payment structure (including redemption provisions) of the bonds.
Faster prepayment rates, which are generally associated
with a declining interest rate environment, will reduce the
weighted average life of the bonds. If there is a significant
decline in prevailing interest rates, the price of a bond that is trading at or
above par will not increase to the same extent as the price
of a standard corporate bond with a comparable interest
rate. Furthermore, bondholders will be unable to achieve
comparable yields on the available investment alternatives
in such a reduced interest rate environment. Conversely,
slower prepayment rates, which are generally associated
with an increasing interest rate environment, will increase
the weighted average life of the bonds and decrease the
funds available to a bondholder to reinvest in higher
yielding investment alternatives.
Furthermore, MERIT will apply any funds remaining in the pre-funding account at the
end of the funding period which it does not use to purchase
subsequent contracts to pay down the principal of the
bonds.
See "MATURITY AND PREPAYMENT CONSIDERATIONS" on page
S-21 and "YIELD CONSIDERATIONS" on page S-26. See also
"YIELD CONSIDERATIONS" and "RISK FACTORS -- Average Life
and Yield Considerations" in the Prospectus.
S-4
<PAGE>
TERMINATION OF The initial term of the servicing agreement with Dynex Services
SERVICER AND and the master servicing agreement with Dynex expires December 31,
MASTER 1999. Those agreements may be renewed for subsequent quarterly
SERVICER terms by the trustee, but only if the trustee receives a letter from
Fitch IBCA, Inc., in its capacity as one of the rating
agencies, confirming that such renewal will not result in a
downgrading of its rating of any of the bonds. In addition,
the servicing agreement includes triggers that may result
in termination if Dynex Services' servicing performance
does not meet required standards. If either agreement is
not renewed or is terminated, there may be disruptions in
the administration of the contracts. In particular, it is
likely that delinquencies on the contracts will increase
temporarily, possibly resulting in increased losses, until
the stand-by servicer has completed the logistical
processes necessary to render it fully capable of servicing
the contracts effectively. See "SERVICING OF THE COLLATERAL
-- General -- TERMS OF SERVICING AND MASTer SERVICING
ARRANGEMENTS" on page S-20. Furthermore, if the stand-by
servicer becomes the servicer, the cap on the class
interest rate on the class M1 and class M2 bonds would be
reduced by 1% because the weighted average net rate on the
contracts would thereafter be calculated after deducting
the servicing fee.
MATURITY OF Dynex, the master servicer and MERIT's and IHC's parent corporation,
IMPORTANT DYNEX currently has recourse credit facilities aggregating in excess
CREDIT FACILITIES of $1 billion. Dynex has not obtained replacement
financing for a $100 million credit facility secured by loans serviced by AutoBond
Acceptance Corp., that expires in September 1999.
Dynex has obtained a temporary injunction to compel
AutoBond and its affiliates to release to Dynex the related
loan files and servicing rights. Nevertheless, Dynex can
give no assurance as to when it will actually obtain the
related loan files and servicing rights. Dynex believes
that, if AutoBond and its affiliates do not release the
servicing files, it will be difficult for Dynex to secure
replacement financing for its credit facility that expires
in September 1999. Moreover, regardless of the location of
the servicing files, it may be difficult for Dynex to
secure such replacement financing.
Dynex's credit facilities contain "cross-default"
provisions that cause a default on any one credit facility
to be a default on each. If Dynex does not secure new
sources of credit or obtain an extension of existing
facilities, it may default on one or more of its
facilities, including the credit facility that expires in
September 1999. If a default occurs, Dynex may not be able
to master service the contracts and payments to bondholders
may be delayed or challenged.
DYNEX IS PROPOSING Dynex announced during the second quarter of 1999 that it had retained Lehman Brothers Inc.,
TO SELL DYNEX one of the underwriters of the offered bonds, as an advisor to assist in the sale of Dynex
FINANCIAL, INC. Financial, Inc. (which includes the servicer of the contracts, Dynex Services). Dynex has
not yet identified a purchaser for Dynex Financial, Inc. Dynex can give no assurances as to
when or if Dynex Financial, Inc. will be sold or what the effect of a sale would be on the
servicing of the contracts securing the bonds.
BONDS ARE The bonds will be non-recourse obligations of MERIT. The bondholders will have no rights or
NON-RECOURSE claims against MERIT directly for the payment of principal of and interest on the bonds and
may look only to the collateral pledged to the trustee as
security for the bonds to satisfy MERIT's obligations to
make interest and principal payments on the bonds. No other
person has guaranteed or insured the bonds. The bonds will
be particularly sensitive to the loss experience of the
collateral.
Each bondholder will be deemed, by acceptance
of its bond, to have agreed not to file or cause a filing
against MERIT of an involuntary petition under any
bankruptcy or receivership law for a period of one year and
one day following the payment in full of the bonds and any
other bonds of MERIT.
See "YIELD CONSIDERATIONS -- Subordination" on page S-27.
S-5
<PAGE>
INSOLVENCY OF THE MERIT believes that the transfer of the collateral by Issuer
SELLER COULD Holding Corp., an affiliate of MERIT, to MERIT constitutes an
CAUSE PAYMENT absolute and unconditional sale. Nevertheless, in the event of
DELAYS the bankruptcy of Issuer Holding Corp., a trustee in bankruptcy, or Issuer
Holding Corp. itself as debtor-in-possession, could attempt to
recharacterize the sale as a borrowing secured by a pledge
of that collateral. Such an attempt, even if unsuccessful,
could result in delays in payments on the bonds.
Furthermore, if such an attempt were successful, the
trustee in bankruptcy, or Issuer Holding Corp. itself as
debtor-in-possession, 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 balance, if any, of such bonds together with
interest at the applicable class interest rate to the date
of payment. In the event of an acceleration of the bonds,
the holders of the bonds would lose the right to future
distributions of interest and might suffer reinvestment
risk in a lower interest rate environment.
DELINQUENCIES MAY Approximately 1.36% of the initial contracts were delinquent
INDICATE RISK by one or more scheduled payments as of August 10, 1999. The
OF FUTURE LOSSES inclusion of delinquent contracts may affect the rate of defaults
on the collateral for the bonds and result in increased losses on the
collateral. Defaults may result in principal prepayments on the bonds,
may result in losses on the bonds and may affect the yield
on the bonds. See "SECURITY FOR THE BONDS --The Initial
Contracts" on page S-14.
GEOGRAPHIC The initial contracts are secured by properties located in Texas
CONCENTRATION (19%), North Carolina (13%), Georgia (10%), South Carolina
MAY INCREASE (8%) and Michigan (7%). Consequently, prepayments and losses on
RISK OF LOSS the contracts and resulting payments and potential losses on the bonds may be
affected significantly by changes in the housing markets and the regional
economy of, and by the occurrence of natural disasters in, those states.
NO SECONDARY There is currently no secondary market for the bonds. The
MARKET MAY underwriters intend to establish a market in the bonds but
DEVELOP FOR are not obligated to do so. There is no assurance that any such
THE BONDS market, if established, will continue or that any investor will be able to sell
any of the bonds at a price equal to or greater than the price at
which they were purchased.
COMPUTER RISKS The master servicer and the servicer have each taken action
ASSOCIATED intended to assure that their computer systems are "year 2000
WITH YEAR 2000 compliant". See "SECURITY FOR THE BONDS -- Year 2000 Readiness
Disclosure" on page S-17. Nevertheless, if its computer systems or the computer
systems of other financial intermediaries are not "year
2000 compliant" MERIT could experience disruptions in
collecting payments on the contracts and in making payments
on the bonds. See "DESCRIPTION OF THE BONDS -- Book-Entry
Bonds -- DTC YEAR 2000 COMPLIANCE" on page S-6.
NEW LEGISLATION In July 1999, the President signed into law the Year 2000 Act,
COULD CAUSE which generally limits legal liability for losses caused by
DELAYS IN year 2000 computer-related errors. Among other things, the
PAYMENTS TO YOU legislation provides a grace period from foreclosures for delinquent obligors
whose monthly payments are not processed in an accurate or timely manner
because of an actual year 2000 computer failure.
The Year 2000 Act does not extinguish an obligor's payment
obligations but only delays their enforcement. The Year
2000 Act could delay the servicer's ability to repossess or
foreclose upon some manufactured homes during the first
quarter of the year 2000. These delays, in turn, could
delay payment to you.
</TABLE>
S-6
<PAGE>
DESCRIPTION OF THE BONDS
GENERAL
The following summary of the provisions of the Bonds and the Indenture does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Prospectus and the Indenture. Reference is
made to the Prospectus for important information in addition to that set forth
herein regarding the terms and conditions of the Bonds.
The Bonds will be non-recourse obligations of MERIT. See "RISK FACTORS -- Bonds
are non-recourse" on page S-4.
The majority of the capitalized terms used in the balance of this Prospectus
Supplement are defined under "-- Definitions", on page S-8 and "-- SECURITY FOR
THE BONDs -- The Collateral" on page S-14.
BOOK-ENTRY BONDS
GENERAL. The Bonds will be Book-Entry Bonds, which will be represented by one or
more certificates registered in the name of a nominee of The Depository Trust
Company ("DTC"), and beneficial interests therein will be held by investors
through the book-entry facilities of DTC, as described herein, in minimum
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
except that, for each Class of Bonds, one Bond may be issued in a different
denomination. MERIT has been informed by DTC that its nominee will be Cede & Co.
("Cede"). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Bonds. No person acquiring a Book-Entry Bond (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Bond. A beneficial owner's interest in a Bond will be evidenced by appropriate
entries on the books and records of one or more financial intermediaries
(including a DTC Participant). Payments on Book-Entry Bonds will be effected by
credits to accounts maintained on the books and records of such financial
intermediaries for the benefit of the beneficial owners. See "DESCRIPTION OF THE
BONDS -- Book-Entry Procedures" in the Prospectus.
DTC YEAR 2000 COMPLIANCE. DTC management is aware that some computer
applications, systems, and the like for processing data ("Systems") that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems". DTC has informed its Participants and
other members of the financial community (the "Industry") that it has developed
and is implementing a program so that its Systems, as the same relate to the
timely payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("DTC Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent upon
other parties, including, but not limited to, issuers and their agents, as well
as third party vendors from whom DTC licenses software and hardware, and third
party vendors on whom DTC relies for information or the provision of services,
including telecommunication and electrical utility service providers, among
others. DTC has informed the Industry that it is contacting (and will continue
to contact) third party vendors from whom DTC acquires services to: (i) impress
upon them the importance of such services being Year 2000 compliant; and (ii)
determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
THE TRUSTEE
Chase Bank of Texas, National Association, will act as Trustee for the Bonds. As
of the date of this Prospectus Supplement, the mailing address of the Trustee's
corporate trust office is 600 Travis, 10th Floor, Houston, Texas 77002, and its
telephone number is (713) 216-4181.
S-7
<PAGE>
PAYMENTS OF PRINCIPAL AND INTEREST
PAYMENT DATES
The Payment Dates for the Bonds will be the 28th day of each month (or, if such
day is not a Business Day, then the next succeeding Business Day), commencing
September 1999. For accounting purposes, the Payment Date will be deemed to
occur on the 28th day of the month without regard to whether such day is a
Business Day.
INTEREST PAYMENTS
Interest on each Class of Bonds will be determined based on a 360-day year of
twelve 30-day months. The interest payable on any Class on any Payment Date will
be the interest accrued on the respective outstanding principal balance at the
respective Class Interest Rate during the applicable Accrual Period.
Interest payments allocated to a Class of Bonds on any Payment Date will be paid
to the Holders of the Bonds of such Class PRO RATA in the proportion that the
outstanding principal balance of each Bond of such Class bears to the aggregate
outstanding principal balance of all Bonds of such Class.
On each Payment Date, the Interest Payment Amount will be applied in the
following order of priority:
First, to pay Current Interest with respect to the Class A1, Class A2,
Class A3 and Class A4 Bonds PRO RATA (based on the amounts of
Current Interest then due on the Class A1, Class A2, Class A3 and
Class A4 Bonds, respectively);
Second, to pay Current Interest with respect to the Class M1 Bonds;
Third, to pay Current Interest with respect to the Class M2 Bonds;
Fourth, to pay Current Interest with respect to the Class B1 Bonds;
Fifth, so long as Dynex Services is the Servicer, to pay the Servicing
Fees with respect to the Contracts;
Sixth, to be included in the Principal Payment Amount to the extent
required by the definition thereof; and
Seventh, any remainder to be applied in accordance with the Indenture,
after which it will no longer serve as security for the Bonds.
PRINCIPAL PAYMENTS
Principal payments allocated to a Class of Bonds on any Payment Date will be
paid to the Holders of the Bonds of such Class PRO RATA in the proportion that
the outstanding principal balance of each Bond of such Class bears to the
aggregate outstanding principal balance of all Bonds of such Class.
On each Payment Date prior to September 2004, the Principal Payment Amount will
be applied in the following order of priority:
First, to pay the Class A1, Class A2, Class A3 and Class A4 Bonds until
paid in full, the Principal Payment Amount to be paid sequentially
in that order so that no such payment will be made to the Class A2,
Class A3 and Class A4 Bonds until the Class A1 Bonds are paid in
full, no such payment will be made to the Class A3 and Class A4
Bonds until the Class A2 Bonds are paid in full and no such payment
will be made to the Class A4 Bonds until the Class A3 Bonds are
paid in full; PROVIDED, HOWEVER, that, on any Payment Date on which
the aggregate principal balance of the Class A1, Class A2, Class A3
and Class A4 Bonds is equal to or greater than the aggregate Unpaid
Principal Balance of the Contracts, the Principal Payment Amount
will be paid PRO RATA to the Class A1, Class A2, Class A3 and Class
A4 Bonds (based on principal balances);
Second, to pay the Class M1 Bonds until paid in full;
Third, to pay the Class M2 Bonds until paid in full;
First, to pay the Class B1 Bonds until paid in full; and
Second, any remainder to be applied in accordance with the Indenture, after
which it will no longer serve as security for the Bonds.
S-8
<PAGE>
On each Payment Date on and after the September 2004 Payment Date, the Principal
Payment Amount will be applied in the following order of priority:
First, to pay the Senior Principal Payment Amount to the Class A1, Class
A2, Class A3 and Class A4 Bonds until paid in full, the Senior
Principal Payment Amount to be paid sequentially in that order so
that no such payment will be made to the Class A2, Class A3 and
Class A4 Bonds until the Class A1 Bonds are paid in full, no such
payment will be made to the Class A3 and Class A4 Bonds until the
Class A2 Bonds are paid in full and no such payment will be made
to the Class A4 Bonds until the Class A3 Bonds are paid in full;
PROVIDED, HOWEVER, that, on any Payment Date on which the aggregate
principal balance of the Class A1, Class A2, Class A3 and Class A4
Bonds is equal to or greater than the aggregate Unpaid Principal
Balance of the Contracts, the Senior Principal Payment Amount
will be paid PRO RATA to the Class A1, Class A2, Class A3 and Class
A4 Bonds (based on principal balances);
Second, to pay the Class M1 Principal Payment Amount to the Class M1 Bonds
until paid in full;
Third, to pay the Class M2 Principal Payment Amount to the Class M2 Bonds
until paid in full;
Fourth, to pay the Class B1 Principal Payment Amount to the Class B1 Bonds
until paid in full;
First, to pay the Overcollateralization Principal Payment Amount as
follows: (a) first, to pay principal of the Class B1 Bonds until
paid in full; (b) second, to pay principal of the Class M2 Bonds
until paid in full; (c) third, to pay principal of the Class M1
Bonds until paid in full; (d) fourth, to pay principal of the Class
A1, Class A2, Class A3 and Class A4 Bonds, sequentially in that
order, in each case until paid in full; and
Second, any remainder to be applied in accordance with the Indenture, after
which it will no longer serve as security for the Bonds.
COLLATERALIZATION FUND
On the Closing Date, MERIT will establish a fund (the "Collateralization Fund"),
which will not be part of the REMIC, with the Trustee and deposit therein, as
additional security for the Bonds, manufactured housing installment sales
contracts with an unpaid principal balance as of August 10, 1999, equal to
approximately $15,104,304 (of which approximately $5,064,894 are nonperforming).
For purposes of calculating the balance on deposit in the Collateralization
Fund, the balance of the contracts initially deposited is deemed to be 34.97% of
their outstanding principal balance. On that basis, the balance initially
deposited in the Collateralization Fund is deemed to be approximately
$5,281,975. MERIT may substitute Eligible Investments for the assets initially
deposited in the Collateralization Fund and invest all payments received with
respect to such assets in Eligible Investments. MERIT will not have any other
obligation to make deposits to the Collateralization Fund. The actual percentage
and Collateralization Fund balance may be higher or lower depending on the final
requirements of the Rating Agencies.
On each Payment Date, the Trustee is required, based on written information
provided to the Trustee by the Master Servicer prior to each Payment Date: (a)
to apply interest earnings on assets in the Collateralization Fund (i) first, to
pay interest on the Bonds if the portion of Available Funds attributable to
interest is less than Current Interest on all Classes of the Bonds and (ii)
second, to increase the Principal Payment Amount to the extent required by the
definition thereof; (b) to apply any amounts attributable to principal payments
received with respect to the assets on deposit to the Collateralization Fund to
increase the Principal Payment Amount to the extent required by the definition
thereof; and (c) to release from the Collateralization Fund any interest
earnings on assets on deposit in the Collateralization Fund not required to be
applied as set forth in clause (a) above. Once released from the
Collateralization Fund, such amount will not be available to make payments on
the Bonds.
PRE-FUNDING ACCOUNT AND CAPITALIZED INTEREST ACCOUNT
On the Closing Date, MERIT will establish with the Trustee two funds (the
"Pre-Funding Account" and the "Capitalized Interest Account"). The Pre-Funding
Account and the Capitalized Interest Account will not be part of the REMIC.
S-9
<PAGE>
MERIT will deposit $75,000,000 in the Pre-Funding Account on the Closing Date.
During the Funding Period, MERIT may use money in the Pre-Funding Account to
purchase manufactured housing installment sales contracts ("Subsequent
Contracts") at a purchase price equal to 87.50% of the Unpaid Principal Balance
of such Subsequent Contracts. Any balance remaining in the Pre-Funding Account
at the end of the Funding Period will be added to the Principal Payment Amount
on the next Payment Date resulting in an additional prepayment of the principal
balance of the Bonds.
MERIT will deposit approximately $1,430,625 in the Capitalized Interest Account.
On each Payment Date during the Funding Period the Trustee will withdraw an
amount equal to 1/12 of 7.63% of the Pre-Funded Amount from the Capitalized
Interest Account and deposit such amount in the Collateral Proceeds Account. Any
balance in the Capitalized Interest Account at the end of the Funding Period
will be paid to MERIT.
DEFINITIONS
"Administrative Cost Rate": The administrative cost rate per annum with respect
to each Contract equals the sum of (1) if the appointment of Dynex Services as
Servicer is not renewed, the Servicing Fee Rate (see "SERVICING OF THE
COLLATERAL -- General -- TERMS OF SERVICING AND MASTER SERVICING ARRANGEMENTS"
on page S-20), (2) the MasteR Servicing Fee Rate, (3) the rate used to calculate
certain administrative expenses applicable to such Contract and (4) the fees of
any special servicer.
"Available Funds": On each Payment Date, (a) payments of the principal and
interest (at the Net Rate) received in respect of the Contracts during the
related Due Period and deposited in the Collateral Proceeds Account less (b) any
reimbursement for Advances made by the Servicer, the Master Servicer and the
Trustee and, from and after the occurrence of an Event of Default, all sums due
under the Indenture to the Trustee.
"Bonds": The Offered Bonds shown on the cover page and $20,682,000 principal
amount of the Class B1 Bonds, which are not offered hereby.
"Class B1 Percentage" With respect to any Payment Date: (a) zero, if the Senior
Principal Balance, the Class M1 Principal Balance and the Class M2 Principal
Balance have not yet been reduced to zero after application of principal on the
current Payment Date and the Class B1 Principal Payment Test is not satisfied or
(b) otherwise, a fraction, expressed as a percentage, the numerator of which is
the Class B1 Principal Balance as of such Payment Date, and the denominator of
which is the sum of: (i) the Senior Principal Balance, (ii) the Class M1
Principal Balance, (iii) the Class M2 Principal Balance, (iv) the Class B1
Principal Balance and (v) if the Overcollateralization Test is satisfied, the
Overcollateralization Amount, otherwise zero.
"Class B1 Principal Payment Amount": The product of the Principal Payment
Amount and the Class B1 Percentage.
"Class B1 Principal Payment Test": With respect to any Payment Date, the Class
B1 Principal Payment Test will be satisfied if each of the following tests is
satisfied: (i) a Trigger Event is not in effect, (ii) the sum of the Class B1
Principal Balance, the Overcollateralization Amount and the Collateralization
Fund Balance divided by the sum of the Contract Balance and the
Collateralization Fund Balance as of the immediately preceding Payment Date must
be equal to or greater than 30.625% and (iii) the Class M2 Principal Payment
Test is satisfied.
"Class M1 Percentage": With respect to any Payment Date: (a) zero, if the Senior
Principal Balance has not yet been reduced to zero after application of
principal on the current Payment Date and the Class M1 Principal Payment Test is
not satisfied or (b) otherwise, a fraction, expressed as a percentage, the
numerator of which is the Class M1 Principal Balance and the denominator of
which is the sum of: (i) the Senior Principal Balance, (ii) the Class M1
Principal Balance, (iii) if the Class M2 Principal Payment Test is satisfied,
the Class M2 Principal Balance, otherwise zero (iv) if the Class B1 Principal
Payment Test is satisfied, the Class B1 Principal Balance, otherwise zero and
(v) if the Overcollateralization Test is satisfied, the Overcollateralization
Amount, otherwise zero.
"Class M1 Principal Payment Amount": The product of the Principal Payment
Amount and the Class M1 Percentage.
S-10
<PAGE>
"Class M1 Principal Payment Test": With respect to any Payment Date, the Class
M1 Principal Payment Test will be satisfied if each of the following tests is
satisfied: (i) a Trigger Event is not in effect and (ii) the sum of the Class M1
Principal Balance, the Class M2 Principal Balance, the Class B1 Principal
Balance, the Overcollateralization Amount and the Collateralization Fund Balance
divided by the sum of the Contract Balance and the Collateralization Fund
Balance as of the immediately preceding Payment Date must be equal to or greater
than 59.50%.
"Class M2 Percentage": With respect to any Payment Date: (a) zero, if the Senior
Principal Balance and the Class M1 Principal Balance have not yet been reduced
to zero after application of principal on the current Payment Date and the Class
M2 Principal Payment Test is not satisfied or (b) otherwise, a fraction,
expressed as a percentage, the numerator of which is the Class M2 Principal
Balance and the denominator of which is the sum of: (i) the Senior Principal
Balance, (ii) the Class M1 Principal Balance, (iii) the Class M2 Principal
Balance, (iv) if the Class B1 Principal Payment Test is satisfied, the Class B1
Principal Balance, otherwise zero and (v) if the Overcollateralization Test is
satisfied, the Overcollateralization Amount, otherwise zero.
"Class M2 Principal Payment Amount": The product of the Principal Payment
Amount and the Class M2 Percentage.
"Class M2 Principal Payment Test": With respect to any Payment Date, the Class
M2 Principal Payment Test will be satisfied if each of the following tests is
satisfied: (i) a Trigger Event is not in effect, (ii) the sum of the Class M2
Principal Balance, the Class B1 Principal Balance, the Overcollateralization
Amount and the Collateralization Fund Balance divided by the sum of the Contract
Balance and the Collateralization Fund Balance as of the immediately preceding
Payment Date must be equal to or greater than 42.00% and (iii) the Class M1
Principal Payment Test is satisfied.
"Class Interest Rate": With respect to each Payment Date and the Class A1 Bonds,
the Class Interest Rate initially will equal the per annum rate shown in the
table on the cover page and, if MERIT or its affiliate does not exercise its
option to redeem or effect a mandatory purchase of the Class A1 Bonds on the
Payment Date after the First Optional Redemption Date, such per annum rate will
be increased on the Payment Date after the First Optional Redemption Date as set
forth in note 2 on the cover page. With respect to each Payment Date and the
Class A2, Class A3, Class A4, Class M1 or Class M2 Bonds, the Class Interest
Rate will equal the lesser of: (i) the per annum rate shown in the table on the
cover page and, if MERIT or its affiliate does not exercise its option to redeem
or effect a mandatory purchase of the Class A1, Class A2, Class A3, Class A4,
Class M1 or Class M2 Bonds on the Payment Date after the First Optional
Redemption Date, such per annum rate will be increased on the Payment Date after
the First Optional Redemption Date as set forth in note 2 on the cover page; and
(ii) the Weighted Average Net Rate. With respect to each Payment Date and the
Class B1 Bonds, the Class Interest Rate will equal the lesser of: (i) 7.88% and,
if MERIT or its affiliate does not exercise its option to redeem or effect a
mandatory purchase of the Class B1 Bonds on the Payment Date following the First
Optional Redemption Date, such per annum rate will be increased on such Payment
Date by 1.00%; and (ii) the Weighted Average Net Rate.
"Closing Date": On or about September 2, 1999.
"Collateralization Fund Balance": With respect to each Payment Date, the sum of
(a) 34.97% of the unpaid principal balance of the assets in the
Collateralization Fund other than Eligible Investments and (b) the principal
balance of Eligible Investments held in the Collateralization Fund.
"Contracts": The Initial Contracts and the Subsequent Contracts.
"Contract Balance": With respect to each Payment Date, the sum of (i) the
aggregate Unpaid Principal Balances of the Contracts and (ii) the Pre-Funded
Amount.
"Cumulative Losses": With respect to any Payment Date, the sum of the Losses for
that Payment Date and each preceding Payment Date since August 10, 1999.
"Cumulative Losses Test": With respect to any Payment Date, the Cumulative
Losses Test will be satisfied:
(i) if such Payment Date occurs between September 1, 2004, and August
31, 2005, the Cumulative Losses as of such Payment Date are less than or equal
to 8.00% of the Initial Contract Balance; and
S-11
<PAGE>
(ii) if such Payment Date occurs on or after September 1, 2005, the
Cumulative Losses as of such Payment Date are less than or equal to 9.00% of the
Initial Contract Balance.
"Current Interest": With respect to each Class of Bonds and each Payment Date,
the interest accrued at the applicable Class Interest Rate for the applicable
Accrual Period on the outstanding principal balance of such Class.
"Current Losses Test": With respect to any Payment Date, the aggregate Losses
with respect to such Payment Date and the two preceding Payment Dates are less
than or equal to 2.75% of the arithmetic average of the Contract Balance for the
second preceding Payment Date and the current Payment Date.
"First Optional Redemption Date": The earlier of (i) the Payment Date in August
2004 or (ii) the first Payment Date on which, after taking into account payments
of principal to be made on such Payment Date, the aggregate outstanding
principal balance of the Bonds is less than 35% of the aggregate principal
balance of the Bonds on the Closing Date.
"Funding Period": The period commencing on the date the Bonds are issued and
ending on the earlier of (i) the date on which the Pre-Funded Amount is less
than $100,000 or (ii) the day before the Master Servicer Remittance Date
preceding the Payment Date in November 1999.
"Indenture": The Indenture dated as of November 1, 1994, between MERIT and the
Trustee, as amended by a First Supplemental Indenture dated as of November 1,
1994, and as supplemented by the Series 13 Supplement dated as of August 1,
1999.
"Initial Collateralization Fund Balance": The Collateralization Fund Balance as
of the Closing Date.
"Initial Contracts": The Contracts pledged to the Trust Estate on the Closing
Date.
"Initial Contract Balance": The sum of (i) the Unpaid Principal Balance of the
Contracts on the Closing Date and (ii) the Original Pre-Funded Amount.
"Interest Payment Amount": On each Payment Date, the sum of (i) the portion of
Available Funds attributable to interest on the Contracts, (ii) the amount
withdrawn from the Capitalized Interest Account and deposited in the Collateral
Proceeds Account and (iii) any interest earnings on the Collateralization Fund
to the extent required to be used to pay Current Interest on the Bonds.
"Master Servicing Fee Rate": 0.02% per annum.
"Net Rate": The interest rate on a Contract less the Administrative Cost Rate.
"Original Pre-Funded Amount": $75,000,000.
"Overcollateralization Amount": With respect to each Payment Date, the excess of
(a) the Contract Balance over (b) the sum of the Senior Principal Balance, the
Class M1 Principal Balance, the Class M2 Principal Balance and the Class B1
Principal Balance.
"Overcollateralization Percentage": With respect to any Payment Date, (a) zero,
if the Senior Principal Balance, the Class M1 Principal Balance, the Class M2
Principal Balance and the Class B1 Principal Balance have not yet been reduced
to zero after application of principal on the Current Payment Date and the
Overcollateralization Test is not satisfied or (b) otherwise, a fraction,
expressed as a percentage, the numerator of which is the Overcollateralization
Amount as of such Payment Date and the denominator of which is the sum of: (i)
the Senior Principal Balance, (ii) the Class M1 Principal Balance, (iii) the
Class M2 Principal Balance, (iv) the Class B1 Principal Balance and (v) the
Overcollateralization Amount.
"Overcollateralization Principal Payment Amount": The product of the Principal
Payment Amount and the Overcollateralization Percentage.
"Overcollateralization Test": With respect to any Payment Date, the
Overcollateralization Test will be satisfied if each of the following tests is
satisfied: (i) the Payment Date occurs during or after September 2004, (ii) a
Trigger Event is not in effect, (iii) the sum of the Overcollateralization
Amount and the Collateralization Fund Balance divided by the sum of the Contract
Balance and the Collateralization Fund Balance as of the immediately preceding
Payment Date must be equal to or greater than 21.875%, (iv) the
Overcollateralization Amount is not less than 2.00% of the Initial Contract
Balance and (v) the Class B1 Principal Payment Test is satisfied.
S-12
<PAGE>
"Payment Date": The 28th day of each month or, if such day is not a business
day, then on the next succeeding business day, commencing on September 28, 1999.
"Pre-Funding Account": The account into which the Original Pre-Funded Amount
will be deposited on the Closing Date.
"Pre-Funded Amount": With respect to each Payment Date, the Original Pre-Funded
Amount less the amount theretofore applied to purchase Subsequent Contracts.
"Prepayment Period": With respect to each Payment Date, the period commencing on
the twenty-first day of the month preceding the month in which the Payment Date
is deemed to occur and ending on the twentieth day of the month in which the
Payment Date is deemed to occur, except that the first Prepayment Period shall
begin on the August 10, 1999, and end on September 20, 1999.
"Principal Balance": With respect to any Payment Date and any Class of Bonds or
the Senior Bonds, the outstanding principal balance of such Class or the Senior
Bonds, as the case may be.
"Principal Payment Amount": On each Payment Date, the sum of (i) the Available
Funds (less the portion thereof attributable to interest) received with respect
to the Contracts, (ii) on the Payment Date immediately following the end of the
Funding Period any Pre-Funded Amount, (iii) an amount equal to any Losses
incurred with respect to the Contracts during the related Prepayment Period to
the extent any of the following amounts are available, to be drawn in the
following order: (A) cash and cash equivalents in the Collateralization Fund
attributable to principal ("Reserve Principal"), (B) the balance of the Interest
Payment Amount (after providing for interest then due on the Bonds and the
Servicing Fee) ("Excess Interest") and (C) any interest earnings on assets in
the Collateralization Fund ("Reserve Interest") and (iv) the amount necessary to
be paid as principal on the Bonds in order to ensure that the Subordination
Balance will be at least equal to the Target Subordination Balance after payment
of current Losses pursuant to clause (iii) above, to the extent any Excess
Interest remains.
"Senior Bonds": The Class A1, Class A2, Class A3 and Class A4 Bonds.
"Senior Percentage": With respect to any Payment Date: a fraction, expressed as
a percentage, the numerator of which is the Senior Principal Balance and the
denominator of which is the sum of: (i) the Senior Principal Balance, (ii) if
the Class M1 Principal Payment Test is satisfied, the Class M1 Principal
Balance, otherwise zero, (iii) if the Class M2 Principal Payment Test is
satisfied, the Class M2 Principal Balance, otherwise zero, (iv) if the Class B1
Principal Payment Test is satisfied, the Class B1 Principal Balance, otherwise
zero and (v) if the Overcollateralization Test is satisfied, the
Overcollateralization Amount, otherwise zero.
"Senior Principal Payment Amount": The product of the Principal Payment Amount
and the Senior Percentage.
"Servicing Fee Rate": The lesser of (i) 1% per annum and (ii) the amount
specified in a servicing agreement as the rate to be used in determining the fee
payable to a servicer. "Sixty-Day Delinquency Ratio": With respect to any
Payment Date, a fraction, expressed as a percentage, the numerator of which is
the aggregate of the outstanding balances of all Contracts that were 60 days or
more delinquent as of the end of the related Due Period (including Contracts in
respect of which the related Manufactured Homes have been repossessed but are
still in inventory) and the denominator of which is the Contract Balance.
"Subordination Balance": The sum of (A) the Overcollateralization Amount and
(B) the Collateralization Fund Balance.
"Subsequent Contracts": The Contracts pledged to the Trust Estate after the
Bonds are issued.
"Target Subordination Balance": For any Payment Date prior to the Payment Date
occurring in September 2004, 12.50% of the sum of (A) the Initial Contract
Balance and (B) the Initial Collateralization Fund Balance. For any Payment Date
on or after the Payment Date occurring in September 2004, the lesser of (i)
12.50% of the sum of (A) the Initial Contract Balance and (B) the Initial
Collateralization Fund Balance and (ii) 21.875% of the sum of (A) the Contract
Balance and (B) the Collateralization Fund Balance.
"Thirty-Day Delinquency Ratio": With respect to any Payment Date, a fraction,
expressed as a percentage, the numerator of which is the aggregate of the
S-13
<PAGE>
outstanding balances of all Contracts that were 30 days or more delinquent as of
the end of the related Due Period (including Contracts in respect of which the
related Manufactured Homes have been repossessed but are still in inventory) and
the denominator of which is the Contract Balance.
"Trigger Event": With respect to any Payment Date during or after September
2004, a Trigger Event exists if (i) the Cumulative Losses Test is not satisfied,
(ii) the Current Losses Test is not satisfied, (iii) the Thirty-Day Delinquency
Ratio exceeds 7.00% or (iv) the Sixty-Day Delinquency Ratio exceeds 5.00%.
"Weighted Average Net Rate": With respect to any Payment Date, the weighted
average (by principal balance) of the Net Rates on the Contracts.
The actual percentages in the definitions may be higher or lower depending on
the final requirements of the Rating Agencies.
EVENTS OF DEFAULT
An Event of Default means any one of the following events (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(i) on any Payment Date, default in the payment of Current
Interest on any Senior Bond when the same shall become due and
payable (or, after the Senior Bonds have been paid in full,
the Class of Bonds then outstanding with the highest
seniority), which Default shall continue for a period of five
days; or
(ii) on the Stated Maturity Date of any Class of Bonds, default in
the payment in full of the outstanding principal balance of
any such Class of Bonds; or
(iii) default in the performance, or breach, of any other covenant
or warranty of MERIT in the Indenture and continuance of such
default or breach for a period of 60 days after there shall
have been given, by registered or certified mail, to MERIT by
the Trustee or by the Holders of at least 66 2/3% in then
outstanding principal balance of the Senior Bonds (or, after
the Senior Bonds have been paid in full, the Class of Bonds
then outstanding with the highest seniority), a written notice
specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default"
under the Indenture; or
(iv) the entry of a decree or order by a court having jurisdiction
in the premises adjudging MERIT bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of
MERIT under the federal Bankruptcy Code or any other
applicable federal or state law, or appointing a receiver,
liquidator, assignee, or sequestrator (or other similar
official) of MERIT or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in
effect for a period of 90 consecutive days; or
(v) the institution by MERIT of proceedings to be adjudicated as
bankrupt or insolvent, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking
reorganization or relief under the federal Bankruptcy
Code or any other similar applicable federal or state law, or
the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee or
sequestrator (or other similar official) of MERIT or of any
substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by MERIT in
furtherance of any such action.
Upon the occurrence of a default with respect to any Class of Bonds (without
regard to the passage of time or giving of notice, or both) and the continuance
of such default for 60 days, the Trustee is required to resign as trustee for
any Class of Bonds which is subordinate to the outstanding Class of Bonds with
S-14
<PAGE>
the highest seniority. MERIT is required in such circumstances to appoint one or
more separate trustees for the Holders of such Classes of Bonds; PROVIDED,
HOWEVER, that, if MERIT fails to appoint such separate trustees within 15 days
thereafter, the Trustee immediately petition a court of competent jurisdiction
to appoint such separate trustees.
Each Bondholder shall be deemed to have agreed, by its acceptance of its Bond,
not to file, or join in filing, any petition in bankruptcy or commence any
similar proceeding in respect of MERIT for a period of one year and one day
following the payment in full of the Bonds and any other bonds of MERIT.
Upon certain Events of Default, the Holders of the Bonds shall have the remedies
described in the Indenture. See "THE INDENTURE -- Default" in the Prospectus
with respect to the rights of the Bondholders. Funds collected by the Trustee
following an Event of Default will be applied in the order specified above under
"-- Payments of Principal and Interest" on page S-6.
SO LONG AS THE SENIOR BONDS (AND AFTER THE SENIOR BONDS HAVE BEEN PAID IN FULL,
THE CLASS M1 BONDS; AND AFTER THE CLASS M1 BONDS HAVE BEEN PAID IN FULL, THE
CLASS M2 BONDS) ARE OUTSTANDING, THE FAILURE TO PAY INTEREST ON OR PRINCIPAL OF
ALL CLASSES OF BONDS SUBORDINATE THERETO PRIOR TO THE STATED MATURITY DATE WILL
NOT CONSTITUTE AN EVENT OF DEFAULT.
LOSSES
Losses with respect to the Contracts will be borne, by virtue of the payment
priorities described herein, first, by the cash and cash equivalents on deposit
in the Collateralization Fund attributable to principal, second, by any interest
received on the Contracts in excess of interest required to be paid on the Bonds
on any Payment Date, third, by any interest earnings on assets on deposit in the
Collateralization Fund, fourth, by the limited overcollateralization of the
Bonds and, fifth, by the Class B1, Class M2 and Class M1 Bonds (in that order)
before any losses will be borne by the Class A1, Class A2, Class A3 and Class A4
Bonds. Losses will be borne by the Class A1, Class A2, Class A3 and Class A4
Bonds PRO RATA based on their outstanding principal balance.
STATED MATURITY DATES
The Stated Maturity Dates for the Bonds are set forth on the cover page hereof
and represent the dates on which the Bonds are payable in full. The Stated
Maturity Dates for the Bonds have been calculated in accordance with the
assumptions set forth under "MATURITY AND PREPAYMENT CONSIDERATIONS" on page
S-21.
OPTIONAL REDEMPTION
On any Payment Date on or after the earlier of (i) the Payment Date in August
2004 and (ii) the first Payment Date on which, after taking into account
payments of principal to be made on such Payment Date, the aggregate outstanding
principal balance of the Bonds is less than 35% of the aggregate principal
balance of the Bonds on the Closing Date (the "First Optional Redemption Date"),
MERIT may redeem the Bonds in whole, but not in part, or an affiliate of MERIT
may effect a mandatory purchase of a Class of Bonds in whole, but not in part,
without retiring such Bonds so that a designee of the Issuer has the ability to
own or resell such Bonds.
Any such redemption or mandatory purchase will be paid in cash at a price equal
to 100% of the aggregate outstanding principal balance of the Class of Bonds so
redeemed, plus accrued and unpaid interest for the applicable Accrual Period.
See "DESCRIPTION OF THE BONDS -- Redemption" in the Prospectus.
Any redemption of a Class of Bonds may have an adverse effect on the yield of
such Class, because such redemption would have the same effect on such Class as
a prepayment in full of the Contracts. See "YIELD CONSIDERATIONS" on page S-26.
SECURITY FOR THE BONDS
THE COLLATERAL
The collateral for the Bonds initially will consist of (i) manufactured housing
installment sales contracts pledged by MERIT (the "Initial Contracts") and the
Original Pre-Funded Amount and (ii) initial deposits by MERIT in the
Collateralization Fund and the Capitalized Interest Account.
S-15
<PAGE>
THE INITIAL CONTRACTS
The Initial Contracts include both Adjustable Rate Contracts, which provide for
adjustments in their interest rates as described below, and Level Payment
Contracts, which have fixed annual percentage rates and provide for level
monthly payments over their term sufficient to amortize the principal balance in
full. 13.65% of the Initial Contracts provide for allocation of payments
according to the "actuarial" method (each, an "Actuarial Contract") and the
balance provide for allocation of payments according to the simple interest
method (each, a "Simple Interest Contract").
The portion of each monthly payment for any Actuarial Contract allocable to
principal will be equal to the total amount thereof less the portion allocable
to interest. In each month, the portion allocable to interest is a precomputed
amount equal to one month's interest on the principal balance determined by
reducing the initial principal balance by the principal portion of all monthly
payments that were due in prior months (whether or not timely made) and all
prior partial principal prepayments. Thus, each payment allocated to a scheduled
monthly payment of an Actuarial Contract will be applied to interest and
principal in accordance with such allocation whether such monthly payment is
received in advance of or subsequent to the date it is due. All payments
received on an Actuarial Contract (other than prepayments in full or in part)
will be applied when received to current and any previously unpaid monthly
payments in the order they were due.
Payments on a Simple Interest Contract will be applied first to interest accrued
through the date immediately preceding the date of receipt of payment and then
to unpaid principal. Accordingly, if an obligor pays an installment less than
one month after the previous payment, the portion of the payment allocable to
interest will be less than if the payment had been made when due, the portion of
the payment applied to reduce the principal balance will be correspondingly
greater, and the principal balance will be amortized more rapidly than
scheduled. Conversely, if an obligor pays an installment more than one month
after the previous payment, the portion of the payment allocable to interest for
the payment period will be greater than if the payment had been made when due,
the portion of the payment applied to reduce the principal balance will be
correspondingly less, and the principal balance will be amortized more slowly
than scheduled, in which case a larger portion of the principal balance may be
due on the final scheduled payment date.
Whenever reference is made herein to a percentage of the Initial Contracts or to
the characteristics of the Initial Contracts, the calculation is approximate and
is based on the Unpaid Principal Balances of the Initial Contracts as of August
10, 1999.
All the Initial Contracts have an original term to maturity of not more than 30
years. The weighted average remaining term to stated maturity of the Initial
Contracts was 318 months. 1.69% of the Initial Contracts were Adjustable Rate
Contracts and 98.31% were Level Payment Contracts.
As specified in the related Contract, the interest rate on each Adjustable Rate
Contract will adjust on each Interest Adjustment Date applicable thereto to a
rate that is calculated in accordance with the average of LIBOR for six-month
Eurodollar deposits in the London market based on quotations of major banks as
published either by Fannie Mae or THE WALL STREET JOURNAL (the "Six-Month LIBOR
Index") and a fixed percentage (the "Gross Margin"), subject to, in most cases,
(i) a maximum periodic increase or decrease of 1% per annum (a "Periodic Rate
Cap") and (ii) any minimum and maximum lifetime interest rate. Adjustments are
subject to Periodic Rate Caps, and minimum and maximum lifetime interest rates,
and, accordingly, the interest rate on any such Adjustable Rate Contract, as
adjusted on any Interest Adjustment Date, may not equal the sum of the Six-Month
LIBOR Index and the applicable Gross Margin.
With respect to the Initial Contracts, (i) the interest rates range from 5.75%
to 14.25%, with a weighted average interest rate of 8.88% . For the Adjustable
Rate Contracts, (i) the weighted average Gross Margin is 5.80%, (ii) the maximum
lifetime interest rates range from 11.25% to 16.25%, with a weighted average
maximum lifetime interest rate of 14.26%, and (iii) the minimum lifetime
interest rates range from 6.25% to 11.25%, with a weighted average minimum
lifetime interest rate of 9.26%. In no case will the minimum lifetime interest
rate of an Adjustable Rate Contract be less than the Gross Margin of such
Contract.
S-16
<PAGE>
DELINQUENCIES. Delinquencies with respect to the Initial Contracts are as
follows:
31 TO 60 DAYS 61 DAYS AND GREATER TOTAL
1.36% 0.0% 1.36%
Nonperforming manufacturing housing installment sales contracts having an
aggregate unpaid principal balance of $5,064,894 have been deposited in the
Collateralization Fund. If those contracts had been included in the Initial
Contracts, the delinquency percentages set forth above would have been higher.
SELECTED INITIAL CONTRACT DATA
The Initial Contracts and related properties securing the Initial Contracts have
the characteristics set forth in the following tables as of August 10, 1999. The
characteristics of the Initial Contracts actually pledged to secure the Bonds
may vary from information set forth herein due to a number of factors, including
prepayments, delinquencies and losses with respect to the Initial Contracts from
August 10, 1999 to the Closing Date and the acquisition of additional Contracts
by MERIT before the Closing Date. Asterisks (*) in the following tables indicate
values between 0.0% and 0.5%. Whenever reference is made in the tables to a
percentage of the Initial Contracts, such percentage is based on the aggregate
Unpaid Principal Balance of the Initial Contracts as of August 10, 1999.
Percentages may not sum to 100% due to rounding.
S-17
<PAGE>
SELECTED DATA FOR INITIAL CONTRACTS
1) CURRENT UNPAID PRINCIPAL BALANCE
NUMBER UNPAID UNPAID
CURRENT UNPAID OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE ($) LOANS BALANCE ($) BALANCE (%)
1 - 10,000 42 320,757 *
10,001 - 20,000 371 5,976,386 2
20,001 - 30,000 1,192 30,680,571 10
30,001 - 40,000 1,624 56,723,964 19
40,001 - 50,000 1,281 57,455,345 19
50,001 - 60,000 1,030 56,362,513 19
60,001 - 70,000 620 40,006,346 13
70,001 - 80,000 276 20,571,042 7
80,001 - 90,000 176 14,902,195 5
90,001 - 100,000 105 9,917,317 3
100,001 - 110,000 43 4,498,417 1
110,001 - 120,000 27 3,077,043 1
120,001 - 130,000 12 1,502,560 *
130,001 - 170,000 14 1,981,099 1
------- ------------ -----
Totals: 6,813 303,975,556 100
======= ============= =====
The average Unpaid Principal Balance is $44,617, the maximum Unpaid Principal
Balance is $165,506 and the minimum Unpaid Principal Balance is $773.
2) REMAINING TERM TO STATED MATURITY
NUMBER UNPAID UNPAID
REMAINING TERM OF PRINCIPAL PRINCIPAL
(MONTHS) LOANS BALANCE ($) BALANCE (%)
1 - 150 364 7,617,374 3
151 - 210 638 18,496,195 6
211 - 250 943 32,578,389 11
251 - 290 307 10,944,932 4
291 - 330 313 11,252,570 4
331 - 340 1,152 54,102,890 18
341 - 350 29 1,519,853 *
351 - 355 100 5,840,873 2
356 - 360 2,967 161,622,480 53
----- ----------- ----
Totals: 6,813 303,975,556 100
===== =========== ====
The weighted average remaining term to stated maturity is 318 months.
3) ORIGINAL LOAN-TO-VALUE RATIO(1)
NUMBER UNPAID UNPAID
ORIGINAL LTV RATIO(%) OF PRINCIPAL PRINCIPAL
LOANS BALANCE ($) BALANCE (%)
50.00 and below 100 2,394,193 1
50.01 - 55.00 47 1,348,687 *
55.01 - 60.00 59 2,087,418 1
60.01 - 65.00 77 2,928,879 1
65.01 - 70.00 119 5,632,169 2
70.01 - 75.00 187 9,220,325 3
75.01 - 80.00 567 27,120,170 9
80.01 - 85.00 936 44,454,166 15
85.01 - 90.00 2,376 107,262,851 35
90.01 - 95.00 2,185 95,182,421 31
95.01 - 100.00 160 6,344,277 2
----- ----------- -----
Totals: 6,813 303,975,556 100
===== =========== ===
(1) The Loan-to-Value Ratio of a Contract is equal to the ratio (expressed as a
percentage) of the original amount financed and the fair market value of the
property at the time of origination. The fair market value of the manufactured
homes is the total amount of the related contract plus any cash downpayment and
the value of any trade-in and in the case of a land-secured Contract, the value
of the land securing the Contract as appraised at origination. The weighted
average original loan-to-value ratio is 87.27%.
4) CURRENT INTEREST
NUMBER UNPAID UNPAID
CURRENT INTEREST OF PRINCIPAL PRINCIPAL
RATES (%) LOANS BALANCE ($) BALANCE (%)
5.750 - 5.999 36 3,064,086 1
6.250 - 6.499 42 3,206,816 1
6.500 - 6.749 77 5,960,790 2
6.750 - 6.999 352 22,024,556 7
7.000 - 7.249 42 2,779,984 1
7.250 - 7.499 222 13,585,872 4
7.500 - 7.749 396 21,260,731 7
7.750 - 7.999 566 28,564,431 9
8.000 - 8.249 154 8,007,648 3
8.250 - 8.499 346 18,156,718 6
8.500 - 8.749 438 21,682,709 7
8.750 - 8.999 527 22,802,875 8
9.000 - 9.249 195 8,938,277 3
9.250 - 9.499 363 13,782,444 5
9.500 - 9.749 462 19,055,218 6
9.750 - 9.999 645 25,009,662 8
10.000 - 10.249 93 3,868,033 1
10.250 - 10.499 289 10,391,319 3
10.500 - 10.749 361 12,939,062 4
10.750 - 10.999 336 12,100,451 4
11.000 - 11.249 88 3,358,816 1
11.250 - 11.499 136 4,381,626 1
11.500 - 11.749 235 7,506,391 2
11.750 - 11.999 148 4,344,173 1
12.000 - 12.249 43 1,232,446 *
12.250 - 12.499 85 2,251,901 1
12.500 - 12.749 43 1,324,724 *
12.750 - 12.999 42 1,144,613 *
13.000 - 13.249 5 141,465 *
13.250 - 13.499 32 821,845 *
13.500 - 13.749 5 89,650 *
13.750 - 13.999 8 188, 569 *
14.000 - 14.250 1 7,654 *
------- ----------- -----
Totals: 6,813 303,975,556 100
======= =========== =====
The weighted average current interest rate per annum is 8.88%.
5) STATE DISTRIBUTION OF PROPERTIES
STATE NUMBER UNPAID UNPAID
OF LOANS PRINCIPAL PRINCIPAL
BALANCE ($) BALANCE (%)
Texas 1,400 57,296,309 19
North Carolina 742 38,483,485 13
Georgia 669 29,131,048 10
South Carolina 542 25,036,353 8
Michigan 486 20,182,848 7
Kentucky 387 15,211,316 5
Tennessee 313 13,604,243 4
Oregon 189 10,685,643 4
Florida 215 9,910,951 3
Ohio 250 9,799,521 3
Virginia 199 9,403,564 3
Washington 150 8,801,737 3
West Virginia 187 7,613,055 3
Arkansas 149 6,810,466 2
Mississippi 145 6,424,954 2
Arizona 117 5,649,211 2
Alabama 113 5,099,737 2
California 98 4,538,013 1
Oklahoma 90 4,009,292 1
Idaho 76 3,833,641 1
Indiana 90 3,659,933 1
New York 62 2,315,651 1
Others 144 6,474,586 2
----- ----------- ---
Totals: 6,813 303,975,556 100
===== =========== ===
Others include: Colorado, Delaware, Illinois, Kansas, Louisiana, Maryland,
Missouri, Nevada, New Mexico, Pennsylvania, Utah and Vermont.
S-18
<PAGE>
6) NEW OR USED
NUMBER UNPAID UNPAID
OF LOANS PRINCIPAL PRINCIPAL
BALANCE ($) BALANCE (%)
New 5,946 276,825,069 91
Used 867 27,150,488 9
----- ----------- ----
Totals 6,813 303,975,556 100
===== =========== ====
7) SINGLE OR MULTI-WIDE
NUMBER UNPAID UNPAID
OF LOANS PRINCIPAL PRINCIPAL
BALANCE ($) BALANCE (%)
Single Wide 2,542 75,503,310 25
Multi-Wide 4,271 228,472,246 75
----- ----------- ----
Totals 6,813 303,975,556 100
===== =========== ====
8) YEAR OF LOAN ORIGINATION
YEAR NUMBER UNPAID UNPAID
OF LOANS PRINCIPAL PRINCIPAL
BALANCE ($) BALANCE (%)
1999 4,447 212,336,184 70
1998 40 3,580,441 1
1997 2,314 87,607,825 29
1996 12 451,107 *
----- ----------- ----
Totals 6,813 303,975,556 100
===== =========== ====
YEAR 2000 READINESS DISCLOSURE
The Master Servicer and the Servicer are preparing their computer systems and
computer-driven equipment and devices for the year 2000. Virtually every
computer operation could be affected in some way by the rollover of the
two-digit year value from 99 to 00. Systems that do not properly recognize
date-sensitive information when the year changes to 2000 could fail or generate
erroneous data. The year 2000 problem could affect traditional information
systems and embedded systems. It could also affect software or computer
applications that use, store, transmit or receive information involving dates.
The objective of the Master Servicer and the Servicer is to be year 2000
compliant. "Year 2000 compliant" means that critical systems, devices,
applications and business relationships have been evaluated and are expected to
be suitable for continued use into and beyond the year 2000. To that end, they
have evaluated their critical systems, devices, applications and business
relationships to determine the extent to which they are in fact "year 2000
compliant.
The Master Servicer and the Servicer expect to have systems and applications
capable of processing, before January 1, 2000, date and date-related data
consistent with the functionality of such systems and applications and without a
material adverse effect upon its performance of services.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Contracts is
calculated as of the close of business on August 10, 1999, when the aggregate
unpaid principal balance of the Initial Contracts was expected to be
$303,975,556. However, the Contracts on which those calculations are based do
not include Initial Contracts pledged to secure the Bonds and acquired by MERIT
prior to the Closing Date but after those calculations were made. Further,
certain Contracts on which those calculations are based may not be included
among the Initial Contracts pledged to secure the Bonds as of the Closing Date.
The Initial Contracts are now expected to have an aggregate unpaid principal
balance of approximately $322,453,213 as of August 10, 1999. Nevertheless, MERIT
may acquire additional Contracts before the Closing Date and some of the Initial
Contracts may be removed prior to closing as a result of incomplete
documentation or non-compliance with representations and warranties, if MERIT
deems such removal necessary or appropriate, and MERIT may substitute other
contracts subject to certain terms and conditions. Neither the removal or
substitution of contracts nor the addition of contracts not included originally
are expected to cause material variances from the information set forth herein.
A current report on Form 8-K will be available to purchasers of the Bonds and
will be filed with the Securities and Exchange Commission, together with the
Indenture, within fifteen days after the initial issuance of the Bonds and will
provide additional information with respect to the Contracts actually pledged to
the Bonds on the Closing Date. A current report on Form 8-K will also be filed
within 15 days of the ending of the Funding Period with respect to the
Pre-Funded Amount reflecting the purchase of any other Subsequent Contracts (see
" -- SUBSEQUENT CONTRACTS" below). Also, MERIT intends to file certain
additional yield tables and other computational materials with the Commission in
S-19
<PAGE>
a report on Form 8-K. Such tables and materials were prepared by the
Underwriters at the request of certain prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Modeling
Assumptions; see "MATURITY AND PREPAYMENT CONSIDERATIONS" on page S-21.
Accordingly, such tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
The Master Servicer will make available on an ongoing basis current information
relating to the Collateral, including (i) Contract delinquencies of 30 days, 60
days and 90 days or over, (ii) Contracts in foreclosure, (iii) REO, (iv) Losses
on the Contracts, (v) the remaining Overcollateralization Amount, and (vi)
modifications made to Contracts.
SUBSEQUENT CONTRACTS
The application of the Pre-Funded Amount to the purchase of Subsequent Contract
is subject to certain conditions including, but not limited to the following:
(a) each Subsequent Contract must satisfy the same representations and
warranties as the Initial Contracts; (b) Subsequent Contracts may not be
selected in a manner that is reasonably believed to be adverse to the interests
of the Bondholders; (c) each Subsequent Contract must satisfy the following
criteria: (i) such Subsequent Contract may not be 30 or more days delinquent;
(ii) the lien securing such Subsequent Contract must be a first lien; (iii) such
Contract may not have a loan-to-value ratio greater than 100%; (iv) such
Contract may not have an interest rate less than 6.50% per annum (or, in the
case of an Adjustable Rate Contract, a minimum interest rate less than 6.25% per
annum); (v) such Contract may not have a principal balance greater than $125,000
($175,000 in the case of a Contract secured by a mortgage); and (vi) such
Contract may not have an initial term of more than 30 years; and (d) following
the purchase of such Contracts, (i) the weighted average interest rate of the
Contracts may not be less than 8.78% per annum, (ii) at least 85% of the
Subsequent Contracts will have a minimum interest rate of 7.00% per annum, (iii)
the weighted average loan-to-value ratio of the Contracts may not exceed 92%,
(iv) the weighted average remaining term to maturity will be no more than 332
months, (v) the percentage of the Contracts (by unpaid principal balance) in any
State in which more than 5% of the Initial Contracts (by unpaid principal
balance) were located will not be greater than the sum of such percentage of the
Initial Contracts plus 2%, (vi) the percentage (by unpaid principal balance) of
the Contracts with respect to which the borrower is not the original owner of
the related Manufactured Home will not exceed 10% and (vii) no more than 2% of
the Contracts may be Adjustable Rate Contracts.
SUBSTITUTION OF CONTRACTS
In certain circumstances within two years of the Closing Date, MERIT may pledge
to the Trustee a Contract in substitution for a Contract initially pledged (an
"Original Contract") to secure the Bonds in the event of a breach of a
representation or warranty with respect to such Original Contract or in the case
of defective or incomplete documentation with respect to such Original Contract
which materially and adversely affects the value of such Original Contract. It
is anticipated that any substitution for an Original Contract will not
materially change the characteristics of the Contracts as set forth above.
SERVICING OF THE COLLATERAL
GENERAL
MASTER SERVICER -- DYNEX. Dynex has been engaged to act as Master Servicer and
will initially be performing all master servicing and bond administration
duties. As of June 30, 1999, Dynex acted as master servicer for approximately
29,000 loans, including single family mortgage loans, manufactured housing
installment sales contracts, multifamily mortgage loans and commercial mortgage
loans, with an aggregate principal balance of approximately $3.9 billion. See
"THE ISSUER" in the Prospectus.
Dynex currently has recourse credit facilities aggregating in excess of $1
billion. Dynex has not obtained replacement financing for a $100 million credit
facility secured by loans serviced by AutoBond Acceptance Corp., that expires in
September 1999.
S-20
<PAGE>
Dynex sought and has received a temporary injunction to compel AutoBond and its
affiliates to release to Dynex the related loan files and servicing rights.
Nevertheless, Dynex can give no assurance as to when it will actually obtain the
related loan files and servicing rights. Dynex believes that, if AutoBond and
its affiliates do not release the servicing files, it will be difficult for
Dynex to secure replacement financing for its credit facility that expires in
September 1999. Moreover, regardless of the location of the servicing files, it
may be difficult for Dynex to secure such replacement financing.
Dynex's credit facilities contain "cross-default" provisions that cause a
default on any one credit facility to be a default on each. If Dynex does not
secure new sources of credit or obtain an extension of existing facilities, it
may default on one or more of its facilities, including the $100 million credit
facility that expires in September 1999. If a default occurs, Dynex may not be
able to master service the contracts and payments to bondholders may be delayed
or challenged.
STAND-BY MASTER SERVICER -- NORWEST. Norwest Bank Minnesota, National
Association, has agreed to be the Stand-By Master Servicer of the Contracts; if
the appointment of Dynex as Master Servicer is not renewed, Norwest will assume
some of the master servicing duties (but not certain of the bond administration
duties of Dynex). Moreover, Norwest will not assume Dynex's duties to supervise,
administer, monitor and oversee the servicing by the Servicer. Instead, if
Norwest becomes the master servicer, the Issuer or an affiliate will be
responsible for supervising the servicing of the Contracts by the Servicer. The
principal executive offices of Norwest are located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota. Norwest performs its master servicing and bond
administrator activities principally at 11000 Broken Land Parkway, Columbia,
Maryland. Norwest is engaged in the business of master servicing, on behalf of
third party investors, residential single family mortgage loans secured by
properties located in all 50 states and the District of Columbia. As of June 30,
1999, Norwest was master servicing more than 639,000 mortgage loans representing
an aggregate outstanding principal balance of approximately $73 billion.
SERVICER -- DYNEX SERVICES. Dynex Services, a division of Dynex Financial, Inc.,
an affiliate of MERIT, has been retained on a quarterly basis as the Servicer of
the Contracts. Dynex Services commenced its servicing operations in November
1996. Dynex Services services all the manufactured housing contracts it
originates or purchases from its servicing operation located in Fort Worth,
Texas. As of June 30, 1999, Dynex Services serviced a portfolio of approximately
20,638 manufactured housing contracts totaling approximately $893 million.
The following sets forth the delinquency experience related to manufactured
housing contracts serviced through Dynex Services for fiscal years ending 1997
and 1998 and the six months ended June 30, 1999:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30
------------------------------
1997 1998 1999
--------------------------------------------
(Dollars in Thousands)
<S> <C>
Outstanding Dollars of Serviced Assets (1).................. $286,873 $708,620 $893,447
Delinquent Dollars (2):
30 - 59 days............................................ $4,704 $7,515 $9,189
60 - 89 days............................................ $977 $2,020 $3,197
90 days or more......................................... $1,360 $2,347 $4,191
Total Dollars Delinquent..................................... $7,041 $11,882 $16,577
Delinquency as a Percentage of Serviced Assets (3)........... 2.45% 1.68% 1.86%
Percentage of Serviced Assets Repossessed/Foreclosed......... .33% .73% .59%
Net Loss Percentage (4)...................................... .21% .54% .49%
</TABLE>
- -------------------
(1) Excludes contracts already in repossession/foreclosure.
(2) The period of delinquency is based on the number of days payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the following month.
(3) By outstanding dollars as of period end.
S-21
<PAGE>
(4) The calculation of net loss percentage includes unpaid interest accrued
through the date of liquidation and all repossession liquidation expenses
and is based on the principal balance of contracts being serviced as of
period end including contracts already in repossession/foreclosure.
PROPOSED SALE OF DYNEX SERVICES BY DYNEX -- Dynex announced during the second
quarter of 1999 that it had retained Lehman Brothers Inc., one of the
underwriters of the Offered Bonds, as an advisor to assist in the sale of Dynex
Services. Dynex has not yet identified a purchaser for Dynex Services.
STAND-BY SERVICER -- GreenPoint Credit Corp. has been retained as Stand-By
Servicer for the Contracts and will become the Servicer if the appointment of
Dynex Services as Servicer is not renewed. If GreenPoint becomes the Servicer,
it will service the Contracts under its own servicing agreement and the
Servicing Fee will not be subordinate to payments on the Bonds.
TERMS OF SERVICING AND MASTER SERVICING ARRANGEMENTS -- Dynex's engagement as
Master Servicer and Dynex Services' engagement as Servicer are on a quarterly
basis with initial terms ending December 31, 1999. These engagements may be
renewed for subsequent quarterly terms by the Trustee; provided that the Trustee
shall not renew either such engagement unless it receives a letter from Fitch
IBCA, Inc., in its capacity as one of the Rating Agencies, prior to any
quarterly renewal date, confirming that such renewal will not result in a
downgrading of its rating of any of the Bonds. In addition, the servicing
agreement includes triggers that may result in termination if Dynex Service's
servicing performance does not meet required standards. If either agreement is
not renewed or is terminated, there may be disruptions in the administration of
the contracts. In particular, it is likely that delinquencies on the contracts
will increase temporarily, possibly resulting in increased losses, until the
stand-by servicer has completed the logistical processes necessary to render it
fully capable of servicing the contracts effectively.
If Fitch IBCA, Inc. confirms that there will be no adverse effect on its then
ratings of the Bonds, the requirement of quarterly renewals of the Servicing and
Master Servicing Agreements will be removed.
ADVANCES
On or before each Payment Date, the Servicer will be obligated (subject to the
limitations provided in its servicing agreement) to make a cash advance (an
"Advance") with respect to any delinquent loan in an amount equal to the sum of
(i) the scheduled payment (the interest portion only in the case of Simple
Interest Contracts and, in any case, without deduction of the Servicing Fee so
long as Dynex Services is the Servicer), (ii) amounts for the payment of
assessments, insurance premiums and property protection expenses and (iii)
amounts to cover expenses relating to foreclosure and liquidation. Dynex (but
not Norwest) as Master Servicer will be obligated to make any required advance
if the Servicer fails to make such advance. The Trustee will be obligated to
make any required Advance if the Master Servicer fails to do so. Nevertheless,
none of them is required to make any Advance if it has determined in its good
faith business judgment that such advance would not be recoverable. See
"SERVICING OF THE COLLATERAL" in the Prospectus.
FORBEARANCE AND MODIFICATION AGREEMENTS
To the extent set forth in the Servicing Agreement, the Servicer may, with the
approval of the Master Servicer in most cases, enter into a forbearance or
modification agreement with the borrower under a defaulted Contract, provided
that such Servicer and, if required, the Master Servicer have determined in
their good faith business judgment that granting such forbearance or
modification will maximize recovery to the Trust Estate on a present value
basis. The interests of the Master Servicer in determining whether to enter into
a forbearance or modification agreement (or in establishing the terms of any
such forbearance or modification agreement) may conflict with the interests of
Bondholders.
EVENTS OF DEFAULT
Dynex will generally have the right to terminate the Servicer in the event of a
breach by such Servicer of any of its obligations thereunder. In the event of
such termination, Dynex generally assumes certain of such Servicer's servicing
S-22
<PAGE>
obligations, including the obligation to make Advances (limited as provided
herein under "--Advances"), until such time as a successor servicer is
appointed. If Dynex is unable to act as servicer, Dynex will generally appoint
or petition a court of competent jurisdiction for the appointment of a suitable
loan servicing institution to act as successor servicer under such Servicing
Agreement. Pending such appointment, Dynex will be obligated to service the
Contracts subject to the same limitations as apply to the Master Servicer's
obligation to fulfill the servicing responsibility of a terminated servicer. Any
successor servicer, including Dynex, will be entitled generally to compensation
arrangements similar to, and not in excess of, those provided to the terminated
Servicer. If Norwest becomes the Master Servicer, it is anticipated that
GreenPoint Credit Corp. will become the Servicer.
SERVICING AND OTHER COMPENSATION AND EXPENSES
The primary compensation payable to the Servicer is the monthly servicing fee
(the "Servicing Fee"), which fee is capped at an amount equal to 1/12 of 1% (the
"Servicing Fee Rate") multiplied by the Unpaid Principal Balance of each
Contract on the first day of the Due Period preceding each Payment Date. So long
as Dynex Services is the Servicer of the Contracts, Dynex Services will remit
the monthly payments on the Contracts without retaining the Servicing Fee and
the Trustee will pay such Servicing Fee to Dynex Services to the extent of the
Interest Payment Amount available after having paid interest on the Bonds. In
addition to the Servicing Fees, late payment fees, loan assumption fees and
conversion fees with respect to the Contracts, and any interest or other income
earned on collections with respect to the Contracts pending remittance to the
Master Servicer will be paid to or retained by the Servicer as additional
servicing compensation. The Servicer is obligated to pay certain insurance
premiums and certain ongoing expenses associated with the related Contracts and
incurred by the Servicer in connection with its responsibilities under the
Servicing Agreement. The Master Servicing Fee will be equal to 0.02% per annum
on the aggregate Unpaid Principal Balance of the Contracts.
SPECIAL SERVICER
A Special Servicer acceptable to the Rating Agencies may be appointed to
undertake some of or all the Servicer's obligations with respect to Contracts
that are in default. The Special Servicer, if any, may be entitled to various
fees, including, but not limited to, (i) a special servicing fee expressed as a
fixed percentage of the remaining Unpaid Principal Balance of each specially
serviced Contract, (ii) a performance fee applicable to each liquidated Contract
based upon the Liquidation Proceeds of such Contract, or both. See "SERVICING OF
THE COLLATERAL -- Special Servicing Agreement" in the Prospectus.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Stated Maturity Date for Class A1, Class A3, Class A4, Class M1, Class M2
and Class B1 Bonds was calculated by adding approximately four years to the last
scheduled payment date on the Contracts originally pledged to such Bonds. The
Stated Maturity Date for the Class A2 Bonds was calculated by adding
approximately twelve months to the last scheduled payment date on the Contracts
originally pledged to such Bonds.
Because the rate of payment (including payments attributable to prepayments,
defaults, liquidations, and repurchases) of principal on the Contracts may
exceed the scheduled rate of payments, and could exceed such scheduled rate by a
substantial amount, the actual final payment of principal of the Bonds may be
earlier, and could be substantially earlier, than the Stated Maturity Date of
such Class.
S-23
<PAGE>
WEIGHTED AVERAGE LIFE OF THE BONDS
Weighted average life refers to the average amount of time that will elapse from
the date of delivery of a bond until each dollar of principal of such bond will
be repaid to the investor. The weighted average life of the Bonds will be
influenced by the rate at which principal of the Contracts is paid, which may be
in the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes payments resulting from refinancings, liquidations of the
Contracts due to defaults, casualties, indemnifications and purchases by or on
behalf of MERIT or the Servicer, as the case may be).
Prepayments on loans are commonly measured relative to a prepayment standard or
model. The prepayment assumption model used in this Prospectus Supplement, the
Manufactured Housing Prepayment Model ("MHP"), is based on an assumed rate of
prepayment each month of the then unpaid principal balance of a pool of new
manufactured housing installment sales contracts. A prepayment assumption of
100% MHP assumes constant prepayment rates of 3.7% per annum of the then unpaid
principal balance of such Contracts in the first month of the life of the
contracts and an additional 0.1% per annum in each month thereafter until the
24th month. Beginning in the 24th month and in each month thereafter during the
life of all the contracts, 100% MHP assumes a constant prepayment rate of 6.0%
per annum each month.
As used in the following tables "200% MHP" assumes the Contracts will prepay at
rates equal to twice 100% of the MHP assumed prepayment rates; "300% MHP"
assumes the Contracts will prepay at rates equal to three times 100% of the MHP
prepayment rates, and so forth.
FACTORS AFFECTING PREPAYMENTS ON THE CONTRACTS
The rate of payments (including prepayments) on a pool of manufactured housing
installment sale contracts is influenced by a variety of economic, geographic,
social, tax, legal and other factors. If prevailing interest rates fall
significantly below the then current interest rates on the Contracts or
significantly below the maximum lifetime interest rates on the Adjustable Rate
Contracts, the rate of prepayments on such Contracts would be expected to
increase. Conversely, if prevailing rates rise significantly above the then
current interest rates on the Contracts or significantly above the maximum
lifetime interest rates on the Adjustable Rate Contracts, the rate of
prepayments would be expected to decrease. Other factors affecting prepayment of
Contracts include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity in the related properties and servicing
decisions, as well as Contract terms and the type of collateral securing a
Contract. See "SECURITY FOR THE BONDS -- Selected Initial Contract Data" on page
S-15. The Contracts may be prepaid, in whole or in part, at any time by the
borrowers. NO ASSURANCE CAN BE GIVEN AS TO THE RATE OF PRINCIPAL PAYMENTS OR
PREPAYMENTS ON THE CONTRACTS.
Of the Contracts, 1.69% were Adjustable Rate Contracts as of August 10, 1999.
MERIT is not aware of any publicly available statistics relating to the
principal prepayment experience of adjustable rate manufactured housing
installment sales contracts loans over an extended period of time, and MERIT's
experience with respect to adjustable rate contracts is insufficient to draw any
conclusions with respect to the expected prepayment rates on the Adjustable Rate
Contracts. Defaults on Adjustable Rate Contracts leading to foreclosure and the
ultimate liquidation of the related properties may occur with greater frequency
in their early years, although little data is available with respect to the rate
of default on Adjustable Rate Contracts. Increases in the required monthly
payments on the Adjustable Rate Contracts may result in a default rate higher
than that on contracts with fixed interest rates. MERIT, at its option, may
purchase, on any Payment Date, any Contract that is delinquent in payment by 90
days or more. Any such purchase must be made at a price equal to the outstanding
principal balance of the related Contract plus accrued and unpaid interest
thereon at its interest rate through the Payment Date following the date of
purchase. See "YIELD CONSIDERATIONS" and "MATURITY AND PREPAYMENT
CONSIDERATIONS" in the Prospectus. Furthermore, MERIT will have the option to
pledge to the Trustee a Substitute Contract in substitution for a defaulted
Contract or REO, as more particularly described in "SECURITY FOR THE BONDS --
Substitution of Contracts" on page S-18. The weighted average life of the Bonds
S-24
<PAGE>
may increase to the extent that MERIT exercises its option to pledge Substitute
Contracts to the Trustee for defaulted Contracts or Repo Property, because such
substitution will be effected in lieu of foreclosure and disposition of the
related properties or Repo Property and the payment of Liquidation Proceeds to
Holders of the Bonds. See "YIELD CONSIDERATIONS" on page S-26.
The interest rates on the Adjustable Rate Contracts will adjust periodically
(although not on the same dates), generally based on the current Six-Month LIBOR
Index as applicable (which may not rise and fall consistently with prevailing
interest rates or other adjustable rate residential loans based on other
indices), plus the Gross Margins for the Adjustable Rate Contracts (which may be
different from the current margins on other adjustable rate residential loans).
As a result, the interest rates on the Adjustable Rate Contracts at any time may
not equal the prevailing rates for similar adjustable rate residential loans,
and the rate of prepayment may be lower or higher than would otherwise be
anticipated. See "RISK FACTORS -- Uncertain Timing of Principal" on page S-3.
MANDATORY PREPAYMENT
If not all the Original Pre-Funded Amount is used to acquire Subsequent
Contracts, then the Holders of the Bonds then entitled to receive payments of
principal will receive a partial prepayment on the Payment Date immediately
following the end of the Funding Period.
Although no assurances can be given, MERIT expects that the principal amount of
Subsequent Contracts to be purchased will require the application of
substantially all the Original Pre-Funded Amount and that there should be no
material prepayment as a result of a failure to purchase Subsequent Contracts.
MODELING ASSUMPTIONS
The following assumptions (the "Modeling Assumptions") have been used in
preparing the principal decrement tables on the following pages (the "DEC
Tables"). It has been assumed that: (1) the Adjustable Rate Contracts consist of
one assumed Adjustable Rate Contract, (2) the Level Payment Contracts consist of
two assumed Level Payment Contracts and (3) the Pre-Funded Amount is applied to
acquire one Level Payment Contract, each with the characteristics set forth in
the following tables as of August 10, 1999:
<TABLE>
<CAPTION>
August 10, 1999 Current
Contract Current Gross Total Current Gross Original Current Periodic Next Reset
Type Balance Index WAC Rate Fees Net WAC Margin WAM WAM Cap Date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Level Payment $215,626,512.50 Fixed 8.5439% 0.020% 8.5239% N/A 332 330 N/A N/A
Level Payment $83,224,555.65 Fixed 9.7094% 0.020% 9.6894% N/A 308 284 N/A N/A
Level Payment * $104,191,656.96 Fixed 8.5439% 0.020% 8.5239% N/A 332 332 N/A N/A
Adjustable Rate $5,124,488.25 Six-Month LIBOR 9.2926% 0.020% 9.2726% 5.800% 350 330 1.00% 11/1/00
</TABLE>
- ---------------
* Represents the assumed Subsequent Contracts.
It has been further assumed that:
(i) all scheduled payments on the assumed Contracts are
received timely on the payment date for each Contract, commencing
September 1, 1999, and prepayments on such Contracts are received on
the last day of each month beginning August 31, 1999, and include 30
days of interest thereon;
(ii) there are no defaults or shortfalls on the assumed
Contracts;
(iii) the assumed Contracts prepay monthly at the specified
constant percentages of MHP;
(iv) the Closing Date for the Bonds is September 2, 1999;
(v) payments are made to the Bondholders on the 28th day of
each month, commencing in September 1999;
(vi) the initial principal amount of each Class of Bonds is as
set forth on the cover hereof;
S-25
<PAGE>
(vii) there is no optional redemption or mandatory purchase of
the Bonds (except with respect to the line entitled "Weighted Average
Life with Redemption" which assumes an early redemption on the earlier
of (1) August 28, 2004, or (2) the Payment Date on which, after taking
into account payments of principal to be made on such Payment Date, the
aggregate outstanding principal balance of the Bonds is less than 35%
of the initial aggregate principal balance of the Bonds) and no
increase in the Class Interest Rates of the Bonds as a result of
MERIT's failure to redeem the Bonds when it is permitted to do so;
(viii) there are no prepayment fees or penalties;
(ix) 100% of all principal amounts due with respect to the
assets in the Collateralization are received and are invested in
Eligible Investments held in Collateralization Fund;
(x) Six month LIBOR remains constant at 5.885%;
(xi) all the Original Pre-Funded Amount is applied to the
purchase of Subsequent Contracts; and
(xii) for purposes of calculating the value of the
Collateralization Fund, the initial deposit to the Collateralizataion
Fund was assumed to be approximately $15,858,828, which was valued at
34.49% to derive a deemed initial principal balance of approximately
$5,469,710.
If the Bonds are redeemed when MERIT has the option to do so, the weighted
average life of the Bonds will be shorter than the weighted average life set
forth on the line entitled "Weighted Average Life Without Redemption", and,
using the Modeling Assumptions, the weighted average life of the Bonds would be
as set forth on the line entitled "Weighted Average Life With Redemption." See
"DESCRIPTION OF THE BONDS -- Optional Redemption" on page S-13.
There will be discrepancies between the Contracts actually included in the
Collateral and the Modeling Assumptions. Any discrepancy may have an effect upon
the percentages of initial principal amount (and weighted average lives) set
forth in the DEC Tables. To the extent that the Contracts actually included in
the Collateral have characteristics that differ from the Modeling Assumptions,
the Bonds are likely to have weighted average lives that are shorter or longer
than indicated by such tables. Other things being equal, to the extent that cash
is used to redeem Bonds because Contracts are not delivered together with all
the required documentation or Contracts are repurchased, the Bonds will have
shorter weighted average lives than indicated by the DEC Tables, which will
adversely affect the yield of such Bonds to the extent that they are purchased
at a premium.
There is no assurance that prepayment of the Contracts will conform to any of
the percentages of MHP described in the DEC Tables. Among other things, the DEC
Tables assume that the Contracts prepay at the indicated percentage rates of
MHP, notwithstanding the fact that such Contracts may vary substantially as to
geographic concentration of properties, interest rate and prepayment terms.
Variations in actual prepayment experience for the Contracts will increase or
decrease the percentages of initial principal balance (and weighted average
lives) shown in the DEC Tables.
The DEC Tables indicate the projected weighted average life of each Class of the
Bonds and set forth the percentage of the initial balance of the Bonds that
would be outstanding after each of the dates shown at various percentages of MHP
as indicated below. See "MATURITY AND PREPAYMENT CONSIDERATIONS" in the
Prospectus.
The Weighted Average Life values included in the following DEC Tables have been
determined by (a) multiplying the amount of each principal payment by the number
of years from the date of delivery of the Bonds to the related Payment Date, (b)
summing the results and (c) dividing the sum by the total principal to be paid
on the applicable Class of Bonds. Asterisks (*) in the following tables indicate
values between 0.0% and 0.5%.
S-26
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT
Class A1 Bonds Scenario
-----------------------------
75% 150% 200% 250% 300%
--- ---- ---- ---- ----
Initial Percent 100 100 100 100 100
August 28, 2000 76 56 44 31 18
August 28, 2001 48 9 0 0 0
August 28, 2002 20 0 0 0 0
August 28, 2003 0 0 0 0 0
August 28, 2004 0 0 0 0 0
August 28, 2005 0 0 0 0 0
August 28, 2006 0 0 0 0 0
August 28, 2007 0 0 0 0 0
August 28, 2008 0 0 0 0 0
August 28, 2009 0 0 0 0 0
August 28, 2010 0 0 0 0 0
August 28, 2011 0 0 0 0 0
August 28, 2012 0 0 0 0 0
August 28, 2013 0 0 0 0 0
August 28, 2014 0 0 0 0 0
August 28, 2015 0 0 0 0 0
August 28, 2016 0 0 0 0 0
August 28, 2017 0 0 0 0 0
August 28, 2018 0 0 0 0 0
August 28, 2019 0 0 0 0 0
August 28, 2020 0 0 0 0 0
August 28, 2021 0 0 0 0 0
August 28, 2022 0 0 0 0 0
August 28, 2023 0 0 0 0 0
August 28, 2024 0 0 0 0 0
August 28, 2025 0 0 0 0 0
August 28, 2026 0 0 0 0 0
August 28, 2027 0 0 0 0 0
August 28, 2028 0 0 0 0 0
August 28, 2029 0 0 0 0 0
Weighted Average
Life
Without
Redemption(1) 1.9 1.2 0.9 0.8 0.6
With
Redemption(2) 1.9 1.2 0.9 0.8 0.6
Class A2 Bonds Scenario
-----------------------------
75% 150% 200% 250% 300%
--- ---- ---- ---- ----
Initial Percent 100 100 100 100 100
August 28, 2000 100 100 100 100 100
August 28, 2001 100 100 65 13 0
August 28, 2002 100 21 0 0 0
August 28, 2003 86 0 0 0 0
August 28, 2004 31 0 0 0 0
August 28, 2005 0 0 0 0 0
August 28, 2006 0 0 0 0 0
August 28, 2007 0 0 0 0 0
August 28, 2008 0 0 0 0 0
August 28, 2009 0 0 0 0 0
August 28, 2010 0 0 0 0 0
August 28, 2011 0 0 0 0 0
August 28, 2012 0 0 0 0 0
August 28, 2013 0 0 0 0 0
August 28, 2014 0 0 0 0 0
August 28, 2015 0 0 0 0 0
August 28, 2016 0 0 0 0 0
August 28, 2017 0 0 0 0 0
August 28, 2018 0 0 0 0 0
August 28, 2019 0 0 0 0 0
August 28, 2020 0 0 0 0 0
August 28, 2021 0 0 0 0 0
August 28, 2022 0 0 0 0 0
August 28, 2023 0 0 0 0 0
August 28, 2024 0 0 0 0 0
August 28, 2025 0 0 0 0 0
August 28, 2026 0 0 0 0 0
August 28, 2027 0 0 0 0 0
August 28, 2028 0 0 0 0 0
August 28, 2029 0 0 0 0 0
Weighted Average
Life
Without
Redemption(1) 4.7 2.7 2.2 1.8 1.5
With
Redemption(2) 4.6 2.7 2.2 1.8 1.5
<PAGE>
Class A3 Bonds Scenario
-----------------------------
75% 150% 200% 250% 300%
--- ---- ---- ---- ----
Initial Percent 100 100 100 100 100
August 28, 2000 100 100 100 100 100
August 28, 2001 100 100 100 100 72
August 28, 2002 100 100 59 6 0
August 28, 2003 100 50 0 0 0
August 28, 2004 100 0 0 0 0
August 28, 2005 83 0 0 0 0
August 28, 2006 45 0 0 0 0
August 28, 2007 8 0 0 0 0
August 28, 2008 0 0 0 0 0
August 28, 2009 0 0 0 0 0
August 28, 2010 0 0 0 0 0
August 28, 2011 0 0 0 0 0
August 28, 2012 0 0 0 0 0
August 28, 2013 0 0 0 0 0
August 28, 2014 0 0 0 0 0
August 28, 2015 0 0 0 0 0
August 28, 2016 0 0 0 0 0
August 28, 2017 0 0 0 0 0
August 28, 2018 0 0 0 0 0
August 28, 2019 0 0 0 0 0
August 28, 2020 0 0 0 0 0
August 28, 2021 0 0 0 0 0
August 28, 2022 0 0 0 0 0
August 28, 2023 0 0 0 0 0
August 28, 2024 0 0 0 0 0
August 28, 2025 0 0 0 0 0
August 28, 2026 0 0 0 0 0
August 28, 2027 0 0 0 0 0
August 28, 2028 0 0 0 0 0
August 28, 2029 0 0 0 0 0
Weighted Average
Life
Without
Redemption(1) 6.9 4.0 3.2 2.6 2.2
With
Redemption(2) 5.0 4.0 3.2 2.6 2.2
Class A4 Bonds Scenario
-----------------------------
75% 150% 200% 250% 300%
--- ---- ---- ---- ----
Initial Percent 100 100 100 100 100
August 28, 2000 100 100 100 100 100
August 28, 2001 100 100 100 100 100
August 28, 2002 100 100 100 100 82
August 28, 2003 100 100 92 67 44
August 28, 2004 100 96 65 37 14
August 28, 2005 100 80 56 31 11
August 28, 2006 100 71 48 26 9
August 28, 2007 100 64 42 22 7
August 28, 2008 89 57 36 18 6
August 28, 2009 81 50 31 15 4
August 28, 2010 75 44 26 11 0
August 28, 2011 69 39 22 2 0
August 28, 2012 64 34 14 0 0
August 28, 2013 59 30 5 0 0
August 28, 2014 53 22 0 0 0
August 28, 2015 48 14 0 0 0
August 28, 2016 43 6 0 0 0
August 28, 2017 39 0 0 0 0
August 28, 2018 34 0 0 0 0
August 28, 2019 29 0 0 0 0
August 28, 2020 18 0 0 0 0
August 28, 2021 8 0 0 0 0
August 28, 2022 0 0 0 0 0
August 28, 2023 0 0 0 0 0
August 28, 2024 0 0 0 0 0
August 28, 2025 0 0 0 0 0
August 28, 2026 0 0 0 0 0
August 28, 2027 0 0 0 0 0
August 28, 2028 0 0 0 0 0
August 28, 2029 0 0 0 0 0
Weighted Average
Life
Without
Redemption(1) 15.6 10.6 7.9 5.8 4.3
With
Redemption(2) 5.0 5.0 4.8 4.4 3.8
- ---------------------------
(1) In years, assuming no redemption of the Bonds.
(2) In years, assuming the Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
S-27
<PAGE>
Class M1 Bonds Scenario
-----------------------------
75% 150% 200% 250% 300%
--- ---- ---- ---- ----
Initial Percent 100 100 100 100 100
August 28, 2000 100 100 100 100 100
August 28, 2001 100 100 100 100 100
August 28, 2002 100 100 100 100 100
August 28, 2003 100 100 100 100 100
August 28, 2004 100 100 100 100 100
August 28, 2005 100 95 87 84 81
August 28, 2006 100 85 75 70 65
August 28, 2007 100 75 65 58 52
August 28, 2008 100 67 56 46 25
August 28, 2009 95 60 44 19 0
August 28, 2010 88 53 21 0 0
August 28, 2011 81 40 2 0 0
August 28, 2012 75 21 0 0 0
August 28, 2013 69 5 0 0 0
August 28, 2014 63 0 0 0 0
August 28, 2015 57 0 0 0 0
August 28, 2016 51 0 0 0 0
August 28, 2017 36 0 0 0 0
August 28, 2018 18 0 0 0 0
August 28, 2019 * 0 0 0 0
August 28, 2020 0 0 0 0 0
August 28, 2021 0 0 0 0 0
August 28, 2022 0 0 0 0 0
August 28, 2023 0 0 0 0 0
August 28, 2024 0 0 0 0 0
August 28, 2025 0 0 0 0 0
August 28, 2026 0 0 0 0 0
August 28, 2027 0 0 0 0 0
August 28, 2028 0 0 0 0 0
August 28, 2029 0 0 0 0 0
Weighted Average
Life
Without
Redemption(1) 15.9 10.5 9.0 8.3 7.8
With
Redemption(2) 5.0 5.0 5.0 5.0 4.4
Class M2 Bonds Scenario
-----------------------------
75% 150% 200% 250% 300%
--- ---- ---- ---- ----
Initial Percent 100 100 100 100 100
August 28, 2000 100 100 100 100 100
August 28, 2001 100 100 100 100 100
August 28, 2002 100 100 100 100 100
August 28, 2003 100 100 100 100 100
August 28, 2004 100 100 100 100 100
August 28, 2005 100 95 87 84 81
August 28, 2006 100 85 75 70 55
August 28, 2007 100 75 53 31 10
August 28, 2008 100 62 22 0 0
August 28, 2009 95 36 0 0 0
August 28, 2010 88 12 0 0 0
August 28, 2011 81 0 0 0 0
August 28, 2012 75 0 0 0 0
August 28, 2013 68 0 0 0 0
August 28, 2014 47 0 0 0 0
August 28, 2015 26 0 0 0 0
August 28, 2016 6 0 0 0 0
August 28, 2017 0 0 0 0 0
August 28, 2018 0 0 0 0 0
August 28, 2019 0 0 0 0 0
August 28, 2020 0 0 0 0 0
August 28, 2021 0 0 0 0 0
August 28, 2022 0 0 0 0 0
August 28, 2023 0 0 0 0 0
August 28, 2024 0 0 0 0 0
August 28, 2025 0 0 0 0 0
August 28, 2026 0 0 0 0 0
August 28, 2027 0 0 0 0 0
August 28, 2028 0 0 0 0 0
August 28, 2029 0 0 0 0 0
Weighted Average
Life
Without
Redemption(1) 14.4 9.2 7.9 7.4 7.0
With
Redemption(2) 5.0 5.0 5.0 5.0 4.4
- ---------------------------
(1) In years, assuming no redemption of the Bonds.
(2) In years, assuming the Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
The DEC Tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Contracts
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction with the Modeling Assumptions.
YIELD CONSIDERATIONS
GENERAL
The yield to maturity of, and the aggregate amount of payments on, the Bonds
will be related to the rate and timing of principal payments on the Contracts,
which will be affected by the amortization schedules of the Contracts and the
rate of principal prepayments thereon (including for this purpose payments
resulting from refinancings, liquidations of the Contracts due to default,
casualties and condemnations and repurchases). An optional redemption of a Class
of Bonds will have the same effect as a prepayment in full of the Contracts with
respect to such Class. No assurance can be given as to the rate of principal
payments or prepayments on the Contracts.
The timing of changes in the rate of prepayments on the Contracts may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a prepayment of principal of a
Contract, the greater will be the effect on the investor's yield to maturity. As
a result, the effect on an investor's yield of principal prepayments occurring
at a rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Bonds would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments.
If the purchaser of a Bond offered at a discount from its Parity Price
calculates the anticipated yield to maturity of such Bond based on an assumed
rate of payment of principal that is faster than that actually received on the
Contracts, the actual yield to maturity will be lower than that so calculated.
Conversely, if the purchaser of a Bond offered at a premium over its Parity
S-28
<PAGE>
Price calculates the anticipated yield to maturity of such Bond based on an
assumed rate of payment of principal that is slower than that actually received
on the Contracts, the actual yield to maturity will be lower than that so
calculated.
Because the rate of principal payments (including prepayments) on the Contracts
may significantly affect the weighted average life and other characteristics of
the Bonds, prospective investors are urged to consider their own estimates as to
the anticipated rate of future prepayments on the Contracts and the suitability
of the Bonds to their investment objectives. For factors affecting principal
prepayments on the Contracts, see "MATURITY AND PREPAYMENT CONSIDERATIONS" on
page S-21.
In certain circumstances a Substitute Contract may be pledged to the Trustee in
substitution for a defaulted Contract or Repo Property, as more particularly
described in "SECURITY FOR THE BONDS -- Substitution of Contracts" on page S-18.
The amount, if any, by which the Unpaid Principal Balance of the defaulted
Contract or Repo Property exceeds the Unpaid Principal Balance of the Substitute
Contract would constitute a Loss on such Contract or Repo Property. Furthermore,
to the extent that any Substitute Contract has payment terms that differ from
the original Contract such difference in payment terms will affect the yield to
maturity of investors in the Bonds. MERIT's ability to pledge Substitute
Contracts may result in an increase in the weighted average life of the Bonds,
because such substitution would be effected in lieu of a foreclosure and
disposition of the related properties or REO and the resulting payment of
Liquidation Proceeds to Holders of the Bonds.
A higher than expected rate of default could produce payment delays and could
lead to foreclosures. A foreclosure may produce proceeds upon sale that are less
than the Unpaid Principal Balance of such Contract plus interest accrued thereon
and the expenses of sale. Such a shortfall upon foreclosure would result in a
Loss on such Contract.
SUBORDINATION
On each Payment Date, the holders of any higher ranking Class of Bonds will have
a preferential right to receive amounts of interest and, generally, principal
before any payments are made on any Class of Bonds subordinate to such Class. As
a result, the Class M2 and Class M1 Bonds will be more sensitive to the rate of
delinquencies and defaults on the Contracts than the Senior Bonds .
Losses with respect to the Contracts will be borne, by virtue of the payment
priorities described herein, first, by the cash and cash equivalents on deposit
in the Collateralization Fund attributable to principal, second, by any interest
received on the Contracts in excess of interest required to be paid on the Bonds
on any Payment Date, third, by any interest earnings on assets on deposit in the
Collateralization Fund, fourth, by the limited overcollateralization of the
Bonds and, fifth, by the Class B1, Class M2 and Class M1 Bonds (in that order)
before any losses will be borne by the Class A1, Class A2, Class A3 and Class A4
Bonds. Losses will be borne by the Class A1, Class A2, Class A3 and Class A4
Bonds PRO RATA based on their outstanding principal balance.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
MERIT will cause an election to be made to treat the Contracts and the
Collateral Proceeds Account (the "REMIC Estate") as a REMIC for federal income
tax purposes; the Capitalized Interest Account, the Pre-Funding Account and the
Collateralization Fund will not be part of the REMIC Estate. The Bonds will be
designated as the regular interests in the REMIC; MERIT will retain the residual
interest in the REMIC.
In the opinion of Arter & Hadden LLP, counsel to MERIT, for federal income tax
purposes, assuming (i) the REMIC election is made, (ii) the Indenture is fully
executed, delivered and enforceable against the parties thereto in accordance
with its terms, (iii) the transactions described herein are completed on
substantially the terms and conditions set forth herein and (iv) compliance with
the Indenture, the REMIC Estate will be treated as a REMIC and each Class of
S-29
<PAGE>
Bonds will be treated as a "regular interest" in the REMIC and generally will be
treated as debt instruments issued by the REMIC. Holders of Bonds that otherwise
report income under a cash method of accounting will be required to report
income with respect to the Bonds under an accrual method.
As a result of the qualification of the REMIC Estate as a REMIC, the REMIC will
not be subject to federal income tax except with respect to (i) income from
prohibited transactions, (ii) "net income from foreclosure property" and (iii)
certain contributions to the REMIC after the Closing Date. The total income of
the REMIC (exclusive of any income that is taxed at the REMIC level) will be
taxable to the beneficial owners of the Bonds and the residual interest. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. Income with respect
to the Pre-Funding Account, the Capitalized Interest Account and the
Collateralization Fund will be taxed to MERIT.
The Class A1 Bonds earn interest at a fixed rate and will be issued with
original issue discount only if their stated principal amount exceeds their
issue price. The Class A2, Class A3, Class A4, Class M1 and Class M2 Bonds will
be treated as contingent payment obligations and will be treated as issued with
original issue discount regardless of their issue prices. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Original Issue Discount" in the Prospectus. In
determining the rate of accrual of original issue discount, amortization of bond
premium or market discount, if any, on the Bonds, Bondholders should use a
prepayment assumption of 200% MHP (as described under "MATURITY AND PREPAYMENT
CONSIDERATIONS -- Modeling Assumptions" on page S-23). No representation,
however, is made herein as to the rate at which prepayments on the Contracts
actually will occur.
The OID Regulations contain provisions (the "Contingent Payment Regulations")
that address the federal income tax treatment of debt obligations that provide
for one or more contingent payments. Although the Contingent Payment
Regulations, by their terms, do not apply to REMIC regular interests and other
instruments that are subject to section 1272(a)(6) of the Code, in the absence
of further guidance, MERIT intends to account for income on the Class A2, Class
A3, Class A4, Class M1 and Class M2 Bonds in the manner described in this
paragraph. Income will be accrued on those Bonds based on a constant yield that
is derived from a projected payment schedule as of the Closing Date. The
projected payment schedule will take into account the Pricing Prepayment
Assumptions and the interest payments that are expected to be made, based on the
assumption that the principal balances of the Contracts pay down pro rata. 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.
The method described in the foregoing paragraph for accounting for interest on
the Class A2, Class A3, Class A4, Class M1 and Class M2 Bonds is consistent with
Code section 1272(a)(6) and the legislative history to that section. However,
considerable uncertainty exists with respect to the treatment of bonds such as
the Class A2, Class A3, Class A4, Class M1 and Class M2 Bonds under the OID
Regulations. Accordingly, there can be no assurance that the Internal Revenue
Service will not assert successfully that a method less favorable to Bondholders
should apply. In view of the complexities and the current uncertainties as to
income inclusions with respect to securities such as the Class A2, Class A3,
Class A4, Class M1 and Class M2 Bonds, each purchaser should consult his own tax
advisor to determine the appropriate amount and method of income inclusion on
such certificates for federal income tax purposes.
CREDIT ENHANCEMENT PROVIDED BY COLLATERALIZATION FUND AND SALE OF CALL RIGHT
The Bonds will be entitled to the benefit provided by the Collateralization
Fund, which is not part of the REMIC, and will be purchased subject to the right
of an affiliate of MERIT to effect a mandatory purchase of a Class or Classes of
the Bonds on any Payment Date on and after the earlier of (i) the Payment Date
in August 2004 or (ii) the Payment Date on which, after taking into account
payments of principal to be made on such Payment Date, the aggregate outstanding
principal balance of the Bonds is less than 35% of the initial aggregate
outstanding principal balance of the Bonds (the "Call Right").
If the benefit provided by the Collateralization Fund is treated as separate
from the Bonds, the purchasers of the Bonds may be treated for federal income
tax purposes as having purchased simultaneously (i) the Bonds without the credit
enhancement provided by the Collateralization Fund and (ii) the credit
S-30
<PAGE>
enhancement provided by the Collateralization Fund. The purchasers of the Bonds
would have to allocate for federal income tax purposes the amount paid by them
between the Bonds without the credit enhancement and the credit enhancement
provided by the Collateralization Fund.
If the Call Right is treated as separate from the Bonds, the purchasers of the
Bonds may be treated for federal income tax purposes as having purchased such
Bonds without any obligation to sell such Bonds and as having simultaneously
sold a separate option to effect a mandatory purchase of the Bonds. The
purchasers of the Bonds would be considered to have received an option premium
and to have purchased the Bonds for a purchase price equal to the amount paid
plus the option premium. Certain rules (such as the straddle rules) governing
the treatment of a debt instrument and a related option could apply in this
situation and, in certain circumstances, could affect a Bondholder's holding
period and cost-of-carry in respect of its Bonds.
MERIT, however, believes that the credit enhancement provided by the
Collateralization Fund and the Call Right retained by MERIT should be treated as
part of a single debt instrument for federal income tax purposes. Even if the
credit enhancement provided by the Collateralization Fund and/or the Call Right
and the Bonds are not treated as a single debt instrument, MERIT believes that
the fair market value of each of the credit enhancement provided by the
Collateralization Fund and the Call Right retained by MERIT is DE MINIMIS and,
therefore, the purchase price of the Bonds would not be affected in any event.
If nevertheless, the Internal Revenue Service determined that the credit
enhancement provided by the Collateralization Fund had more than DE MINIMIS
value, the result of that determination would be that a Bondholder would have to
allocate its purchase price for the Bond between the individual interest in the
Collateralization Fund and its regular interest in the REMIC in accordance with
the relative fair market value of those two property rights. The amount
allocated to the credit enhancement provided by the Collateralization Fund would
likely be treated as a notional principal contract subject to special accounting
rules under applicable Treasury Regulations. Similarly, if the Service
determined that the Call Right had more than DE MINIMIS value, the result of
that determination would be that a Bondholder had sold a call right with more
than DE MINIMIS value, which, if not exercised by MERIT, would result in a gain
to the Bondholder. In that event, the issue price of such a Bond would be
greater, by the value of the Call Right, than the aggregate price paid. If the
issue price is greater than the stated redemption price at maturity, the Bond
would have acquisition premium.
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.
USE OF PROCEEDS
MERIT will retain from the proceeds from the sale of the Bonds an issuance fee
that will be used to cover its expenses and to compensate it for facilitating
the issuance of the Bonds. The proceeds from the sale of the Bonds net of the
issuance fee will be used by MERIT to purchase the Collateral from Issuer
Holding Corp. A portion of such net proceeds will be used to repay Lehman
Brothers Inc. and Greenwich Capital Markets, Inc., in respect of certain
extensions of credit made to one or more affiliates of MERIT.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
dated as of the date hereof (the "Underwriting Agreement") between Lehman
Brothers Inc. and Greenwich Capital Markets, Inc. (the "Underwriters"), Issuer
Holding Corp. and MERIT, MERIT has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase from MERIT, the Class A1, Class A2, Class
S-31
<PAGE>
A3, Class A4, Class M1 and Class M2 Bonds other than $11,000,000 principal
amount of the Class M2 Bonds (the "Offered Bonds"). An affiliate of MERIT will
purchase the Class M2 Bonds not purchased by the Underwriters and may offer such
Class M2 Bonds from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale.
The distribution of the Offered Bonds will be effected from time to time in one
or more negotiated transactions, or otherwise, at varying prices to be
determined, in each case, at the time of sale. The Underwriters may effect such
transactions by selling Offered Bonds to or through dealers, and such dealers
may receive from the Underwriters, for whom they act as agent, compensation in
the form of underwriting discounts, concessions or commissions. The Underwriters
and any dealers that participate with the Underwriters in the distribution of
the Offered Bonds may be deemed to be underwriters, and any discounts,
commissions or concessions received by them, and any profit on the resale of the
Offered Bonds purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act"). In
addition, Lehman Brothers Inc. will be entitled to receive a structuring fee of
$366,500 from MERIT.
The Underwriting Agreement provides that MERIT and Issuer Holding Corp. will
indemnify the Underwriters against certain civil liabilities, including
liabilities under the Act to the extent and under the circumstances set forth
therein.
MERIT expects to receive proceeds of approximately $325,333,000, plus accrued
interest, before deducting expenses estimated to be $625,000.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the offered
certificates in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when the offered
certificates originally sold by syndicate members are purchased in a syndicate
covering transaction to cover syndicate short positions. Stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the offered certificates to be higher than it would otherwise be in the
absence of these transactions. These transactions, if commenced, may be
discontinued at any time.
Some of the Contracts have been the subject of financing provided by affiliates
of the Underwriters. The Underwriters and their affiliates have lending
relationships with affiliates of MERIT.
LEGAL MATTERS
Certain legal matters relating to the Bonds will be passed upon for MERIT by
Arter & Hadden LLP, Washington, D.C., and certain legal matters relating to the
Bonds will be passed upon for the Underwriters by Hunton & Williams, Richmond,
Virginia, which also performs certain legal services for MERIT and its
affiliates on other matters.
RATINGS
It is a condition to the issuance of the Bonds that the Offered Bonds be rated
as set forth on the cover page.
The ratings assigned to asset-backed bonds take into consideration the credit
quality of the related pool of assets, including any credit enhancement,
structural and legal aspects associated with such bonds and the extent to which
the payment stream on the related assets is adequate to make payments required
on such bonds. Ratings on such bonds do not, however, constitute a statement
regarding frequency of prepayments on the related loans. As a result, the
ratings do not address the possibility that the holders of the Offered Bonds
might suffer a lower than anticipated yield.
S-32
<PAGE>
A security rating is not a recommendation to buy, sell or hold Offered Bonds and
may be subject to revision or withdrawal at any time by the assigning Rating
Agency. In the event that a rating initially assigned to the Offered Bonds is
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to the Offered Bonds.
Each security rating should be evaluated independently of any other security
rating.
MERIT has not requested a rating on the Offered Bonds by any rating agency other
than Moody's Investors Services, Inc., and Fitch IBCA, Inc. (collectively, the
"Rating Agencies"). Nevertheless, there can be no assurance as to whether any
other rating agency will nonetheless issue a rating and, if it does, what such
rating would be. A rating assigned to the Offered Bonds by a rating agency that
has not been requested by MERIT to do so may be lower than the rating assigned
by the Rating Agencies pursuant to MERIT's request.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the
Code (any of the foregoing a "Plan"), persons acting on behalf of a Plan, or
persons using the assets of a Plan ("Plan Investors"), should carefully review
with their legal advisors whether the purchase or holding of the Bonds could
give rise to a transaction that is prohibited under ERISA or the Code or cause
the Collateral securing the Bonds to be treated as "plan assets" for purposes of
regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations"). Prospective investors should be aware that, although
certain exceptions from the application of the prohibited transaction rules and
the Plan Asset Regulations exist, there can be no assurance that any such
exception will apply with respect to the acquisition of a Bond. See "ERISA
CONSIDERATIONS" in the Prospectus.
If the Offered Bonds are treated as equity for purposes of ERISA, the purchaser
of an Offered Bond could be treated as having acquired a direct interest in the
Collateral securing the Offered Bonds. In that event, the purchase, holding, or
resale of the Offered Bonds could result in a transaction that is prohibited
under ERISA or the Code. Furthermore, regardless of whether the Offered Bonds
are treated as equity for purposes of ERISA, the acquisition or holding of the
Offered Bonds by or on behalf of a Plan could still be considered to give rise
to a prohibited transaction if MERIT, the Trustee, any Master Servicer, any
Servicer or any of their respective affiliates is or becomes a party in interest
or a disqualified person with respect to such Plan. Nevertheless, one or more
alternative exemptions may be available with respect to certain prohibited
transaction rules of ERISA that might apply in connection with the initial
purchase, holding and resale of the Offered Bonds, depending in part upon the
type of Plan fiduciary making the decision to acquire Offered Bonds and the
circumstances under which such decision is made. Those exemptions include, but
are not limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 95-60,
regarding investments by insurance company general accounts; (ii) PTCE 91-38,
regarding investments by bank collective investment funds; (iii) PTCE 90-1,
regarding investments by insurance company pooled separate accounts; (iv) PTCE
84-14, regarding transactions negotiated by qualified professional asset
managers; or (v) PTCE 96-23, regarding transactions negotiated by in-house asset
managers. Before purchasing Bonds, a Plan subject to the fiduciary
responsibility provisions of ERISA or described in Section 4975(e)(1) (and not
exempt under Section 4975(g)) of the Code should consult with its counsel to
determine whether the conditions of any exemption would be met. A purchaser of a
Offered Bond should be aware, however, that even if the conditions specified in
one or more exemptions are met, the scope of the relief provided by an exemption
might not cover all acts that might be construed as prohibited transactions. See
"ERISA CONSIDERATIONS" in the Prospectus.
MERIT believes that the Offered Bonds will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
Accordingly, a Plan that acquires such Bond should not be treated as having
acquired a direct interest in the assets of MERIT. Nevertheless, there can be no
complete assurance that such Bonds will be treated as debt obligations without
significant equity features for purposes of the Plan Asset Regulations.
S-33
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
At the end of the Funding Period the Senior Bonds and the Class M1 Bonds will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 for so long as they are rated in one of the two
highest rating categories by one or more nationally recognized statistical
rating organizations. As mortgage related securities, the Senior Bonds and the
Class M1 Bonds will be legal investments for entities to the extent provided in
SMMEA, unless there are state laws overriding SMMEA. A number of states have
enacted legislation overriding the legal investment provisions of SMMEA. See
"LEGAL INVESTMENT" in the Prospectus.
THE CLASS M2 BONDS WILL NOT CONSTITUTE MORTGAGE RELATED SECURITIES FOR PURPOSES
OF SMMEA BECAUSE THEY ARE NOT RATED IN ONE OF THE TWO HIGHEST RATING CATEGORIES
BY A NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION. There are
significant interpretive uncertainties in determining the appropriate
characterization of the Class M2 Bonds under various legal investment
restrictions, and thus the ability of investors that face legal restrictions to
purchase the Class M2 Bonds. Any financial institution regulated by the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration, any state insurance
commission or any other federal or state agency with similar authority should
review any applicable rules, guidelines and regulations prior to purchasing any
certificates. Financial institutions should review and consider the
applicability of the Federal Financial Institutions Examination Counsel
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices, to the extent adopted by their respective
federal regulators, which, among other things, sets forth guidelines for
investing in certain types of mortgage related securities and prohibits
investment in high risk mortgage securities.
MERIT does not make any representations as to the proper characterization of any
class of the Offered Bonds for legal investment or other purposes, or as to the
legality of investment by particular investors in any class of the offered
certificates under applicable legal investment restrictions. Accordingly, all
institutions that must observe legal investment laws and regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors to determine whether and to what extent the offered certificates
constitute legal investments under SMMEA or must follow investment, capital or
other restrictions. See "LEGAL INVESTMENT" in the Prospectus.
S-34
<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: (a) one- to four-family, residential
mortgage loans ("Mortgage Loans"), which may include Second Lien Mortgage Loans,
(b) mortgage loans secured by model homes leased to homebuilders ("Model Home
Loans"), (c) manufactured housing installment sales contracts ("Manufactured
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"). Each item of the Collateral for a Series
of Bonds may be referred to herein as a "Loan." 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").
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." The Loans may be underwritten in
accordance with underwriting standards for "non-conforming credits," which
include borrowers whose creditworthiness and repayment ability do not satisfy
Fannie Mae or FHLMC underwriting guidelines. See "RISK FACTORS -- Credit
Considerations." The Collateral securing a Series will be serviced by one or
more Servicers that are subject to supervision by a Master Servicer, which may
be Dynex Capital, Inc. ("Dynex") or another entity experienced in acting as a
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 Servicer and the
Master Servicer will be obligated under certain circumstances to make Advances.
See "SERVICING OF THE COLLATERAL."
The Prospectus Supplement 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) information as to the the Trust Estate securing such
Series; (v) the redemption features pertaining to the Series and (vi) additional
information with respect to the plan of distribution of Bonds of each Class. See
"DESCRIPTION OF THE BONDS."
Bonds of a Series will be characterized for federal income tax purposes as
debt instruments. If specified in a Prospectus Supplement, one or more elections
will be made to treat the related Trust Estate or specified portions thereof as
real estate mortgage investment conduits (each, a "REMIC") for federal income
tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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."
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED BEFORE PURCHASING BONDS OF A SERIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales offered hereby unless accompanied by a related
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS AUGUST 11, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY....................1
RISK FACTORS..........................6
Credit Considerations..............6
Limited Obligations...............11
Limited Liquidity.................12
Bankruptcy or Insolvency of the
Issuer..........................12
Bankruptcy or Insolvency of IHC
or a Participant................12
Deficiency on Sale of Collateral..12
Modification and Substitution
of Collateral.....................12
Pledge of Additional Collateral...13
Average Life and Yield
Considerations..................13
Limited Nature of Ratings.........14
Insurance and Credit Support
Limitations.....................14
Lender Regulations................14
Limitations on Subordination......15
Original Issue Discount...........15
Legal Investment Considerations...15
Consolidated Tax Return...........15
DESCRIPTION OF THE BONDS.............15
General...........................15
Book-Entry Procedures.............16
Payments of Principal and
Interest........................22
Redemption........................23
MATURITY AND PREPAYMENT
CONSIDERATIONS.....................23
YIELD CONSIDERATIONS.................23
SECURITY FOR THE BONDS...............24
General...........................24
The Collateral....................24
The Mortgage Loans................24
The Model Home Loans..............26
The Manufactured Home Loans.......27
The Consumer Finance Loans........28
Substitution of Collateral........29
Pledge of Additional Collateral and
Issuance of Additional Bonds....29
Master Servicer Custodial Account.30
Collateral Proceeds Account.......30
Reserve Fund or Accounts..........30
Other Funds or Accounts...........30
Investment of Funds...............31
Insurance on the Collateral.......31
Credit Enhancement................33
Bond Insurance and Surety Bonds...34
ORIGINATION OF THE COLLATERAL........34
Mortgage Loans and Manufactured
Home Loans........................34
Model Home Loans..................35
Consumer Finance Loans............35
Representations and Warranties....36
SERVICING OF THE COLLATERAL..........36
General...........................36
Payments on Collateral............37
Advances..........................38
Collection and Other Servicing
Procedures......................38
Defaulted Collateral..............39
Maintenance of Insurance Policies;
Claims Thereunder and Other
Realization Upon Defaulted
Collateral......................39
Evidence as to Servicing
Compliance......................40
Events of Default and Remedies....40
Master Servicing Agreement........41
Special Servicing Agreement.......41
THE INDENTURE........................41
General...........................41
Modification of Indenture.........42
Events of Default.................42
Authentication and Delivery of
Bonds...........................44
List of Bondholders...............44
Annual Compliance Statement.......44
Reports to Bondholders............44
Trustee's Annual Report...........44
Trustee.........................45
Satisfaction and Discharge of the
Indenture.......................45
CERTAIN LEGAL ASPECTS OF THE
COLLATERAL.........................45
Mortgage Loans and Model Home
Loans...........................45
Manufactured Home Loans...........49
Consumer Finance Loans............53
Consumer Protection Laws..........55
Environmental Considerations......55
Enforceability of Certain
Provisions......................56
THE ISSUER...........................56
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.......................56
General...........................56
Bonds Treated as Debt Without a
REMIC Election..................57
REMIC Bonds.......................58
Sales or Exchanges of Bonds.......61
Original Issue Discount...........62
Market Discount...................65
Premium...........................67
Reporting and Other Administrative
Matters.........................67
Backup Withholding with Respect to
Bonds...........................67
Foreign Investors in Bonds........67
STATE TAX CONSIDERATIONS.............68
ERISA CONSIDERATIONS.................68
LEGAL INVESTMENT.....................69
USE OF PROCEEDS......................70
PLAN OF DISTRIBUTION.................70
LEGAL MATTERS........................71
FINANCIAL INFORMATION................71
ADDITIONAL INFORMATION...............71
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE.......................71
REPORTS TO BONDHOLDERS...............71
GLOSSARY.............................72
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Bonds contained in the related
Prospectus Supplement and Indenture to be prepared and delivered in connection
with the offering of Bonds of such Series.
Capitalized terms used herein and not defined herein will have the
respective meanings assigned to them in the "GLOSSARY."
ISSUER.................. MERIT SecuritiesCorporation, 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."
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 Chase Bank of Texas,
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."
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 therefor, principal will be paid on the Bonds
in an amount equal to the Principal Distribution Amount
defined in the related Prospectus Supplement. 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
that consists of one or more of the following:
A. COLLATERAL.... The Collateral for Bonds of each Series may consist of:
<PAGE>
MORTGAGE LOANS: 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.
MODEL HOME LOANS: 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: 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: 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.
Mortgage Loans, Model Home Loans, Manufactured Home
Loans and 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 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."
The Collateral for each Series of Bonds will be more
specifically described in the related Prospectus
Supplement.
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) 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 earthquakes, 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 loans, cash, securities,
certificates of deposit, letters of credit or other
instruments or documents acceptable to the Rating
Agencies for such Series in one or more Reserve Funds
that may be used by the Trustee 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 any Reserve Fund as
described in the Prospectus Supplement for a Series.
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 insurance
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.............. 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 Mortgage Loans,
Model Home Loans, Manufactured Home Loans or Consumer
Finance Loans will perform the 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 Mortgage Loans, 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."
3
<PAGE>
MASTER SERVICER......... Except as otherwise indicated in a Prospectus
Supplement, Dynex will act as Master Servicer (in such
capacity, the "Master Servicer") with respect to all
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
"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 THE COLLATERAL --
Special Servicing Agreement."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES..... The federal income tax consequences to Bondholders will
depend on, among other things, whether one or more
elections are made to treat the related Trust Estate
(or specified portions) as "real estate mortgage
investment conduits" (each, a "REMIC") under the
provisions of the Internal Revenue Code of 1986, as
amended ( the "Code"). If no such election is made,
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 Code section 856(i)), will constitute debt
instruments for federal income tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and in
the related Prospectus Supplement, which will specify
whether a REMIC election will be made.
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 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."
4
<PAGE>
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 Code Section 4975 (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 Code Section 4975. Investors are advised to
consult their counsel and to review "ERISA
CONSIDERATIONS." 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.
5
<PAGE>
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. 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 Fannie
Mae 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 Fannie Mae 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 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."
6
<PAGE>
As specified in the related Prospectus Supplement, in order to maximize
recoveries on defaulted Mortgage Loans, the Master Servicer may 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 may
result in an Event of Default under the Indenture. See "THE INDENTURE -- Events
of Default."
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 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 Fannie Mae or FHLMC generally will bear higher rates of interest
than mortgage loans that are originated in accordance with Fannie Mae 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 Fannie Mae or
FHLMC due to borrower credit characteristics that do not meet Fannie Mae or
FHLMC underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such Fannie Mae 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 FANNIE MAE 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.
7
<PAGE>
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
Fannie Mae 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 Fannie
Mae 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 with respect to a
Model 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 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. 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 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.
8
<PAGE>
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 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, the Participant will not amend any certificate of title to change the
lienholder specified therein or take any other steps to effect re-registration
of any Manufactured Home with the appropriate state motor vehicle authority. In
addition, the Participant will not deliver any certificate of title, note
thereon the Issuer's interest or file any UCC-3 financing statements or other
instruments evidencing the transfer to the Issuer of the 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 transfer of the security interest created by a Manufactured
Home Loan in the underlying Manufactured Home will be effective or whether the
security interest in the Manufactured Home will be perfected. In addition, in
the absence of notation of the interest in a Manufactured Home on the related
certificate of title, re-registration of the Manufactured Home with the
appropriate state motor vehicle authority, delivery of the certificate of title
or filing of an appropriate transfer instrument under the applicable UCC, it is
unclear whether the assignment to the Issuer of the security interest created by
a Manufactured Home Loan in the underlying Manufactured Home will be effective
against creditors of the Participant or a trustee in bankruptcy of the
Participant. 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.
9
<PAGE>
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 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. 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 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 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.
10
<PAGE>
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 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, may 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, any Underwriter or any Affiliate of any
Underwriter, any 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, any Underwriter or any Affiliate of any Underwriter,
any Master Servicer or any Servicer.
11
<PAGE>
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 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 IHC. 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. 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.
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."
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."
12
<PAGE>
In addition, under certain circumstances, the Issuer may substitute new
Collateral ("Substitute Collateral") for defaulted 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."
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 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."
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."
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.
13
<PAGE>
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 Holders 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 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", "-- Consumer Protection Laws" "-- Mortgage Loans and Model Home Loans --
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS."
14
<PAGE>
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.
ORIGINAL ISSUE DISCOUNT
Certain Bonds may be issued, or the Trustee may treat such Bonds as
issued, with original issue discount for federal income tax purposes. The
Trustee will report original issue discount with respect to such Bonds on an
accrual basis, which may be prior to the receipt of cash associated with such
income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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 future 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.
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 (prior to
its disbursement to the Issuer), 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.
15
<PAGE>
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds may be issued up to the aggregate principal
amount authorized from time to time by the Issuer. The Indenture provides that
Additional Bonds may be issued for any outstanding Class of Bonds or Series up
to the aggregate principal amount authorized from time to time by the Issuer,
subject to the provisions of the related Series Supplement or supplements
thereto.
The Bonds of each Series will be issued in fully-registered certificated
or book-entry form in the authorized denominations specified in the related
Prospectus Supplement. The Bonds of each Series that are issued in certificated
form may be transferred or exchanged at the corporate trust office of the
Trustee without the payment of any service charge, other than any tax or other
governmental charge payable in connection therewith. Unless otherwise specified
in the related Prospectus Supplement, the Trustee will make payments of
principal of and interest on the Bonds of a Series that are issued in
certificated form (i) by checks mailed to registered Bondholders at their
addresses appearing on the books and records of the Issuer or (ii) by wire
transfer of immediately available funds upon timely request to the Trustee in
writing by any Bondholder of Bonds having an initial principal amount of at
least $1,000,000 or such other amount as may be specified in the related
Prospectus Supplement except that the final payments in retirement of each Class
of Bonds of a Series issued in certificated form will be made only upon
presentation and surrender of such Bonds at the office or agency of the Issuer
maintained for that purpose. The Trustee will make such payments with respect to
Bonds in book-entry form as set forth below.
BOOK-ENTRY PROCEDURES
The Prospectus Supplement for a Series may specify that certain Classes of
the Bonds will initially be issued in book-entry form ("Book-Entry Bonds") in
the authorized denominations specified therein. Each such Class of Bonds will be
represented by one or more certificates registered in the name of the nominee of
the depository, which is expected to be The Depository Trust Company ("DTC" and,
together with any successor or other depository selected by the Issuer, the
"Depository"). The Depository or its nominee will be registered as the record
holder of the Bonds in the Bond Register. No person acquiring a Book-Entry Bond
(a "beneficial owner") will be entitled to receive a certificate representing
such Bond.
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.
16
<PAGE>
The Prospectus Supplement for a Series may also specify that CEDEL Bank,
S.A. ("CEDEL") and Euroclear System ("Euroclear") will hold omnibus positions on
behalf of their participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of the Depository. Citibank, N.A., acts as
depositary for CEDEL and Chase Manhattan Bank acts as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries").
CEDEL. CEDEL is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participant
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to CEDEL Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. CEDEL interfaces with domestic markets in
several countries. As a professional depository, CEDEL is subject to regulation
by the Luxembourg Monetary Institute. CEDEL Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to CEDEL is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
EUROCLEAR. Euroclear was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Morgan Guaranty
Trust Company of New York, Brussels Office (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear Securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is an office of a New York trust company which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Depository Participant will be
made during subsequent securities settlement processing and dated the business
day following the settlement date for the Depository. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or CEDEL participants on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or through
a CEDEL Participant (as defined below) or Euroclear Participant (as defined
below) to a Depository Participant will be received with value on the settlement
date for the Depository but will be available in the relevant CEDEL or Euroclear
cash account only as of the business day following settlements in the
Depository. For information with respect to tax documentation procedures
relating to the Bonds, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Backup
Withholding with Respect to Bonds" and "-- Global Clearance, Settlement and Tax
Documentation Procedures -- CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION
REQUIREMENTS."
17
<PAGE>
Transfers between Depository Participants will occur in accordance with
the rules of the Depository. Transfers between CEDEL Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through the Depository, on the one hand, and directly or indirectly through
CEDEL Participants or Euroclear Participants, on the other, will be effected in
the Depository in accordance with its rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however, such cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in the Depository, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
Beneficial Owners of the Book-Entry Bonds may experience some delay in
their receipt of payments, since such payments will be forwarded by the Paying
Agent to the Depository. Distributions with respect to Bonds held through CEDEL
or Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because the Depository can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Bonds to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Bonds, may be limited due to the lack of physical certificates for such
Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry
form may reduce the liquidity of such Bonds in the secondary market since
certain potential investors may be unwilling to purchase Bonds for which they
cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Master Servicer to
the Depository, may be made available by the Depository to Beneficial Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Depository Participants to whose
accounts the Book-Entry Bonds of such Beneficial Owners are credited.
So long as the Bonds are held as Book-Entry Bonds by the Depository, it is
expected that the Depository will take any action permitted to be taken by the
Holders of the Bonds under the Agreement only at the direction of one or more
Depository Participants to whose accounts the Book-Entry Bonds are credited.
CEDEL or the Euroclear Operator, as the case may be, will take any action
permitted to be taken by a Holder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through the Depository. The Depository may take
actions, at the direction of the Depository Participants, with respect to some
Bonds which conflict with actions taken with respect to other Bonds.
None of the Sellers, the Depositor, the Servicers, the Master Servicer,
any Bond Insurer or the Trustee will have any responsibility for any aspect of
the records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Bonds or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Definitive Bonds will be issued to Beneficial Owners of the Book-Entry
Bonds, or their nominees, rather than to the Depository, only if (a) the
Depository or the Depositor advises in writing that the Depository is no longer
willing, qualified or able to discharge properly its responsibilities as a
nominee and depository with respect to the Book-Entry Bonds and the Depositor or
the Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through the Depository or
(c) the Depository, at the direction of the Depository Participants to whose
accounts are credited a majority of the outstanding Book-Entry Bonds, advises
the Trustee in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of Beneficial
Owners.
18
<PAGE>
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through the
Depository of Definitive Bonds. Upon surrender by the Depository of the global
certificate or certificates representing the Book-Entry Bonds and instructions
for re-registration, the Bond Registrar will issue Definitive Bonds, and
thereafter the Bond Registrar will recognize the holders of such Definitive
Bonds as Holders under the Agreement.
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
The Prospectus Supplement for a Series may specify that Bonds of a Series
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same- day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors through the Depository will be
conducted according to its rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and Depository
Participants will be effected on a delivery-against-payment basis through the
Relevant Depositaries (in such capacity) and as Depository Participants.
Non-U.S. holders (as described below) will be subject to U.S. withholding
taxes unless they meet certain requirements and deliver appropriate U.S. tax
documents to the securities clearing organizations or their participants.
INITIAL SETTLEMENT. All Bonds will be held in book-entry form by the
Depository. Investors' interests in the Bonds will be represented through
financial institutions acting on their behalf as direct and indirect
participants in the Depository. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in its account as a Depository
Participant.
Investors electing to hold through the Depository will follow its
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold through CEDEL or Euroclear accounts will follow
the settlement procedures applicable to conventional eurobonds, except that
there will be no temporary global security and no "lock-up" or restricted
period. Bonds will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
SECONDARY MARKET TRADING. Because the purchaser determines the place of
delivery, it is important to establish at the time of the trade where both the
purchaser's and seller's accounts are located to ensure that settlement can be
made on the desired value date.
TRADING BETWEEN DEPOSITORY PARTICIPANTS. Secondary market trading between
Depository Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
19
<PAGE>
TRADING BETWEEN DEPOSITORY PARTICIPANT AS SELLER AND CEDEL OR EUROCLEAR
PARTICIPANT AS PURCHASER. When Bonds are to be transferred from the account of a
Depository Participant to the account of a CEDEL Participant or a Euroclear
Participant, the purchaser will send instructions to CEDEL or Euroclear through
a CEDEL Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear will instruct the Relevant Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Bonds from and including the last distribution
date to and excluding the settlement date, on the basis of the actual number of
days in such accrual period and a year assumed to consist of 360 days or a
360-day year of twelve 30-day months as applicable to the related class of
Bonds. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the Relevant Depositary to the account of the Depository
Participant against delivery of the Bonds. After settlement has been completed,
the Bonds will be credited to the respective clearing system and by the clearing
system, in accordance with its usual procedures, to the CEDEL Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Bonds will accrue from, the value date (which will be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (I.E., the trade fails), the CEDEL or Euroclear cash debt will be
valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Bonds are
credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants may elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Bonds
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Bonds were credited to their accounts. Nevertheless, interest on the
Bonds would accrue from the value date. Therefore, in many cases the interest
accruing on the Bonds during that one-day period may substantially reduce or
offset the amount of such overdraft charges, although the result will depend on
each CEDEL Participant's or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Depository Participants may employ their usual procedures for crediting Bonds to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the seller on the
settlement date. Thus, to the Depository Participants a cross-Depository market
transaction will settle no differently than a trade between two Depository
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR PARTICIPANT AS SELLER AND PARTICIPANT
AS PURCHASER. Due to time zone differences in their favor, CEDEL Participants
and Euroclear Participants may employ their customary procedures for
transactions in which Bonds are to be transferred by the respective clearing
system, through the respective Depository, to a Depository Participant. The
seller will send instructions to CEDEL or Euroclear through a CEDEL Participant
or Euroclear Participant at least one business day prior to settlement. In these
cases CEDEL or Euroclear will instruct the Relevant Depositary to credit the
Bonds to the Depository Participant's account against payment. Payment will
include interest accrued on the Bonds from and including the last distribution
to and excluding the settlement date on the basis of the actual number of days
in such accrual period or a year assumed to consist of 360 days or a 360-day
year of twelve 30-day months as applicable to the related class of Bonds. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of CEDEL Participant or Euroclear Participant
the following day, and receipt of the cash proceeds in the CEDEL Participant's
or Euroclear Participant's account will be back-valued to the value date (which
will be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (I.E., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account will instead be
valued as of the actual settlement date.
20
<PAGE>
Finally, day traders that use CEDEL or Euroclear and that purchase Bonds
from Depository Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
o borrowing through CEDEL or Euroclear for one day (until the purchase side
of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
o borrowing the Bonds in the U.S. from a Depository Participant no later
than one day prior to settlement, which would give the Bonds sufficient
time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the Depository Participant is
at least one day prior to the value date for the sale to the CEDEL
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS. A Beneficial
Owner of Bonds holding through CEDEL or Euroclear (or through the Depository
Participant if the holder has an address outside the U.S.) will be subject to
the 30% U.S. withholding tax that generally applies to payments of interest
(including original issue discount) on registered debt issued by U.S. Persons
(as defined under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Foreign Investors
in Bonds"), unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such Beneficial Owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such Beneficial Owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial Owners of
Certificates that are Non-U.S. Persons (any person who is not a U.S. Person) can
obtain a complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Holder of a Certificate or their
agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Holder of a Certificate
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds the security
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Certificates.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Certificates.
21
<PAGE>
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 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."
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
22
<PAGE>
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.
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 Classes of the
Bonds in full by their Stated Maturity Date. See "SERVICING OF THE COLLATERAL --
Master Servicing Agreement" and " -- Special Servicing Agreement."
The Prospectus Supplement for a Series of Bonds may contain a table
setting forth percentages of the original principal amount of each Class of
Bonds of such Series anticipated to be outstanding after each of the dates shown
in the table. It is unlikely that the prepayment experience of the 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.
23
<PAGE>
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".
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, (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 will be composed of
Mortgage Loans, Model Home Loans, Manufactured Home Loans and Consumer Finance
Loans.
THE MORTGAGE LOANS
GENERAL. Mortgage Loans will be secured generally by liens on single
family (one-family or two- to four-family) attached or detached residential
property, which may include Second Lien Mortgage Loans.
24
<PAGE>
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 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."
The Prospectus Supplement applicable to a Series of Bonds will include
among other things information, as of the applicable Cut-off Date, as to (i) the
aggregate principal balance of the Mortgage Loans, (ii) the range of remaining
terms to stated maturity or weighted average remaining term to stated maturity
of the Mortgage Loans, (iii) the current Scheduled Principal Balance of the
largest Mortgage Loan and the average outstanding Scheduled Principal Balance of
the Mortgage Loans, (iv) the weighted average Note Rate or range of Note Rates
borne by the Mortgage Loans, (v) the range of original loan-to-value ratios or
the weighted average loan-to-value ratio of the Mortgage Loans and (vi) the
geographic distribution of the Mortgaged Premises.
SECOND LIENS. Certain of the Mortgage Loans 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
25
<PAGE>
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, 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.
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
26
<PAGE>
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.
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 Loans -- GENERAL."
THE MANUFACTURED HOME LOANS
GENERAL. 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 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
27
<PAGE>
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.
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
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).
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
28
<PAGE>
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
Except as otherwise provided in the related Prospectus Supplement 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.
In addition, unless otherwise provided in the related 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.
In cases where one or more REMIC elections are made, the Issuer will not
be able to substitute items of Collateral except in accordance with the REMIC
Provisions.
PLEDGE OF ADDITIONAL COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS
Except in cases where one or more REMIC elections are made, the Issuer
may, to the extent specified in the related Prospectus Supplement, 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
29
<PAGE>
pledge of Additional Collateral will not affect theClass 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.
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."
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.
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, (iii) accumulating funds that are credited to the Issuer's account
pending their distribution to the Issuer and (iv) providing for the acquisition
of additional Collateral. To the extent such funds and accounts are material,
they will be described in the related Prospectus Supplement.
30
<PAGE>
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.
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
31
<PAGE>
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' 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, 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."
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." 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.
32
<PAGE>
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:
(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.
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."
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
33
<PAGE>
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 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae 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
34
<PAGE>
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 Fannie Mae, FHLMC, the Participant
or an Affiliate of the Participant. The appraiser is required to inspect the
property and verify that it is in good repair and that construction, if new, has
been completed. The appraisal is based on the market value of comparable homes
and, if considered applicable by the appraiser, the estimated rental income of
the property and a replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to Fannie
Mae 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 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 Fannie Mae 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.
35
<PAGE>
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 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." 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.
36
<PAGE>
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 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 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.
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.
37
<PAGE>
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
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 Fannie
Mae.
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 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.
38
<PAGE>
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." 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 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.
39
<PAGE>
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." 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 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.
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.
40
<PAGE>
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 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% and 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 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 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
41
<PAGE>
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."
MODIFICATION OF INDENTURE
With the consent of the Holders of not less than a majority in principal
balance of the outstanding Bonds of each Series to be affected or, if fewer than
all Classes of a Series would be affected, of each Class to be affected, the
Trustee and the Issuer may execute a supplemental indenture to add provisions
to, or change in any manner or eliminate provisions of, the Indenture relating
to such Series, or to such Class or Classes, or modify in any manner the rights
of the Holders of the Bonds of such Series, or of such Class or Classes. If any
such supplemental indenture would adversely affect the Holders of any Senior
Bonds or of any Subordinated Bonds, then approval of Holders of a majority in
principal balance of such outstanding Senior Bonds or of such outstanding
Subordinated Bonds, as the case may be, would also be required.
Without the consent of the Bondholders of each outstanding Bond affected,
however, no supplemental indenture may (i) change the Stated Maturity Date of
the principal of, or timing of any installment of principal or interest on, any
Bond, reduce the principal amount thereof or the interest thereon or the
redemption price thereof or the time for redemption with respect thereto, change
the provisions relating to the application of proceeds of the Trust Estate to
the payment of principal on the Bonds, change any place where, or the currency
in which, any Bond or interest thereon is payable, or impair the right to
institute suit for payment on or after the maturity thereof or, in the case of
redemption, on or after the redemption date, (ii) reduce the percentage in
principal amount of Bonds of the affected Series whose Holders must consent to
any supplemental indenture or to any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or adversely affect the Collateral securing a Series,
(iv) permit the creation of any lien ranking prior to or on a par with the lien
of the Indenture with respect to any part of the Trust Estate or terminate the
lien of the Indenture on any part of the Trust Estate or 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 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
42
<PAGE>
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 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 of such
Series may declare the principal of all the Bonds of such Series to be
immediately due and payable, by a notice in writing to the Issuer and to the
Trustee. Any such declaration may be rescinded by the Bondholders of not less
than a majority in principal balance of the outstanding Bonds that were entitled
to vote on the declaration. Following any such declaration that is not
rescinded, the Trustee shall sell the Collateral as described in the Indenture.
If an Event of Default has occurred and is continuing and no Bonds of the Series
have been declared due and payable, or any such declaration and its consequences
has been rescinded, the Trustee may, and on the direction of a majority in
principal balance of the outstanding Senior Bonds (or, if no Senior Bonds are
outstanding, Subordinated Bonds) shall give notice to the Issuer of its election
to preserve the Trust Estate, collect the proceeds thereof and make and apply
all payments in respect of the Bonds in accordance with the Indenture.
Proceeds from the liquidation of the Collateral for a Series of Bonds will
be applied, after all required payments and reimbursements to the Trustee,
Servicer, Master Servicer and Special Servicer, in the order set forth in the
Series Supplement and related Prospectus Supplement for such Series of Bonds.
Declaration of acceleration and liquidation of the Collateral pursuant to the
foregoing procedures shall be the sole remedy for the Bondholders upon an Event
of Default. In the event that a Series of Bonds is declared due and payable, as
described above, and the Collateral securing the Bonds is sold, the net proceeds
from such sale may be insufficient to pay the full unpaid amount of principal of
and interest due on each outstanding Class of Bonds of such Series. Furthermore,
in the event that the principal of the Bonds of a Series is declared due and
payable, as described above, and the Collateral securing such Series is sold,
the Bondholders of any Discount Bonds may be 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
43
<PAGE>
outstanding) of the same Series have made written request upon the Trustee to
institute such proceedings in its own name as Trustee and have offered the
Trustee reasonable indemnity, (iii) the Trustee has for 60 days failed to
institute any such proceeding, and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding Senior Bonds (or
the Subordinated Bonds if no Senior Bonds are outstanding) of a Series.
Except as otherwise provided in the related Prospectus Supplement, at
such time as an Event of Default for a Series is declared and so long as Senior
Bonds of such Series remain outstanding, the Trustee will cease to act on behalf
of the Holders of Subordinated Bonds and will thereafter act only on behalf of
the Holders of the Senior Classes of Bonds. The Issuer is required in such
circumstances to appoint a separate trustee for the Holders of the Subordinated
Bonds. Such trustee may seek to act in a manner adverse to the Holders of the
Senior Bonds, and such action may result in a delay in disposition of the Trust
Estate or the exercise of other remedies and, consequently, a delay in payment
to the Holders of the Senior Bonds. Should the Issuer fail to appoint a separate
trustee within 60 days after such Event of Default, the Trustee will petition a
court of competent jurisdiction to appoint a separate trustee.
AUTHENTICATION AND DELIVERY OF BONDS
The Issuer may from time to time deliver Bonds executed by it to the
Trustee and request that the Trustee authenticate such Bonds. Upon the receipt
of such Bonds and such request, and subject to the Issuer's compliance with
certain conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Issuer may direct.
LIST OF BONDHOLDERS
Three or more Bondholders of the Bonds of a Series, each of whom has owned
a Bond of such Series for at least six months, may, by written request to the
Trustee, obtain access to the list of all Bondholders of Bonds of the same
Series or of all Bonds, as specified in the request, maintained by the Trustee
for the purpose of communicating with other Bondholders with respect to their
rights under the Indenture. The Trustee may elect not to afford the requesting
Bondholders access to the list of Bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Bondholders, to all such
Bondholders.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a written
statement as to fulfillment of its obligations under the Indenture.
REPORTS TO BONDHOLDERS
On or before each Payment Date for a Series, the Trustee will transmit by
mail to each Bondholder of such Series a report with respect to the principal
balance of the Bonds of such Series held by such Bondholder as of the
immediately preceding Payment Date and the amount of principal, interest and
premium, if any, paid with respect to the Bonds of such Series held by such
Bondholder since the immediately preceding Payment Date. Such report also will
include information regarding the levels of Delinquencies and Losses on the
Collateral, losses 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.
44
<PAGE>
TRUSTEE
The Trustee for each Series of Bonds will be specified in the respective
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Issuer or any of its Affiliates.
The Trustee may resign at any time, in which event the Issuer will be
obligated to appoint a successor Trustee. The Issuer may remove the Trustee and
appoint a successor Trustee if the Trustee ceases to be eligible to act as
Trustee under the Indenture or if the Trustee becomes insolvent or otherwise
incapable of acting with respect to any Series of Bonds. The Issuer may also
remove the Trustee and appoint a successor Trustee for any Series of Bonds at
any time provided that the Issuer receives confirmation that the appointment of
the successor Trustee will not result in the lowering of the rating of that
Series of Bonds. The Trustee with respect to a Series of Bonds may also be
removed at any time by the holders of a majority in principal amount of the
Bonds of such Series then outstanding.
Any resignation and removal of the Trustee, and the appointment of a
successor Trustee, will not become effective until acceptance of such
appointment by the successor Trustee. The Trustee, and any successor Trustee,
each will have a combined capital and surplus of at least $50,000,000, or will
be a member of a bank holding system, the aggregate combined capital and surplus
of which is at least $50,000,000, provided that the Trustee's and any such
successor Trustee's separate capital and surplus shall at all times be at least
the amount specified in Section 310(a)(2) of the Trust Indenture Act of 1939 and
that the Trustee and such successor Trustee will be subject to supervision or
examination by federal or state authorities and will have an office in the
United States.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will be discharged as to a Series upon the cancellation of
all 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
45
<PAGE>
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/owner is the
beneficiary. At origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/owner, the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE. Foreclosure of a deed of trust is generally accomplished by
a non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee in some states must provide notice
to any other individual having an interest in the real property, including any
second lienholders. The trustor, borrower or any person having a junior
encumbrance on the real estate may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, that may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage generally is accomplished by judicial
action to recover the mortgage debt by enforcing the mortgagee's rights under
the mortgage. It is regulated by statutes and rules and subject throughout to
the court's equitable powers. Generally, a mortgagor is bound by the terms of
the mortgage note and the mortgage as made and cannot be relieved from his
default if the mortgagee has exercised his rights in a commercially reasonable
manner. However, because a foreclosure action historically was equitable in
nature, the court may exercise equitable powers to relieve a mortgagor of a
default and deny the mortgage foreclosure on proof that either the mortgagor's
default was neither willful nor in bad faith or the mortgagee's action
established a waiver, fraud, bad faith, or oppressive or unconscionable conduct
such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a noncollusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly a suit against the debtor on the mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the principal
amount of the mortgage or deed of trust plus accrued and unpaid interest and the
expenses of foreclosure, in which event the mortgagor's debt will be
extinguished or the lender may purchase for a lesser amount in order to preserve
its right against a borrower to seek a deficiency judgment in states where such
a judgment is available. Thereafter, the lender will assume the burdens of
ownership, including obtaining casualty insurance, paying taxes and making such
repairs at its own expense as are necessary to render the property suitable for
sale. The lender will commonly obtain the services of a real estate broker and
pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any insurance proceeds.
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
46
<PAGE>
condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure
on the property. Upon completion of the foreclosure proceedings by the holder of
the senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the second
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings.
Furthermore, the terms of the second mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust. In the event of
a conflict between the terms of the first mortgage or deed of trust and the
second mortgage or deed of trust, the terms of the first mortgage or deed of
trust will govern. Upon a failure of the mortgagor or trustor to perform any of
its obligations, the senior mortgagee or beneficiary, subject to the terms of
the senior mortgage or deed of trust, may have the right to perform the
obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the second mortgage.
EQUITY RIGHTS OF REDEMPTION. The purposes of a foreclosure action are to
enable the mortgagee to realize upon its security and to bar the mortgagor, and
all persons who have an interest in the property that is subordinate to the
foreclosing mortgagee, from their "equity of redemption."
The doctrine of equity of redemption provides that, until the property
covered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having an interest that is subordinate
to that of the foreclosing mortgagee have an equity of redemption and may redeem
the property by paying the entire debt with interest. In addition, in some
states, when a foreclosure action has been commenced, the redeeming party must
pay certain costs of such action. Those having an equity of redemption must be
made parties and duly summoned to the foreclosure action in order for their
equity of redemption to be barred.
STATUTORY RIGHTS OF REDEMPTION. In some states, after sale pursuant to a
deed of trust or foreclosure of a mortgage, the trustor or mortgagor and
foreclosed second lienor are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a nonstatutory right that
must be exercised prior to the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of a right of redemption is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
DUE-ON-SALE PROVISIONS. The Mortgage Loans may contain due-on-sale
clauses, which permit the lender to accelerate the maturity of the Mortgage Loan
if the Borrower sells, transfers or conveys the related Mortgaged Premises in
violation of the restrictions with respect thereto set forth in the applicable
Security Instrument. The enforceability of these clauses has been the subject of
legislation or litigation in many states. Some jurisdictions automatically
enforce such clauses, while others require a showing of reasonableness and hold,
on a case-by-case basis, that a "due-on-sale" clause may be invoked only where a
sale threatens the legitimate security interest of the lender.
The Garn-St. Germain Depository Institutions Act of 1982 purports to
preempt state laws that prohibit the enforcement of "due-on-sale" provisions in
certain loans made after October 15, 1982. The Servicer may thus be able to
accelerate the Mortgage Loans that contain a "due-on-sale" provision, upon
transfer of an interest in the related Mortgaged Premises, regardless of its
ability to demonstrate that a sale threatens its legitimate security interest.
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.
47
<PAGE>
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.
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 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
48
<PAGE>
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.
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 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 of or all 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
49
<PAGE>
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. 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 lienholder specified therein, 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 or note thereon the
Issuer'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 in bankruptcy of the Participant.
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
Issuer's interest therein may be subordinated to the interests of others that
may claim an interest therein under applicable real estate laws.
The Issuer'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 Issuer's adverse interest in such Manufactured 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 on the related certificate of title or delivery of the
required documents and fees necessary to register the home 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 security interest in the Manufactured
Home.
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.
50
<PAGE>
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 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 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 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
51
<PAGE>
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.
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. 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. See "--
Mortgage Loans and Model Home Loans -- FORECLOSURE." 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.
52
<PAGE>
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.
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 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 of
or all 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 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"
53
<PAGE>
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 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 IN MANUFACTURED
HOMES."
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 IN MANUFACTURED HOMES," 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 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
54
<PAGE>
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 A 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
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
55
<PAGE>
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 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. It is a wholly
owned, limited purpose financing subsidiary of IHC and an indirect subsidiary of
Dynex Capital, Inc., formerly named Resource Mortgage 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 is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Bonds.
Such consequences will depend on whether the Issuer determines: (i) to treat the
Bonds of a particular Series as debt for federal income tax purposes (without
reference to the REMIC Provisions referred to below) or (ii) to make one or more
elections to treat all or a portion of the related Trust Estate as a real estate
mortgage investment conduit ("REMIC") under Code Sections 860A through 860G (the
"REMIC Provisions". The discussion is based upon the advice of Arter & Hadden,
LLP, special counsel to the Issuer. Arter & Hadden LLP have delivered to the
Issuer their opinion, which addresses issues identified below as being covered
thereby and states that the discussion of federal income tax issues in this
section accurately sets forth their views on those issues. The discussion
reflects the applicable provisions of:
(i) the Internal Revenue Code of 1986, as amended as of December 31, 1998
(the "Code");
(ii) the final regulations on REMICs (the "REMIC Regulations") promulgated
on December 23, 1992;
56
<PAGE>
(iii) the final regulations under Sections 1271 through 1273 and 1275 of the
Code (the "OID Regulations") concerning debt instruments promulgated on
January 21, 1994;
(iv) the final regulations concerning debt instruments providing for
contingent payments (the "Contingent Payment Regulations") promulgated
on June 11, 1996;
(v) the final mark-to-market regulations under Section 475 (the
"Mark-To-Market Regulations") promulgated December 31, 1996;
(vi) the regulations concerning withholding for foreign persons (the
"Withholding Regulations") published on October 6, 1997, as amended
December 31, 1998, generally applicable to payments made after December
31, 2000; and
(vii) the regulations concerning amortization of premium (the "Premium
Regulations") effective for debt instruments acquired after March 2,
1998.
The discussion does not, however, purport to cover all federal income tax
consequences applicable to particular investors, some of which may be subject to
special rules. This summary focuses primarily upon investors which 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. In addition, the authorities on which the discussion is
based are subject to change or differing interpretation, and any change or
differing interpretation could be applied retroactively. In some instances when
the Treasury Department has not adopted regulations implementing provisions of
the Code, the discussion cites the views expressed in the Conference Committee
Report (the "Committee Report") to the Tax Reform Act of 1986 which enacted the
Code. The discussion does not address the state or local tax consequences of the
purchase, ownership and disposition of Bonds. Investors should consult their own
tax advisers in determining the federal, state, local, or other tax consequences
to them of the purchase, ownership and disposition of the Bonds.
BONDS TREATED AS DEBT WITHOUT A REMIC ELECTION
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 assuming that no REMIC election
is made. With respect to each Series of Bonds treated as debt without a REMIC
election, however, special counsel to the Issuer will advise the Issuer that,
based upon the facts as they exist at the time the opinion is issued, in their
opinion the Bonds covered by the opinion 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 treat certain arrangements that
securitize real estate mortgages as taxable corporations. An entity will be
characterized as a TMP if (i) substantially all 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, without a REMIC election, the Issuer or the portion of
the Issuer relating to the ownership of the 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 (or such portion) be treated as a
"separate" corporation which may not be treated as an includible corporation
with any other corporation for purposes of filing a consolidated tax return.
Because, however, the Issuer is also a "qualified REIT subsidiary" (as defined
in Code Section 856(i)(2)) of Dynex, which itself is a REIT, characterization of
the Issuer as a TMP will not subject the Issuer to corporate income tax and,
instead, will result only in the shareholders of Dynex being required to include
57
<PAGE>
in income, as "excess inclusion" income, some of or all their allocable share of
the Issuer's net income that would be excess inclusion income if the Issuer were
treated as a REMIC. Nevertheless, 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 corporation. No assurance can be given as to the continued
qualification 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 issued without a REMIC election 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 such Bonds. The
Issuer may redeem a Class or Classes of such Bonds at any time upon a
determination by the Issuer, based upon an opinion of counsel, that a
substantial risk exists that such Class or Classes 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.
TAXATION OF BONDS TREATED AS DEBT. Payments received by Bondholders on
such Bonds generally should be accorded the same tax treatment under the Code as
payments received on other taxable corporate bonds. Except as described below
under "-- Original Issue Discount," "-- Market Discount" and "-- Premium,"
interest paid or accrued on such a Bond will be treated as ordinary income to
the Bondholder and a principal payment thereon will be treated as a return of
capital to the extent that the Bondholder's basis therein is allocable to that
payment. In general, interest paid on such Bonds to Bondholders who report their
income on the cash receipts and disbursements method should be taxable to them
when received. Interest earned by Bondholders who report their income on the
accrual method will be taxable when accrued, regardless of when it is actually
received.
TREATMENT OF SUBORDINATED 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.
STATUS OF BONDS TREATED AS DEBT. With respect to Bonds issued without a
REMIC election, Bondholders should be aware that (i) such 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) such 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) such Bonds held by a REIT will
not constitute "real estate assets" within the meaning of Code Section
856(c)(5)(B); and (iv) income derived from such 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). Such Bonds
will not qualify as "Government securities" within the meaning of Code Section
851(b)(3)(A)(i).
REMIC BONDS
For each series of Bonds for which a REMIC election is made with respect
to the related Trust Estate or one or more segregated pools of assets therein as
one or more REMICs (a "REMIC Mortgage Pool"), special counsel to the Issuer will
deliver their opinion generally to the effect that, assuming that:
(i) a REMIC election is timely made in the required form,
(ii) there is ongoing compliance with all provisions of the Indenture and
(iii) certain representations set forth in the Indenture are true,
such REMIC Mortgage Pool will qualify as a REMIC and the interests therein will
be considered to be "regular interests" or "residual interests" therein within
the meaning of the REMIC Provisions.
REMICs may issue one or more classes of "regular" interests and must
issue one and only one class of "residual" interest (which will not be issued as
Bonds). A Bond representing a regular interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Bond."
Among the ongoing requirements to qualify for REMIC treatment is that
substantially all the assets of the REMIC Mortgage Pool (as of the close of the
third calendar month beginning after the creation of the REMIC and continually
thereafter) must consist of only "qualified mortgages" and "permitted
investments."
A "Qualified Mortgage" means:
58
<PAGE>
(i) any obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an
interest in real property (including for this purpose any obligation
secured by stock held by a person as a tenant stockholder in a
cooperative housing corporation) and which is transferred to the
REMIC on the Closing Date in exchange for REMIC Bonds or Interests or
is purchased pursuant to a fixed price contract within three months
of the Closing Date,
(ii) any qualified replacement mortgage,
(iii) any regular interest in another REMIC transferred to the REMIC on the
Closing Date in exchange for regular or residual interests in a REMIC
or
(iv) certain regular interests in a FASIT.
Any property acquired as a result of a foreclosure or deed in lieu with
respect to a Qualified Mortgage ("foreclosure property") is required generally
to be disposed of within three years. The REMIC Regulations treat an obligation
secured by a manufactured home that has a minimum of 400 square feet of living
space and a minimum width in excess of 102 inches and that is of a kind
customarily used at a fixed location as an obligation secured by real property
without regard to the treatment of the obligation or the property under state
law. Consumer Finance Loans will not constitute Qualified Mortgages and,
accordingly, the Issuer will not make a REMIC election with respect to a Trust
Estate which includes Consumer Finance Loans.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. Cash flow investments are investments of
amounts received with respect to qualified mortgages for a temporary period not
to exceed thirteen months before distribution to holders of regular or residual
interests in the REMIC. Qualified reserve assets are intangible investment
assets other than REMIC residual interests that are part of a reasonably
required reserve maintained by the REMIC to provide for full payment of expenses
of the REMIC or amounts due on the regular interests in the event of defaults or
delinquencies on qualified mortgages, lower than expected returns on cash-flow
investments, interest shortfalls on qualified mortgages caused by prepayments of
those mortgages or unanticipated losses or expenses incurred by the REMIC. Such
a fund will be disqualified if more than 30% of the gross income from the assets
in such fund for the year is derived from the sale of property held for less
than three months, unless such sale was required to prevent a default on the
regular interests caused by a default on one or more qualified mortgages. To the
extent that the amount in such a fund exceeds a reasonably required amount, in
must be reduced "promptly and appropriately." Foreclosure property generally is
property acquired by the REMIC in connection with the default or imminent
default of a qualified mortgage. Property so acquired by the REMIC, however,
will not be qualifying foreclosure property if the foreclosure was anticipated
at the time that the related qualified mortgage was transferred to the REMIC.
Furthermore, foreclosure property may not be held beyond the end of the third
taxable year beginning after foreclosure occurs, unless it is established to the
satisfaction of the Secretary of the Treasury that an extension of the
three-year period is necessary for the orderly liquidation of the foreclosure
property. The Secretary of the Treasury may grant one or more extensions, but
any such extention shall not extend the grace period beyond the end of the sixth
taxable year beginning after the date such foreclosure property is acquired.
If an entity elects to be treated as a REMIC but fails to comply with one
or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In such event, the tax treatment of the former REMIC is uncertain.
For example, the entity may be subject to taxation as a separate corporation,
and the REMIC Bonds issued by the entity may not be accorded the status
described below under "-- STATUS Of REMIC BONDS." In the case of an inadvertent
termination of REMIC status, the Treasury Department has authority to issue
regulations providing relief; however, sanctions, such as the imposition of a
corporate tax on all or a portion of the entity's income for the period during
which the requirements for REMIC status are not satisfied, may accompany any
such relief.
VARIABLE RATE REMIC BONDS. REMIC Bonds may bear interest at a variable
rate that is (i) a qualified floating rate if variations in the value of the
rate may be expected to measure contemporaneous variations in the cost of newly
borrowed funds in the currency in which the REMIC Bonds are denominated, (ii) a
weighted average of the interest rates on some of or all the Qualified Mortgages
held by the REMIC provided that all such Qualified Mortgages bear interest at a
fixed rate or a qualified floating rate, (iii) the product of a rate described
59
<PAGE>
in (i) or (ii) and a fixed multiplier, or a constant number of basis points more
or less than a rate described in (i) or (ii) or the product, plus or minus a
constant number of basis points, of a rate described in (i) or (ii) and a fixed
multiplier (which may be either a positive or a negative number), (iii) a rate
described in (i) or (ii) that is subject to a cap or a floor that establishes
either a maximum (or minimum) rate or a maximum number of basis points by which
the rate may increase (decrease) from one accrual or payment period to another
or over the term of the REMIC Bonds and (iv) a rate described in (i) through
(iv) that is subject to an "available funds" cap that limits the amount of
interest to be paid in any accrual or payment period based on the total amount
available for distribution. See "-- Original Issue Discount."
TAXATION OF REMIC BONDS. REMIC Bonds will be treated for federal income
tax purposes as debt instruments issued by the REMIC Mortgage Pool and not as
ownership interests in the REMIC Mortgage Pool or its assets. In general,
interest, original issue discount and market discount paid or accrued on a REMIC
Bond will be treated as ordinary income to the holder of such REMIC Bond.
Distributions in reduction of the stated redemption price at maturity of the
REMIC Bond will be treated as a return of capital to the extent of such holder's
basis in such Bond. Holders of REMIC Bonds that otherwise report income under a
cash method of accounting will be required to report income with respect to
REMIC Bonds under an accrual method.
TREATMENT OF SUBORDINATED BONDS. REMIC Bonds may include one or more
Classes of Subordinated Bonds. Holders of Subordinated Bonds will be required to
report income with respect to such Bonds on the accrual method without giving
effect to delays and reductions in distributions attributable to defaults or
delinquencies on any Loans, except possibly, in the case of income that
constitutes qualified stated interest, to the extent that it can be established
that such amounts are uncollectible. As a result, the amount of income reported
by a Bondholder of a Subordinated Bond in any period could exceed the amount of
cash distributed to such Bondholder in that period.
Although not entirely clear, it appears that: (a) a holder who holds a
Subordinated REMIC Bond in the course of a trade or business or a corporate
holder generally should be allowed to deduct as an ordinary loss any loss
sustained on account of its partial or complete worthlessness and (b) a
noncorporate holder who does not hold a Subordinated REMIC Bond in the course of
a trade or business generally should be allowed to deduct as a short-term
capital loss any loss sustained on account of its complete worthlessness.
Special rules are applicable to banks and thrift institutions. Holders of
Subordinated Bonds should consult their own tax advisers regarding the
appropriate timing, character and amount of any loss sustained with respect to
Subordinated REMIC Bonds.
STATUS OF REMIC BONDS. REMIC Bonds held by a domestic building and loan
association will constitute a "regular . . . interest in a REMIC" within the
meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion that the
assets of the underlying REMIC Mortgage Pool would be treated as "loans secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C)(i)
through (x). REMIC Bonds held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section 856(c)(5)(B), and any
amount includible in gross income with respect to the REMIC Bonds will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B) in
the same proportion that, for both purposes, the assets and income of the REMIC
would be treated as "interests in real property" as defined in Code Section
856(c)(5)(C) or, as provided in the Committee Report, as "real estate assets" as
defined in Code Section 856(c)(5)(B) and as "interest on obligations secured by
mortgages on real property or on interests in real property", respectively.
Moreover, if 95% or more of the assets qualify for any of the foregoing
treatments, the REMIC Bonds (and income thereon) will qualify for the
corresponding status in their entirety. The investment of amounts in any reserve
fund in non-qualifying assets would, and, holding property acquired by
foreclosure pending sale might, reduce the amount of the REMIC Bonds that would
qualify for the foregoing treatment. The REMIC Regulations provide that payments
on Qualified Mortgages held pending distribution are considered part of the
Qualified Mortgages for purposes of Code Section 856(c)(5)(B); it is unclear
whether such collected payments would be so treated for purposes of Code Section
7701(a)(19)(C)(v), but there appears to be no reason why analogous treatment
should be denied. The determination as to the percentage of the REMIC's assets
(or income) that will constitute assets (or income) described in the foregoing
sections of the Code will be made with respect to each calendar quarter based on
the average adjusted basis (or average amount of income) of each category of the
assets held (or income accrued) by the REMIC during such calendar quarter. The
60
<PAGE>
REMIC will report those determinations to holders in the manner and at the times
required by applicable Treasury Regulations. The Prospectus Supplement or the
related Current Report on Form 8-K for each Series of REMIC Bonds will describe
the assets as of the Cut-off Date. REMIC Bonds held by financial institutions to
which Code Section 581 applies will treated as will "evidences of indebtedness"
for purposes of Code Section 582(c)(1). REMIC Bonds will not qualify as
"Government securities" within the meaning of Code Section 851(b)(3)(A)(i).
For purposes of characterizing an investment in REMIC Bonds, a contract
secured by a Manufactured Home qualifying as a "single family residence" under
Code Section 25(e)(10) will constitute (i) a "real estate asset" within the
meaning of Code Section 856 and (ii) an asset described in Code Section
7701(a)(19)(C).
TIERED REMIC STRUCTURES. For certain series of REMIC Bonds, two or more
separate elections may be made to treat designated portions of the related Trust
Estate as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of REMIC Bonds, special counsel to the Issuer will
deliver their opinion generally to the effect that, assuming compliance with all
provisions of the related Indenture, the Tiered REMICs will each qualify as a
REMIC and the REMIC Bonds issued by the Tiered REMICs will be considered to
evidence ownership of REMIC Bonds in the related REMIC within the meaning of the
REMIC Provisions. Solely for purposes of determining whether the REMIC Bonds
will be "real estate assets" within the meaning of Code Section 856(c)(5)(B),
and assets described in Code Section 7701(a)(19)(C), and whether the income
thereon is "interest" described in Code Section 856(c)(3)(B), the Tiered REMICs
will be treated as one REMIC.
PASS-THROUGH OF SERVICING FEES. In general, expenses of the REMIC
Mortgage Pool to service providers, such as servicing compensation of the Master
Servicer and the Servicers, will not affect the income or deductions of holders
of REMIC Bonds. In the case of a "single-class REMIC" (as described below),
however, such expenses and an equivalent amount of additional gross income will
be allocated among all holders of REMIC Bonds for purposes of the limitations on
the deductibility of certain miscellaneous itemized deductions by individuals
contained in Code Sections 56(b)(1) and 67. Generally, any holder of a REMIC
Bond issued by a "single-class REMIC" who is an individual, estate or trust are
permitted to deduct such expenses in determining regular taxable income only to
the extent that such expenses together with certain other miscellaneous
itemized deductions of such individual, estate or trust exceed 2% of adjusted
gross income; such a holder may not deduct such expenses to any extent in
determining liability for alternative minimum tax. Accordingly, REMIC Bonds
receiving an allocation of servicing compensation, may not be appropriate
investments for individuals, estates or trusts.
A "single-class REMIC" is a REMIC that either (i) would be treated as an
investment trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election or (ii) is substantially
similar to such an investment trust and is structured with the principal purpose
of avoiding the allocation of investment expenses to holders of REMIC Bonds. The
Master Servicer intends (subject to certain exceptions which, if applicable,
will be stated in the applicable Prospectus Supplement) to treat each REMIC
Mortgage Pool as other than a "single-class REMIC," consequently allocating
servicing compensation expenses and related income amounts entirely to REMIC
Interests.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code imposes
a tax on REMIC Mortgage Pools equal to 100% of the net income derived from
"prohibited transactions." In general, a prohibited transaction means the
disposition of a Qualified Mortgage other than pursuant to certain specified
exceptions, the receipt of income from a source other than a Qualified Mortgage
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the Qualified Mortgages for temporary investment pending distribution. The
Code also imposes a 100% tax on the value of any contribution of assets to the
REMIC after the Closing Date other than pursuant to specified exceptions, and
subjects "net income from foreclosure property" to tax at the highest corporate
rate. It is not anticipated that a REMIC Mortgage Pool will engage in any such
transactions or receive any such income.
SALES OR EXCHANGES OF BONDS
If a Bond is sold or exchanged, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale or exchange and
its adjusted basis. The adjusted basis of a Bond generally will equal the cost
of such Bond to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Bond and
reduced by premium amortization deductions and distributions previously received
by the seller of amounts included in the stated redemption price at maturity of
such Bond. Gain from the disposition of a REMIC Bond that might otherwise be
treated as a capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess of (i) the amount that would have been
61
<PAGE>
includible in such holder's income had income accrued at a rate equal to 110% of
the AFR as of the date of purchase over (ii) the amount actually includible in
such holder's income. Except as otherwise provided under "-- Market Discount"
and "-- Premium" and under Code Section 582(c), any additional gain or any loss
on the sale or exchange of a Bond will be capital gain or loss, provided such
Bond is held as a capital asset (generally, property held for investment) within
the meaning of Code Section 1221. The distinction between a capital gain or loss
and ordinary income or loss is relevant for various tax purposes, including
determination of the applicable tax rate and limitations on the use of capital
losses to offset ordinary income.
All or a portion of any gain from the sale of a Bond that might otherwise
be capital gain may be treated as ordinary income (i) if such Bond is held as
part of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the holder's net investment in the
conversion transaction at 120% of the appropriate AFR in effect at the time the
taxpayer entered into the transaction reduced by any amount treated as ordinary
income with respect to any prior disposition or other termination of a position
that was held as part of such transaction or (ii) in the case of a noncorporate
taxpayer that has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates.
ORIGINAL ISSUE DISCOUNT
Certain Bonds may be issued with "original issue discount" within the
meaning of Code Section 1273(a). Holders of Bonds issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, in advance of the receipt of the cash
attributable to such income. The Bondholders will receive reports annually (or
more frequently if required) with respect to the original issue discount
accruing on the Bonds as may be required under Code Section 6049 and the
regulations thereunder. See "-- Reporting and Other Administrative Matters."
Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275 and in the OID Regulations. Code Section 1272(a)(6)
provides special original issue discount rules applicable to Bonds. The OID
Regulations do not apply to debt instruments subject to Code Section 1272(a)(6).
However, in the absence of regulations, the Issuer intends to account for
original issue discount on the Bonds in the manner described below.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Pricing Prepayment Assumption") be used in computing the accrual of original
issue discount on Bonds and for certain other federal income tax purposes. The
Pricing Prepayment Assumption is to be determined in the manner prescribed in
Treasury regulations. To date, no such regulations have been promulgated. The
Committee Report indicates that the regulations should provide that the Pricing
Prepayment Assumption, if any, used with respect to a particular transaction
must be the same as that used by the parties in pricing the transaction. In
reporting original issue discount a Pricing Prepayment Assumption consistent
with this standard will be used. Nevertheless, the Issuer does not make any
representation that prepayment will in fact be made at the rate reflected in the
Pricing Prepayment Assumption or at any other rate. Each investor must make its
own decision as to the appropriate prepayment assumption to be used in deciding
to purchase any of the Bonds. The Prospectus Supplement with respect to a Series
of Bonds will disclose the Pricing Prepayment Assumption to be used in reporting
original issue discount, if any, and for certain other federal income tax
purposes.
The total amount of original issue discount on a Bond is the excess of
the "stated redemption price at maturity" of the Bond over its "issue price". In
general, the issue price of a particular class of Bonds will be the price at
which a substantial amount thereof are first sold to the public (excluding bond
houses and brokers). The stated redemption price at maturity of a Bond is equal
to the total of all payments to be made on such Bond other than "qualified
stated interest."
If a Bond is sold with accrued interest that relates to a period prior to
the Closing Date of such Bond, the amount paid for the accrued interest will be
treated instead as increasing the issue price of the Bond. In addition, that
portion of the first interest payment in excess of interest accrued from the
Closing Date to the first Distribution Date will be treated for federal income
tax reporting purposes as includible in the stated redemption price at maturity
of the Bonds, and as excludable from income when received as a payment of
62
<PAGE>
interest on the first Distribution Date (except to the extent of any accrued
market discount as of that date). The OID Regulations suggest, however, that
some of or all this pre-issuance accrued interest may be treated as a separate
asset (and hence is not includible in a Bond's issue price or stated redemption
price at maturity), whose cost is recovered entirely out of interest paid on the
first Distribution Date.
The OID Regulations provide special rules for variable rate instruments
that meet three requirements. First, the noncontingent principal payments may
not exceed the instrument's issue price by more than a specified amount equal to
the lesser of (i) .015 multiplied by the product of the total noncontingent
payments and the weighted average maturity or (ii) 15% of the total
noncontingent principal payments. Second, the instrument must provide for stated
interest (compounded or paid at least annually) at (i) one or more "qualified
floating rates", (ii) a single fixed rate followed by one or more qualified
floating rates, (iii) a single "objective rate" or (iv) a single fixed rate and
a single objective rate that is a qualified inverse floating rate. Third, the
instrument must provide that each qualified floating rate or objective rate in
effect during an accrual period is set at a current value of that rate (one
occurring in the interval beginning three months before and ending one year
after the rate is first in effect on Bond).
Under the OID Regulations, "qualified stated interest" is interest that
is unconditionally payable at least annually during the entire term of the Bond
at either:
(i) a single fixed rate that appropriately takes into account the length of
the interval between payments or
(ii) a current value of a single "qualified floating rate" or "objective
rate" (each, a "Single Variable Rate").
A "current value" is the value of a variable rate on any day that is no
earlier than three months prior to the first day on which that value is in
effect and no later than one year following that day.
A "qualified floating rate" is a rate whose variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds in the currency in which the debt instrument is denominated. For the OID
Regulations, such a rate remains qualified even though it is multiplied by
(i) a fixed, positive multiple greater than 0.65 but not exceeding 1.35,
(ii) increased or decreased by a fixed rate, or
(iii) both (i) and (ii).
Certain combinations of rates constitute a single qualified floating
rate, including (i) interest stated at a fixed rate for an initial period of
less than one year followed by a qualified floating rate if the value of the
floating rate at the Closing Date is intended to approximate the fixed rate and
(ii) two or more qualified floating rates that can reasonably be expected to
have approximately the same values throughout the term of the debt instrument. A
combination of such rates is conclusively presumed to be a single floating rate
if the values of all rates on the Closing Date are within 0.25 percentage points
of one another. A variable rate that is subject to an interest rate cap, floor,
governor or similar restriction on rate adjustment may be a qualified floating
rate only if such restriction is fixed throughout the term of the instrument, or
is not reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction.
An "objective rate" is a rate determined using a single fixed formula and
based on objective financial information or economic information (excluding a
rate based on information that is in the control of the issuer or that is unique
to the circumstances of a related party). A combination of interest stated at a
fixed rate for an initial period of less than one year followed by an objective
rate is treated as a single objective rate if the value of the objective rate at
the Closing Date is intended to approximate the fixed rate, such a combination
of rates is conclusively presumed to be a single objective rate if the objective
rate on the Closing Date does not differ from the fixed rate by more than 0.25
percentage points.
Under the foregoing rules, some of the payments of interest on a Bond
bearing a fixed rate of interest for an initial period followed by a qualified
floating rate of interest in subsequent periods could be treated as included in
the stated redemption price at maturity if the initial fixed rate were to differ
sufficiently from the rate that would have been set using the formula applicable
to subsequent periods. Bonds other than such Bonds providing for variable rates
of interest are not anticipated to have stated interest other than "qualified
stated interest," but, if any such Bonds are so offered, appropriate disclosures
will be made in the Prospectus Supplement. Some of or all the payments on Bonds
63
<PAGE>
providing for the accretion of interest will be included in the stated
redemption price at maturity of such Bonds. Interest payments are
unconditionally payable only if a late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payments. Certain debt
securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on such securities will be unconditionally
payable and constitute qualified stated interest, not original issue discount.
Nevertheless, absent clarification of the OID Regulations, where debt securities
do not provide for default remedies, the interest payments will be included in
their stated redemption prices at maturity and taxed as original issue discount.
Any stated interest in excess of qualified stated interest is included in the
stated redemption price at maturity.
Under a DE MINIMIS rule in the Code, as interpreted in the OID
Regulations, original issue discount on a Bond will be considered to be zero if
it is less than 0.25% of the stated redemption price at maturity of the Bond
multiplied by the number of complete years to its weighted average maturity. For
this purpose, the weighted average maturity is computed as the sum of the
products of each payment (other than a payment of qualified stated interest)
multiplied by a fraction the numerator of which is the number of complete years
from the issue date until such payment is made and the denominator of which is
the stated redemption price at maturity. The IRS may take the position that this
rule should be applied taking into account the Pricing Prepayment Assumption and
the effect of any anticipated investment income. Under the OID Regulations,
Bonds bearing only qualified stated interest except for any "teaser" rate,
interest holiday or similar provision are treated as subject to the DE MINIMIS
rule if the greater of the foregone interest or any excess of stated principal
balance over the issue price is less than such DE MINIMIS amount.
The OID Regulations generally treat DE MINIMIS original issue discount as
includible in income as each principal payment is made, based on the product of
the total amount of such DE MINIMIS original issue discount and a fraction, the
numerator of which is the amount of such principal payment and the denominator
of which is the outstanding principal balance of the REMIC Bond. The OID
Regulations also permit a Bondholder to elect to accrue DE MINIMIS original
issue discount (together with stated interest, market discount and original
issue discount) into income currently based on a constant yield method. See "--
Market Discount" and "-- Premium."
Each holder of a Bond must include in gross income the sum of the "daily
portions" of original issue discount on its Bond for each day during its taxable
year on which it held such Bond. For this purpose, in the case of an original
holder of a Bond, a calculation will first be made of the portion of the
original issue discount that accrued during each accrual period, generally each
period that ends on a date that corresponds to a Distribution Date on the Bond
and begins on the first day following the immediately preceding accrual period
(or in the case of the first such period, begins on the Closing Date). For any
accrual period such portion will equal the excess of (i) the sum of (A) the
present value of all the distributions remaining to be made on the Bond, as of
the end of the accrual period that are included in the stated redemption price
at maturity and (B) distributions made on such Bond during the accrual period of
amounts included in the stated redemption price at maturity over (ii) the
adjusted issue price of such Bond at the beginning of the accrual period. The
present value of the remaining distributions referred to in clause (i)(A) of the
preceding sentence will be calculated based on (i) the yield to maturity of the
Bond, calculated as of the Closing Date, giving effect to the Pricing Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period and (iii) the Pricing Prepayment Assumption.
The adjusted issue price of a Bond at the beginning of any accrual period will
equal the issue price of such Bond, increased by the aggregate amount of
original issue discount with respect to such Bond that accrued in prior accrual
periods and reduced by the amount of any distributions made on such Bond in
prior accrual periods of amounts included in the stated redemption price at
maturity. The original issue discount accruing during any accrual period will
then be allocated ratably to each day during the period to determine the daily
portion of original issue discount for each day. With respect to an accrual
period between the Closing Date and the first Distribution Date that is shorter
than a full accrual period, the OID Regulations permit the daily portions of
original issue discount to be determined according to any reasonable method.
A subsequent purchaser of a Bond that purchases such Bond at a cost (not
including payment for accrued qualified stated interest) less than its remaining
stated redemption price at maturity will also be required to include in gross
income, for each day on which it holds such Bond, the daily portions of original
issue discount with respect to such Bond, but reduced, if such cost exceeds the
"adjusted issue price", by an amount equal to the product of (i) such daily
portions and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Bond for all days on or after the day of purchase. The adjusted
issue price of a Bond on any given day is equal to the sum of the adjusted issue
price (or, in the case of the first accrual period, the issue price) of the Bond
at the beginning of the accrual period during which such day occurs and the
daily portions of original issue discount for all days during such accrual
64
<PAGE>
period prior to such day, reduced by the aggregate amount of distributions made
during such accrual period prior to such day other than distributions of
qualified stated interest.
The qualified stated interest payable with respect to Bonds which are
certain variable rate debt instruments not bearing interest at a Single Variable
Rate generally is determined under the OID Regulations by converting them into
fixed rate debt instruments. Bonds required to be so treated generally include
those providing for stated interest at (i) more than one qualified floating rate
or (ii) a single fixed rate and (a) one or more qualified floating rates or (b)
a single "qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate (disregarding permissible rate caps, floors, governors and similar
restrictions described above).
There is uncertainty concerning the application of Code Section
1272(a)(6) and the OID Regulations to Bonds bearing interest at one or more
variable rates. In the absence of other authority, the provisions of the OID
Regulations governing variable rate debt instruments will be used as a guide in
adapting the provisions of Code Section 1272(a)(6) to such Bonds for the purpose
of preparing reports furnished to Bondholders. A Bond bearing interest at a
Single Variable Rate will take into account for each accrual period an amount
corresponding to the sum of (i) the qualified stated interest accruing on the
outstanding principal balance of the Bond (as the stated interest rate for that
Bond varies from time to time) and (ii) the amount of original issue discount
that would have been attributable to that period on the basis of a constant
yield to maturity for a bond issued at the same time and issue price as the
Bond, having the same principal balance and schedule of payments of principal as
such Bond, subject to the same Pricing Prepayment Assumption, and bearing
interest at a fixed rate equal to the applicable qualified floating rate or
qualified inverse floating rate in the case of a Bond providing for either such
rate, or equal to the fixed rate that reflects the reasonably expected yield on
the Bond in the case of a Bond providing for an objective rate other than a
qualified inverse floating rate, in each case as of the Closing Date. Holders of
Bonds bearing interest at a Multiple Variable Rate generally will take into
account interest and original issue discount under a similar methodology, except
that the amounts of qualified stated interest and original issue discount
attributable to such a Bond first will be determined for an "equivalent" debt
instrument bearing fixed rates, the assumed fixed rates for which are (a) for a
qualified floating rate or qualified inverse floating rate, such rate as of the
Closing Date (with appropriate adjustment for any differences in intervals
between interest adjustment dates), and (b) for any other objective rate, the
fixed rate that reflects the yield that is reasonably expected for the Bond. If
the interest paid or accrued with respect to a Multiple Variable Rate Bond
during an accrual period differs from the assumed fixed interest rate, such
difference will be an adjustment (to interest or original issue discount, as
applicable) to the Bond holder's taxable income for the taxable period or
periods to which such difference relates.
In the case of a Bond that provides for stated interest at a fixed rate
in one or more accrual periods and either one or more qualified floating rates
or a qualified inverse floating rate in other accrual periods, the fixed rate is
first converted into an assumed variable rate. The assumed variable rate will be
a qualified floating rate or a qualified inverse floating rate according to the
type of actual variable rate provided by the Bond and must be such that the fair
market value of the Bond as of the Closing Date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
the assumed variable rate in lieu of the fixed rate. The Bond is then subject to
the determination of the amount and accrual of original issue discount as
described above, by reference to the hypothetical variable rate instrument.
The provisions of the OID Regulations applicable to variable rate debt
instruments may not apply to Bonds having variable rates. If such a Bond is not
governed by the provisions of the OID Regulations applicable to variable rate
debt instruments, it may be subject to the Contingent Payment Regulations. The
application of the Contingent Payment Regulations to instruments such as
variable rate Bonds is subject to differing interpretations. If Bonds with
variable rates are subject to the Contingent Payment Regulations, the related
Prospectus Supplement will include additional information about their
application.
MARKET DISCOUNT
The purchaser of a Bond at a market discount, that is at a purchase price less
than the stated redemption price at maturity (or, in the case of a Bond issued
65
<PAGE>
with original issue discount, the Bond's adjusted issue price (as defined under
"-- Original Issue Discount"), will recognize market discount upon receipt of
each payment of principal. In particular, such a holder will generally be
required to allocate each payment of principal on a Bond first to accrued market
discount and to recognize ordinary income to the extent such principal payment
does not exceed the aggregate amount of accrued market discount on such Bond not
previously included in income. Such market discount must be included in income
in addition to any original issue discount includible in income.
A Bondholder may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. Such election, if made, will apply to all market discount bonds
acquired by such Bondholder on or after the first day of the first taxable year
to which such election applies. In addition, the OID Regulations permit a
Bondholder to elect to accrue all interest and discount, including DE MINIMIS
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If such an election is made, the
Bondholder is deemed to have made an election to include on a current basis
market discount in income with respect to all other debt instruments having
market discount that such Bondholder acquires during the year of the election or
thereafter. Similarly, a Bondholder that makes this election for a Bond that is
acquired at a premium is deemed to have made an election to amortize bond
premium, as described below, with respect to all debt instruments having
amortizable bond premium that such Bondholder owns or acquires. A taxpayer may
not revoke an election to accrue interest, discount and premium on a constant
yield method without the consent of the IRS.
Under a statutory DE MINIMIS exception, market discount with respect to a
Bond will be considered to be zero for purposes of Code Sections 1276 through
1278 if it is less than 0.25% of the stated redemption price at maturity of such
Bond multiplied by the number of complete years to maturity remaining after the
date of its purchase. In interpreting the DE MINIMIS rule with respect to
original issue discount, the OID Regulations refer to the weighted average
maturity of obligations, and it is likely that the same principle will be
applied in determining whether market discount is DE MINIMIS. It appears that DE
MINIMIS market discount on a Bond would be treated in a manner similar to DE
MINIMIS original issue discount. See "-- Original Issue Discount". Such
treatment would result in DE MINIMIS market discount being included in income at
a slower rate than market discount would be required to be included using the
method described in the preceding paragraph.
The Treasury Department is authorized to issue regulations providing for
the method for accruing market discount of more than a DE MINIMIS amount on debt
instruments the principal of which is payable in more than one installment.
Nevertheless, no such regulations have been issued. Until regulations are
issued, certain rules described in the Committee Report might apply. Under those
rules, the holder of a Bond purchased with more than DE MINIMIS market discount
may elect to accrue such market discount either on the basis of a constant yield
method or on the basis of the appropriate proportionate method described below.
Under the proportionate method for obligations issued with original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount multiplied by (ii) a
fraction the numerator of which is the original issue discount accruing during
the period and the denominator of which is the total remaining original issue
discount at the beginning of the period. The Pricing Prepayment Assumption, if
any, used in calculating the accrual of original issue discount should be used
in calculating the accrual of market discount. Under the proportionate method
for obligations issued without original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the total
remaining market discount multiplied by (ii) a fraction the numerator of which
is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the beginning of the period. Because regulations have not been issued, it is
not possible to predict what effect such regulations might have on the tax
treatment of a Bond purchased at a discount in the secondary market.
A Bondholder generally will be required to treat a portion of any gain on
sale or exchange of a Bond as ordinary income to the extent of the market
discount accrued to the date of disposition under one of the foregoing methods
less market discount previously reported as ordinary income as distributions in
reduction of the stated redemption price at maturity were received. See "--
Sales or Exchanges of BondS." A Bondholder may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
66
<PAGE>
incurred or continued to purchase or carry such 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 such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest expense deferral rule described above will not apply.
PREMIUM
A Bond purchased at a cost (not including payment for accrued qualified
stated interest) greater than its remaining stated redemption price at maturity
will be considered to be purchased at a premium. The holder of such a Bond may
elect to amortize such premium under the constant yield method. The OID
Regulations also permit Bondholders to elect to include all interest, discount
and premium in income based on a constant yield method, further treating the
Bondholder as having made the election to amortize premium generally, as
described above. The Committee Report indicates a Congressional intent that the
same rules that apply to accrual of market discount on installment obligations
also apply in amortizing premium under Code Section 171 on installment
obligations such as the Bonds.
The Premium Regulations describe the constant yield method under which
premium is amortized and provide that the resulting offset to interest income
may be taken into account only as a Bondholder takes the corresponding interest
income into account under such holder's regular accounting method. In the case
of instruments that may be called or repaid prior to maturity, the Premium
Regulations provide that the premium is calculated by assuming that the issuer
will exercise its redemption rights in the manner that maximizes the
Bondholder's yield and the Bondholder will exercise its option in a manner that
maximizes the Bondholder's yield. The Premium Regulations do not apply to debt
instruments subject to Code Section 1272(a)(6).
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Reporting of interest income, including any original issue discount, with
respect to Bonds is required annually, and may be required more frequently under
Treasury regulations. Certain holders of Bonds which are generally exempt from
information reporting on debt instruments, such as corporations, banks,
registered securities or commodities brokers, real estate investment trusts,
registered investment companies, common trust funds, charitable remainder
annuity trusts and unitrusts, will be provided interest and original issue
discount income information and the information set forth in the following
paragraph upon request in accordance with the requirements of the Treasury
regulations. The information must be provided by the later of 30 days after the
end of the quarter for which the information was requested, or two weeks after
the receipt of the request.
The information reports must include a statement of the "adjusted issue
price" of a REMIC Bond at the beginning of each accrual period. In addition, the
reports must include information necessary to compute the accrual of any market
discount that may arise upon secondary trading of Bonds. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the Issuer may
not have, it appears that this provision will only require information
pertaining to the appropriate proportionate method of accruing market discount.
BACKUP WITHHOLDING WITH RESPECT TO BONDS
Distribution of interest and principal on Bonds may be subject to the
"backup withholding tax" under Code Section 3406 at a rate of 31 percent if
recipients fail to furnish certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a recipient would be allowed as a
credit against such recipient's federal income tax. Furthermore, certain
penalties may be imposed by the IRS on a recipient that is required to supply
information but that does not do so in the manner required.
FOREIGN INVESTORS IN BONDS
Except as qualified below, payments made on a Bond to a Bondholder that is
not a U.S. Person, as hereinafter defined (a "Non-U.S. Person"), or to a person
acting on behalf of such a Bondholder, generally will be exempt from U.S.
federal income and withholding taxes, provided that (a) the holder of the Bond
is not subject to U.S. tax as a result of a connection to the United States
other than ownership of such Bond, (b) the holder of such Bond signs a statement
under penalties of perjury that certifies that such holder is a Non-U.S. Person,
67
<PAGE>
and provides the name and address of such holder and (c) the last U.S. Person in
the chain of payment to the holder receives such statement from such holder or a
financial institution holding on its behalf and does not have actual knowledge
that such statement is false. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a withholding tax rate
of 30 percent, subject to reduction under an applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership (or other entity treated or classified as a corporation
or partnership) for United States federal income tax purposes, created or
organized in or under the laws of the United States or any state thereof or the
District of Columbia, an estate that is subject to U.S. federal income tax
regardless of the source of its income or a trust if (i) a court within the
United States is able to exercise primary supervision over the administration of
the trust and (ii) one or more United States persons have authority to control
all substantial decisions of the trust.
Holders of REMIC Bonds should be aware that the Service may take the
position that exemption from U.S. withholding taxes does not apply to such a
holder that also directly or indirectly owns 10 percent or more of the residual
interest in the REMIC. Further, the foregoing rules will not apply to exempt a
"United States shareholder" (as such term is defined in Code Section 951) of a
controlled foreign corporation from taxation on such United States shareholder's
allocable portion of the interest or original issue discount income earned by
such controlled foreign corporation.
The Withholding Regulations may affect the United States taxation of
foreign investors in Bonds. The Withholding Regulations are generally proposed
to be effective for payments after December 31, 2000, regardless of the issue
date of the Bonds with respect to which such payments are made, subject to
certain transition rules. The Withholding Regulations provide certain
presumptions with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above and
would replace a number of current tax certification forms with a single,
restated form and standardize the period of time for which withholding agents
could rely on such certifications. The Withholding Regulations also provide
rules to determine whether, for purposes of United States federal withholding
tax, interest paid to a Non-U.S. Person that is an entity should be treated as
paid to the entity or those holding an interest in that entity.
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 the facts and circumstances of the
investment.
Sections 406 and 407 of ERISA and Code Section 4975 prohibit certain
transactions that involve (i) a Plan and any party in interest under ERISA or
68
<PAGE>
"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 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
69
<PAGE>
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including, but not limited to,
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing, under the laws of the
United States or of any State (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to State regulation to the same
extent that under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Bonds of a Series that
are secured by second liens on residential properties will not be treated as
"mortgage related securities" under SMMEA, regardless of the rating assigned
such Bonds.
Under SMMEA, if a State enacted legislation prior to October 4, 1991,
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Bonds will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Several states have enacted legislation overriding SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in any securities, or require the sale or other disposition of any
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
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 the net proceeds from the
sale of each Series offered hereby and by the related Prospectus Supplement to
purchase the Mortgage Loans, to repay indebtedness that has been incurred to
obtain funds to acquire the Mortgage Loans, to establish the Reserve Fund, if
any, for the Series and to pay costs of structuring and issuing the Bonds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or through
one or more underwriters or underwriting syndicates or through designated
agents. The Issuer also may sell the Bonds initially to an Affiliate, and such
Affiliate may sell the Bonds, from time to time, either directly or through one
or more underwriters, underwriting syndicates or through designated agents. The
Bonds of a Series may be acquired by underwriters for their own account and may
be resold from time to time in one or more transactions, at a fixed public
offering price or prices, which may change, or at varying prices determined at
the time of sale. The Issuer also may authorize, from time to time, underwriters
acting as agents to offer and sell the Bonds upon the terms and conditions set
forth in the related Prospectus Supplement.
The related Prospectus Supplement or Supplements for each Series will set
forth the terms of the offering of such Series and of each Class of Bonds within
such Series, including the name or names of the underwriters, the proceeds to
and their use by the Issuer, and either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers, or the method by which the price at
which the underwriters will sell the Bonds will be determined. If Bonds of a
Series are offered other than through underwriters, the related Prospectus
70
<PAGE>
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 Arter & Hadden LLP, Washington, D.C., or counsel
to the Issuer identified in the Prospectus Supplement 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.
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."
71
<PAGE>
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.
"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.
72
<PAGE>
"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, Model Home Loans, Manufactured Home
Loans and Consumer Finance Loans pledged to secure a Series.
"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.
73
<PAGE>
"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.
"FANNIE MAE" means Federal National Mortgage Association.
"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.
"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.
74
<PAGE>
"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.
"LEVEL PAYMENT LOAN" means a Loan the terms of which provide for regular,
level payments of principal and interest throughout its entire term.
"LEVEL PAYMENT MORTGAGE LOAN" means a Mortgage Loan that is a Level
Payment Loan.
"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, a Mortgage Loan, 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.
"MAXIMUM RATE" means, with respect to an Adjustable Rate Loan, the maximum
lifetime Loan Rate payable on the Loan.
75
<PAGE>
"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 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.
"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.
76
<PAGE>
"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.
"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, 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.
77
<PAGE>
"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 Trustee by 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 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:
78
<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.
"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.
79
<PAGE>
"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.
80
<PAGE>
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Bonds in any state where the offer is not permitted.
We do not claim the accuracy of the information in this prospectus supplement
and the accompanying prospectus as of any date other than the dates stated on
the cover page of this prospectus supplement.
---------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Terms of the Bonds and the Collateral.............S-1
Risk Factors......................................S-3
Description of the Bonds..........................S-5
Security for the Bonds...........................S-14
Servicing of the Collateral......................S-18
Maturity and Prepayment Considerations...........S-21
Yield Considerations.............................S-26
Certain Federal Income Tax Consequences..........S-27
Use of Proceeds..................................S-29
Underwriting.....................................S-29
Legal Matters....................................S-30
Ratings..........................................S-30
ERISA Considerations.............................S-31
PAGE
----
PROSPECTUS
Prospectus Summary..................................1
Risk Factors........................................6
Description of the Bonds...........................15
Maturity and Prepayment Considerations.............22
Yield Considerations...............................23
Security for the Bonds.............................23
Origination of the Collateral......................33
Servicing of the Collateral........................35
The Indenture......................................40
Certain Legal Aspects of the Collateral............43
The Issuer.........................................54
Certain Federal Income Tax Consequences............54
State Tax Considerations...........................66
ERISA Considerations...............................66
Legal Investment...................................67
Use of Proceeds....................................67
Plan of Distribution...............................68
Legal Matters .....................................68
Financial Information..............................68
Additional Information.............................68
Incorporation of Certain Documents By Reference....69
Reports to Bondholders.............................69
Glossary...........................................70
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE BONDS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE BONDS WILL DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL 90 DAYS AFTER THE DATE OF THE
PROSPECTUS SUPPLEMENT.
$341,250,000
(APPROXIMATE)
MERIT SECURITIES
CORPORATION
COLLATERALIZED BONDS, SERIES 13
PROSPECTUS SUPPLEMENT
LEHMAN BROTHERS
GREENWICH CAPITAL MARKETS
AUGUST 31, 1999
