Registration No. 333-64385
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1
To
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------
MERIT Securities Corporation
(Exact name of registrant as specified in its charter)
Virginia
(State of Incorporation)
----------
54-1736551
(I.R.S. Employer I.D. No.)
10900 Nuckols Road
Glen Allen, Virginia 23060
(804) 217-5800
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
----------------
Thomas H. Potts, President With a Copy to:
MERIT Securities Corporation Michael P. Murphy, Esq.
10900 Nuckols Road Arter & Hadden LLP
Glen Allen, Virginia 23060 1801 K Street, N.W., Suite 400-K
(804) 217-5800 Washington, D.C. 20006-1301
202-775-6966
(Name, address, including zip code and telephone
number, including area code, of agent for service)
------------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______, 1999)
$_,___,___,___(Approximate)
MERIT Securities Corporation
Collateralized Bonds, Series __
Principal and interest are payable on or about the 28th day of each month,
beginning ______ 28, 1999. The Bonds will be non-recourse. The principal
collateral for the Bonds will be:
o Group I: approximately $__,___,___ in aggregate scheduled principal
balance (as of ____ 1, 1999) of single family mortgage loans (of which
approximately __% are adjustable rate loans and approximately __% are
level payment loans) having a weighted average remaining term to stated
maturity of approximately ___ months.
o Group II: approximately $__,___,___ in aggregate scheduled principal
balance (as of ____ 1, 1999) of fixed rate manufactured housing
installment sales contracts having a weighted average remaining term to
stated maturity of approximately ___ months and $___,000,000 of funds
intended to be used to acquire additional manufactured housing
installment sales contracts that will be pledged to secure the Bonds.
The Bonds will be treated as debt instruments for federal income tax purposes.
MERIT is a "qualified REIT subsidiary" and will not make a REMIC election. See
"Certain Federal Income Tax Consequences" on page S-__.
Consider carefully the risk factors described on page _ of the Prospectus and on
page S-_.
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.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- ---------------- ------------- ------------------- ----------------- ---------------- ------------- -------------
Original Initial Spread Weighted Stated
Principal over One Month Average Life at Ratings Maturity CUSIP
Amount (1) LIBOR (2) Pricing Speed (3) _____/_____ Date (5) Number
- ---------------- ------------- ------------------- ----------------- ---------------- ------------- -------------
<S> <C>
Group I
Class 1-A...... $___ ,000,000 % __/__ years , 28, 20 589962 ___
Class 1-M1..... ,000,000 % __/__ years , 28, 20 589962 ___
Class 1-M2..... ,000,000 % __/__ years , 28, 20 589962 ___
Class 1-B...... ,000,000 % __/__ years , 28, 20 589962 ___
Group II
Class 2-A...... ,000,000 % __/__ years , 28, 20 589962 ___
Class 2-M1..... ,000,000 % __/__ years , 28, 20 589962 ___
Class 2-M2..... ,000,000 % __/__ years , 28, 20 589962 ___
Class 2-B...... ,000,000 % __/__ years , 28, 20 589962 ___
==================================================================================================================
</TABLE>
(1) Plus or minus 5% depending on the collateral actually pledged to secure the
Bonds. The Class 1-A and Class 1-M1 Bonds are, and after the end of the
funding period described herein, the Class 2-A and Class 2-M1 Bonds will
be, "mortgage related securities" for SMMEA purposes. See "Legal Investment
Considerations" in the Prospectus. All Classes of Bonds are "ERISA
eligible". See "ERISA Considerations" on page S-__.
(2) Subject to caps; after the first optional redemption date, the spreads and
caps will increase. See "Terms of the Bonds and the Collateral--The Bonds"
on page S-_.
(3) At the pricing speed (__% CPR for Group I and __% CPR for Group II) to
first optional redemption date maturity date. See "Maturity and Prepayment
Considerations" on page S-__.
(4) See "Ratings" on page S-__.
(5) Determined as described under "Maturity and Prepayment Considerations" on
page S-__.
The underwriters will offer the bonds (other than the class _ bonds), and an
affiliate of MERIT will offer the class _ 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 the bonds (other than the class _
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
_______ __, 1999.
The date of this Prospectus Supplement is _______ __, 1999
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
TERMS OF THE BONDS AND THE COLLATERAL................
RISK FACTORS.........................................
DESCRIPTION OF THE BONDS.............................
General...........................................
Book-Entry Bonds..................................
The Trustee and Custodian.........................
Payments of Principal and Interest................
Collateralization Fund............................
Definitions.......................................
Events of Default.................................
Issuance of Additional Subordinated Bonds.........
Losses............................................
Stated Maturity Dates.............................
Redemption........................................
SECURITY FOR THE BONDS...............................
The Collateral....................................
The Initial Loans.................................
Selected Loan Data................................
Mortgage Pool and Other Insurance for Group I.....
Loans.............................................
Year 2000 Readiness Disclosure....................
Additional Information............................
Subsequent Group II Loans.........................
Substitution of Loans.............................
Conversion Option.................................
SERVICING OF THE COLLATERAL..........................
General...........................................
Advances..........................................
Forbearance and Modification Agreements...........
Events of Default.................................
Master Servicers..................................
Servicing and Other Compensation and Expenses.....
Special Servicer..................................
MATURITY AND PREPAYMENT CONSIDERATIONS...............
Weighted Average Life of the Bonds................
Factors Affecting Prepayments on the Loans........
Mandatory Prepayment..............................
Modeling Assumptions..............................
YIELD CONSIDERATIONS.................................
General...........................................
Subordination.....................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............
USE OF PROCEEDS......................................
UNDERWRITING.........................................
LEGAL MATTERS........................................
RATINGS..............................................
ERISA CONSIDERATIONS.................................
SUMMARY
MERIT. 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 mortgage loans and
manufactured housing installment sales contracts which MERIT acquired from an
affiliate.
Trustee. Chase Bank of Texas, National Association, will act as trustee.
Interest payments. The Trustee will pay interest monthly, in order of seniority,
on the bonds at variable or floating rates, subject to caps.
Principal. The Trustee will pay principal monthly by group 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 mortgage properties or manufactured
homes. Losses will be borne initially by MERIT to the extent that the collateral
exceeds 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." 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.
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 mortgage loans, the
manufactured housing installment sales contracts and the additional collateral
for the bonds, read carefully the entire prospectus supplement and the
accompanying prospectus.
THE BONDS
Payment Dates
The 28th of each month (or, if not a business day, then the next business day).
Interest
The class interest rates per annum will equal One-Month LIBOR plus the spread
shown below for each class subject to the caps shown below.
Spread Cap
Group I
Class 1-A __.__% __.__%
Class 1-M1 __.__% __.__%
Class 1-M2 __.__% __.__%
Class 1-B __.__% __.__%
Group II
Class 2-A __.__% __.__%
Class 2-M1 __.__% __.__%
Class 2-M2 __.__% __.__%
Class 2-B __.__% __.__%
If MERIT does not redeem the bonds on the first optional redemption date, the
spreads and caps will increase as follows:
Increased Increased
Spread Cap
Group I
Class 1-A __.__% __.__%
Class 1-M1 __.__% __.__%
Class 1-M2 __.__% __.__%
Class 1-B __.__% __.__%
Group II
Class 2-A __.__% __.__%
Class 2-M1 __.__% __.__%
Class 2-M2 __.__% __.__%
Class 2-B __.__% __.__%
Computation. Interest will be computed on the basis of a 360-day year consisting
of twelve 30-day months.
One-Month LIBOR. For any payment date, One-Month LIBOR is the London Interbank
Offered Rate ("LIBOR") for one-month Eurodollar deposits appearing on the
Bloomberg Screen LIUS01M Index Page as of 11:00 a.m., London time, on the second
business day in London prior to the commencement of the related accrual period.
(_______ __, 1999, for the first Payment Date). See "Description of the Bonds --
Payments of Principal and Interest" on page S-_.
Accrual Period. Interest is payable on each payment date for the period
commencing on the 1st day of the preceding month (or initially from the closing
date (_______ __, 1999)) through the last day of such month.
Principal
On each payment date, the Trustee will apply:
o the group I principal payment amount, derived generally from principal
payments on the mortgage loans, to pay principal sequentially to the class
1 bonds; and
o the group II principal payment amount, derived generally from principal
payments on the manufactured housing installment sales contracts, to pay
principal sequentially to the class 2 bonds.
The Trustee will make principal payments to the bondholders of each class pro
rata. See "Description of the Bonds -- Payments of Principal and Interest" on
page S-_.
Redemption
MERIT may, at its option, redeem a class or classes of the bonds in whole, but
not in part:
o on any payment date on or after the earlier of (i) ______ 1, 200_, 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
principal balance of the bonds.
o at any time upon a determination by MERIT, based upon an opinion of
counsel, that a substantial risk exists that such bonds will not be treated
for federal income tax purposes as evidences of indebtedness.
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 -- Redemption" on page S-__ and "Description of the Bonds -- Redemption"
in the Prospectus.
<PAGE>
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-_ and "Description of the Bonds --
Book-Entry Procedures" in the Prospectus.
THE COLLATERAL
The collateral for the bonds is the entire interest in:
o group I loans, which are conventional, one- to four-family fully
amortizing first lien mortgage loans
o initial group II loans, which are fixed rate manufactured housing
installment sales contracts, and
o $___,000,000 in cash available to purchase additional manufactured
housing installment sales contracts before ________, 19__.
o The group II loans will consist of the initial group II loans and any
additional manufactured housing installment sales contracts purchased by
MERIT. The loans will consist of the group I loans and the group II loans.
o The purchase of additional manufactured housing installment sales contracts
will increase the aggregate principal balance of the group II loans (and
the loans) and decrease the initial cash collateral by an offsetting
amount.
o To the extent that MERIT does not purchase manufactured housing installment
sales contracts, the remaining cash collateral will be applied as a group
II principal payment amount.
A. Initial Loans
Whenever there is a reference in this Prospectus Supplement to a percentage of,
or to the characteristics of, the initial loans, the calculations are
approximate and are based on the scheduled principal balances of the loans (or
loans in a group) as of _______ 1, 1999.
Group I -- Mortgage Loans
Aggregate Scheduled Principal Balances $
Average Scheduled Principal Balance $
Range of Scheduled Principal Balances $______ to $______
Weighted Average Original Loan-to-Value Ratio %
Loan Rates
Weighted Average by Type
Fixed %
Six-Moth LIBOR %
One-Year CMT %
Weighted Average Gross Margin by Type
Six-Month LIBOR %
One-Year CMT %
Current Weighted Average Loan Rate %
Range of Current Loan Rates __% to __%
Weighted Average Maximum Lifetime Loan Rate %
Range of Maximum Lifetime Loan Ratio __% to __%
Weighted Average Minimum Lifetime Loan Rate %
Range of Minimum Lifetime Loan Rates __% to __%
Weighted Average Remaining Amortization Term Months
Range of Remaining
Amortization Terms __to __Months
Weighted Average Administrative Cost Rate %
Group II -- Manufactured Housing Installment Sales Contracts
Aggregate Scheduled Principal Balances $
Average Scheduled Principal Balance $
Range of Scheduled Principal Balances $
Weighted Average Loan-to-Value Ratio %
Range of Loan Rates __% to __%
Weighted Average Loan Rate %
Weighted Average Remaining Amortization Terms Months
Range of Remaining Amortization Terms __ to __Months
Weighted Average Administrative Cost Rate %
Administrative Cost Rate
The administrative cost rate per annum with respect to each loan equals the sum
of (i) the related servicing, master servicing and bond administration fee
rates, (ii) the rate used to calculate premiums, if any, on pool and other
insurance policies and certain other administrative expenses, if any, applicable
to such loan and (iii) the fees of any special servicer.
B. Collateral Proceeds Account
The servicers must remit collections and advances on the loans (net of servicing
fees and expenses in the case of the group I loans) monthly to the master
servicers, who in turn remit collections and advances (net of the master
servicing and bond administration fees and expenses) 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 funds to MERIT. See "Security for
the Bonds -- Collateral Proceeds Account" in the Prospectus.
C. Credit Enhancement; Subordination
Credit enhancement for the class A bonds will be provided through (i) limited
overcollateralization, i.e., the pledge to the Trustee on the closing date 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 and (ii) the subordination of the class M1, class M2 and class B
bonds. Credit enhancement for the class M1, class M2 and class B bonds will be
provided through (i) the limited overcollateralization described above and (ii)
in the case of the class M1 bonds, the subordination of the class M2 and class B
bonds and, in the case of the class M2 bonds, the subordination of the class B
bonds.
<PAGE>
On the closing date, MERIT will deposit in collateralization fund, as additional
security for the bonds, other assets (with an expected principal balance equal
to approximately $_____________). MERIT may substitute eligible investments (as
defined) for the assets initially deposited in the collateralization fund. MERIT
will not have any other obligation to make deposits to the collateralization
fund.
The principal amount of the collateral and the initial deposit in the
collateralization fund, on the closing date, is expected to exceed the principal
amount of the bonds by ___%. The actual percentage may be lower or higher
depending on the final requirements of the Rating Agencies. Losses will reduce
the excess over the principal amount of the bonds. To the extent that the excess
would otherwise exceed the required amount of overcollateralization, the Trustee
will distribute amounts to MERIT.
See "Description of the Bonds -- Payments of Principal and Interest --
Collateralization Fund" on page S-_.
D. Losses
Losses with respect to the loans (to the extent not covered by credit
enhancement, if any) will be borne, by virtue of the payment priorities
described herein, first by the excess collateral, second by the class B bonds,
third by the class M2 bonds and fourth by the class M1 bonds, in each case pro
rata, by outstanding principal balance, with respect to each class.
Servicers and Master Servicers
_________ services __% of the group I loans; ______________ services __% of the
group I loans; ______________, services __% of the group I loans; and the
balance of the initial loans are serviced by other servicers. Dynex Services
("Dynex Services"), an affiliate of MERIT, services all the group II loans;
_________________ serves as master servicer of __% of the group I loans); ____
serves as master servicer of __% of the group I loans; and Dynex serves as
master servicer of the balance of the group I loans and all the group II loans.
Each servicer will be entitled to a servicing fee and each master servicer will
be entitled to a master servicing fee from interest collected on the loans
(except that the servicing fee with respect to the group II loans is payable
after the payment of interest on the bonds to the extent provided herein). The
servicing and master servicing fees will vary among the loans.
Advances
On or before each payment date, each servicer must (subject to the limitations
provided in its servicing agreement) make a cash advance with respect to any
delinquent loan in an amount equal to the sum of (i) the scheduled payment on
such delinquent loan (net of the servicing fee, except with respect to the group
II loans for which advances are required to be made only to the extent of the
interest portion of a scheduled payment (without deduction for the servicing fee
to the extent provided herein)), (ii) amounts for the payment of real estate
taxes, assessments, insurance premiums and property protection expenses and
(iii) amounts to cover expenses relating to foreclosure and liquidation. The
applicable master servicer, the bond administrator and the Trustee (in that
order) must make any required advance if a required advance has not otherwise
been made. Nevertheless, none of them must 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.
<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.
Subordination Under the cash flow mechanics of the indenture, the trustee
mechanics place will pay:
risk of loss on
the class M1, the class M1 bonds only after paying the related class A
class M2 and bonds
class B bonds
o the class M2 bonds only after paying the related class A
and the class M1 bonds
o the class B1 bonds only after paying the related class A,
class M1 and class M2 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.
If the trustee disposes of a loan at a loss, the aggregate
principal balances of the related bonds may exceed the
scheduled principal balances of the related group of loans.
You should fully consider the subordination risks associated
with an investment in the class M1, class M2 or class B
bonds, including the possibility that you may not fully
recover your initial investment as a result of losses on the
loans.
Loan rates may Subject to the applicable caps, the class interest rates on
limit available the bonds adjust monthly based upon the value of an index
funds to pay (One-Month LIBOR). The loan rates on the fixed rate loans
interest (__% of the group I loans and the group II loans) do not
adjust, and the loan rates on the adjustable rate loans
(___% of the group I loans) adjust semi-annually based upon
Six-Month LIBOR or a CMT index.
o In a rising interest rate environment, the class
interest rates on the bonds (which adjust monthly) may
exceed the net rates on the fixed rate loans or, in
the case of the adjustable rate loans, may rise before
the loan rates on the adjustable rate loans (which
adjust annually or semiannually and are subject to
periodic and lifetime caps).
o One-Month LIBOR, which is the index for the bonds, may
respond to different economic and market factors than
Six-Month LIBOR or the CMT indices, which are the
indices for the adjustable rate loans. One-Month LIBOR
may rise while the other indices are stable or
falling. Even if they move in the same direction,
One-Month LIBOR may rise more rapidly than the other
indices or fall less rapidly in a declining interest
rate environment.
As a consequence, on any payment date, the available funds
attributable to interest on the loans may not be sufficient
to pay current interest and interest carryover amounts on
one or more classes of the bonds; in that event, any
interest carryover amount will be payable on future payment
dates (with interest) to the extent that such funds are
available for the purpose.
Uncertain timing Unlike standard corporate bonds, principal payments on the
of principal Bonds are not fixed and will be determined by, among other
payments may things:
result in
reinvestment risk o the timing and amount of principal payments (including
prepayments, defaults, liquidations and repurchases) on
the loans, which are subject to a variety of economic,
geographic, legal, tax, and social factors primarily
because the loans are generally prepayable by the
borrowers at any time,
o the timing and amount of losses realized on the loans
and
o the principal payment structure (including redemption
provisions) of the bonds.
<PAGE>
Faster prepayment rates, which are generally associated with
a declining interest rate environment, will have the effect
of reducing the weighted average life of the bonds and
increasing the reinvestment risk associated with the
inability to achieve comparable yields on the available
investment alternatives in such reduced interest rate
environment. As a consequence, the price of a bond that is
trading at or above par will not increase to the same degree
as the price of a standard corporate bond with a comparable
interest rate if there is a significant decline in
prevailing interest rates. Conversely, slower prepayment
rates, which are generally associated with an increasing
interest rate environment or declining real estate values,
will have the effect of increasing the weighted average life
of the bonds and decreasing the amount of funds available to
a bondholder to reinvest in higher yielding investment
alternatives.
See "Maturity and Prepayment Considerations" on page S-__
and "Yield Considerations" on page S-__. See also "Yield
Considerations" and "Risk Factors--Average Life and Yield
Considerations" in the Prospectus.
Bonds are The bonds will be non-recourse obligations of MERIT. The
non-recourse bondholders will have no rights or 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.
Each bondholder will be deemed, by acceptance of its bond,
to have agreed (to the extent it may legally do so) 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 and to treat its
bonds as debt instruments for purposes of federal and state
income tax, franchise tax and any other tax measured in
whole or in part by income. The bonds will be particularly
sensitive to the loss experience of the collateral.
See "Yield Considerations -- Subordination" on page S-__.
Insolvency of MERIT believes that the transfer of the collateral by its
MERIT could affiliate, Issuer Holding Corp., to MERIT constitutes an
cause payment absolute and unconditional sale. Nevertheless, in the event
delays of 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 losses in a lower interest rate
environment.
Delinquencies on Of the initial loans, 0.__% of the group I loans and ___% of
the loans may the initial group II loans were delinquent by one or more
indicate risk of scheduled payments. The inclusion of delinquent loans may
future losses affect the rate of defaults. Defaults on delinquent loans
will result in principal prepayments on the bonds and may
affect the yield on the bonds. See "Security for the Bonds
--The Initial Loans" on page S-__.
Loan Of the initial loans, __% (__% of the group I loans and __%
concentration of the group II loans) are secured by properties located in
may increase __________. Consequently, losses and prepayments on the
risk of loss loans and resultant payments on the bonds may be affected
significantly by changes in the housing markets and the
regional economy of ________(particularly, in the
___________metropolitan area where a significant number of
properties securing the loans are located), and also by the
occurrence of natural disasters (such as earthquakes, fires
and floods) in __________ (and such metropolitan area). In
addition, _% and _% of the initial loans are secured by
properties located in ___ and ______, respectively.
<PAGE>
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 are not obligated to do so. There is no assurance that any
for the bonds such market, if established, will continue or that any
investor will be able to sell any of such bonds at a price
equal to or greater than the price at which they were
purchased.
Computer risks The Master Servicer [s] and the servicer [s] have each taken
associated with action intended to assure that their computer systems are
Year 2000 "year 2000 compliant". See "Security for the Bonds -- Year
2000 Readiness Disclosure" on page S-__. If those computer
systems or the computer systems of other financial
intermediaries are not "year 2000 compliant" on a timely
basis, MERIT could experience disruptions in collecting
payments on the loans and in making payments on the bonds.
See "Description of the Bonds -- Book-Entry Bonds -- DTC
Year 2000 Compliance" on page S-_.
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-_.
Book-Entry Bonds
The Bonds will be Book-Entry Bonds, which will be represented by one or
more certificates registered in the name of a nominee of The Depository Trust
Company ("DTC"), and beneficial interests therein will be held by investors
through the book-entry facilities of DTC, as described herein, in minimum
denominations of $100,000 and integral multiples of $1,000 in excess thereof.
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.
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.
<PAGE>
Beneficial owners may elect to hold their Book-Entry Bonds directly
through DTC in the United States, or CEDEL or Euroclear (in Europe) if they are
participants of such systems ("Participants"), or indirectly through
organizations which are Participants. CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositories
which in turn will hold such positions in customers' securities accounts in the
depositories' names on the books of DTC. Citibank will act as depository for
CEDEL and Chase will act as depository for Euroclear (in such capacities,
individually the "Relevant Depository" and collectively the "European
Depositories").
See "Description of the Bonds __ Book Entry Procedures "and" ___ Global
Clearance Settlement and Tax Documentation Procedures" in the Prospectus.
The Trustee and Custodian
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.
Payments of Principal and Interest
Payment Dates
The Payment Dates for the Bonds will be the 1st day of each month (or,
if such day is not a Business Day, then the next succeeding Business Day),
commencing May 1, 1999. For accounting purposes, the Payment Date will be deemed
to occur on the 1st 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 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 for each Group will
be applied in the following order of priority:
First, to pay Current Interest and any Interest Carryover Amount with
respect to the Class A Bonds of that Group;
Second, to pay Current Interest and any Interest Carryover Amount with
respect to the Class M1 Bonds of that Group;
Third, to pay Current Interest and any Interest Carryover Amount with
respect to the Class M2 Bonds of that Group;
Fourth, to pay Current Interest and any Interest Carryover Amount with
respect to the Class B Bonds of that Group;
Fifth, to pay any unpaid Servicing Fee with respect to the Group II
Loans;
Sixth, to pay Current Interest and any Interest Carryover Amount with
respect to the Bonds of the other Group;
Seventh, to be included in the Principal Payment Amounts pro rata to
the extent necessary to cause the Overcollateralization Amount to be
not less than the product of the initial Overcollateralization
Percentage and the outstanding principal amount of the Bonds; and
Eighth, any remainder to be released as security for the Bonds.
<PAGE>
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, the Principal Payment Amount for each Group will
be applied in the following order of priority:
First, to pay principal of the Class A Bonds of that Group until paid
in full;
Second, to pay principal of the Class M1 Bonds of that Group until paid
in;
Third, to pay principal of the Class M2 Bonds of that Group until paid
in full;
Fourth, to pay principal of the Class B Bonds of that Group until paid
in full;
Fifth, to pay principal of the Bonds of the other Group; and
Sixth, any remainder to be released as security for the Bonds.
Collateralization Fund
On the Closing Date, MERIT will establish a fund (the
"Collateralization Fund") with the Trustee and deposit therein, as additional
security for the Bonds, other assets selected by MERIT with a principal balance
equal to approximately $____________ at the Cut-off Date. MERIT may substitute
Eligible Investments for the assets initially deposited in the Collateralization
Fund. MERIT will not have any other obligation to make deposits to the
Collateralization Fund.
On each Payment Date, the Trustee is required, based on written
information provided to the Trustee by the Bond Administrator prior to each
Payment Date: (a) to apply interest earnings on the Collateralization Fund (i)
to pay interest on the Bonds if the portion of Available Funds attributable to
interest is less than Current Interest and any Interest Carryover Amount on the
Bonds and (ii) to increase the Principal Payment Amounts to the extent that the
Overcollateralization Amount would otherwise be less than the initial
Overcollateralization Amount; (b) to apply any principal payments received with
respect to the initial deposit to the Collateralization Fund to increase the
Principal Payment Amounts to the extent that the Overcollateralization Amount
would otherwise be less than the initial Overcolleralization Amount; and (c) to
release from the Collateralization Fund: (i) any interest earnings on assets on
deposit in the Collateralization Fund not required to be applied as set forth in
clause (a) above and (ii) the amount, if any, by which the excess of (x) the sum
of (A) the aggregate Scheduled Principal Balance of the Loans and (B) the
balance in the Collateralization Fund over (y) the principal balance of the
Bonds exceeds the Target Overcollateralization Amount (calculated after all
payments have been made on the Bonds for such Payment Date). Once released from
the Collateralization Fund, such amount will not be available to make payments
on the Bonds.
Definitions
"Available Funds": On each Payment Date, the sum of (a) all
distributions received in respect of the Loans and deposited in the Collateral
Proceeds Account (which represent substantially all the principal and interest
(at the Net Rate (except for servicing fees on the Group II Loans)) during the
related Due Period) less (b) from and after the occurrence of an Event of
Default, all sums due under the Indenture to the Trustee associated with the
disposition of all or a portion of the Trust Estate or the exercise of any of
the other remedies set forth in the Indenture.
"Bond Percentage": On each Payment Date, the aggregate outstanding
principal balance of the Bonds divided by the sum of (i) the then aggregate
Scheduled Principal Balance of the Loans and (ii) the Pre-Funded Amount, in each
case as of such Payment Date (but not more than 100%).
"Bond Payment Percentage": On each Payment Date, 100%; except that, if
on any Payment Date (a) the Overcollateralization Amount is greater than or
equal to the Target Overcollateralization Amount but only to the extent that the
Overcollateralization Amount continues to equal or exceed the Target
Overcollateralization Amount and (b) over the prior six months, the average
Unpaid Principal Balance of the Group I Loans and the Group II Loans delinquent
60 days or more (including for this purpose any Group I or Group II Loans in
foreclosure and REO) has not exceeded __% and __%, respectively, of the average
aggregate Unpaid Principal Balance of all Group I Loans and the Group II Loans,
respectively, then the Bond Payment Percentage for such Payment Date will be the
Bond Percentage for such Payment Date.
<PAGE>
"Class Interest Rates": With respect to each Payment Date, the Class
Interest Rates per annum will initially equal, subject to the Applicable Cap,
One-Month LIBOR, as determined on the applicable LIBOR Floating Rate
Determination Date, plus, in each case, the Applicable Spread. If MERIT does not
exercise its option to redeem the Bonds on the first optional redemption date,
the Applicable Spread and Cap will thereafter be increased. See "Terms of the
Bonds and the Collateral" on page S-_.
"Current Interest": With respect to each Class of Bonds and each
Payment Date, the sum of (i) the interest accrued at the applicable Class
Interest Rate for the applicable Accrual Period on the outstanding principal
balance of such Class, (ii) the excess of (A) interest accrued at the applicable
Class Interest Rate with respect to prior Payment Dates over (B) the amount
actually paid to such Class with respect to interest on such prior Payment Dates
and (iii) interest on such excess at the applicable Class Interest Rate for such
Accrual Period less (iv) the Interest Carryover Amount for such Class.
"Principal Payment Amount": On each Payment Date, the sum of (i) the
product of the Bond Payment Percentage and the portion of Available Funds
attributable to principal received with respect to Loans of the related Group
and (ii) to the extent required to cause the Overcollateralization Amount to be
not less than the initial Overcollateralization Amount, in the following order:
(a) any cash amount in the Collateralization Fund and (b) the balance of the
Interest Payment Amount (after providing for interest then due on the Bonds).
"Interest Carryover Amount": With respect to each Class of Bonds and
each Payment Date, the sum of (i) the product of (x) the outstanding principal
balance of such Class and (y) one-twelfth of the excess of (A) the Class
Interest Rate for such Class over (B) the weighted average (by principal
balance) of the Net Rates on the Loans, in each case with respect to such
Payment Date, and (ii) any such product remaining unpaid with respect to prior
Payment Dates, together with interest thereon at the applicable Class Interest
Rate.
"Interest Payment Amount": On each Payment Date, the sum of (i) the
portion of Available Funds attributable to interest on the Loans and (ii) any
interest earnings on the Collateralization Fund to the extent required to be
used to pay Current Interest and any Interest Carryover Amount on the Bonds.
"Overcollateralization Amount": On each Payment Date, after giving
effect to any payments to be made on such Payment Date, the excess, if any, of
(i) the sum of (A) the aggregate Scheduled Principal Balance of the Loans, (B)
the Pre-Funded Amount and (C) the balance in the Collateralization Fund over
(ii) the aggregate outstanding principal balance of the Bonds. On the Closing
Date, the Overcollateralization Amount is expected to equal ____% of the sum of
(A) the aggregate of the Scheduled Principal Balance of the Loans, (B) the
Original Pre-Funded Amount and (C) the deposit in the Collateralization Fund as
of the Cut-off Date. The actual percentage may be lower or higher than ____%,
depending on the final requirements of the Rating Agencies.
"Pre-Funded Amount": As of any Payment Date, $__________ less the
amount therefore applied to purchase additional manufactured housing installment
sales contracts.
"Target Overcollateralization Amount": On any Payment Date, an amount
equal to the greater of (i) product of (a) twice the percentage represented by
the initial Overcollateralization Amount and (b) the aggregate Scheduled
Principal Balance of the Loans and (ii) $100,000.
LIBOR Floating Rate Determination
On the second London Banking Day prior to the commencement of each
Accrual Period after the initial Accrual Period (each a "LIBOR Floating Rate
Determination Date"), the Bond Administrator will determine the arithmetic mean
of the LIBOR quotations for one-month Eurodollar deposits ("One-Month LIBOR")
for the succeeding Accrual Period on the basis of the offered LIBOR quotations
provided to the Bond Administrator as of 11:00 a.m. (London time) on such LIBOR
Floating Rate Determination Date. As used herein with respect to a LIBOR
Floating Rate Determination Date, "Reference Banks" means four leading banks
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) whose
quotations appear on the Bloomberg Screen LIUS01M Index Page on the LIBOR
Floating Rate Determination Date in question and (iii) which have been
designated as such by the Bond Administrator and are able and willing to provide
such quotations to the Bond Administrator on each LIBOR Floating Rate
Determination Date; and "Bloomberg Screen LIUS01M Index Page" means the display
designated as page "LIUS01M" on the Bloomberg Financial Markets Commodities News
(or such other pages as may replace such page on that service for the purpose of
displaying LIBOR quotations of major banks). If any Reference Bank should be
removed from the Bloomberg Screen LIUS01M Index Page or in any other way fails
to meet the qualifications of a Reference Bank, the Bond Administrator may, in
its sole discretion, designate an alternative Reference Bank.
<PAGE>
On each LIBOR Floating Rate Determination Date, One-Month LIBOR for the
next succeeding Accrual Period for the Bonds will be established by the Bond
Administrator as follows:
(i) If on any LIBOR Floating Rate Determination Date two or more
of the Reference Banks provide offered One-Month LIBOR quotations on
the Bloomberg Screen LIUS01M Index Page, One-Month LIBOR for the next
applicable Accrual Period will be the arithmetic mean of such offered
quotations (rounding such arithmetic mean if necessary to the nearest
five decimal places).
(ii) If on any LIBOR Floating Rate Determination Date only one
or none of the Reference Banks provides such offered quotations,
One-Month LIBOR for the next applicable Accrual Period will be the
higher of (x) One-Month LIBOR as determined on the previous LIBOR
Floating Rate Determination Date and (y) the Reserve Interest Rate.
The "Reserve Interest Rate" will be the rate per annum that the Bond
Administrator determines to be either (A) the arithmetic mean
(rounding such arithmetic mean if necessary to the nearest five
decimal places) of the one-month Eurodollar lending rate that New York
City banks selected by the Bond Administrator are quoting, on the
relevant LIBOR Floating Rate Determination Date, to the principal
London offices of at least two leading banks in the London interbank
market or (B) in the event that the Bond Administrator can determine
no such arithmetic mean, the lowest one-month Eurodollar lending rate
that the New York City banks selected by the Bond Administrator are
quoting on such LIBOR Floating Rate Determination Date to leading
European banks.
(iii) If on any LIBOR Floating Rate Determination Date the Bond
Administrator is required but is unable to determine the Reserve
Interest Rate in the manner provided in paragraph (ii) above,
One-Month LIBOR for the next applicable Accrual Period will be
One-Month LIBOR as determined on the previous LIBOR Floating Rate
Determination Date.
Notwithstanding the foregoing, One-Month LIBOR for the next succeeding
Accrual Period shall not be based on One-Month LIBOR for the previous Accrual
Period for two consecutive LIBOR Floating Rate Determination Dates. If, under
the priorities described above, One-Month LIBOR for the next succeeding Accrual
Period would be based on One-Month LIBOR for the previous LIBOR Floating Rate
Determination Date for the second consecutive LIBOR Floating Rate Determination
Date, the Bond Administrator shall select an alternative index (over which the
Bond Administrator has no control) used for determining one-month Eurodollar
lending rates that is calculated and published (or otherwise made available) by
an independent third party.
The establishment of One-Month LIBOR (or an alternative index) by the
Bond Administrator and the Bond Administrator's subsequent calculation of the
Class Interest Rates for the relevant Accrual Period, in the absence of manifest
error, will be final and binding.
Issuance of Additional Subordinated Bonds
Without the consent of the Bondholders, MERIT may issue additional
bonds of this Series to the extent such bonds are fully subordinated to the
Bonds (including the Class M1, Class M2 and Class B Bonds) or may pledge its
interest in the Loans, subject to the indebtedness evidenced by the Bonds
(including the Class M1, Class M2 and Class B Bonds), to secure bonds of other
series. Any such issuance of additional bonds will be conditioned upon
confirmation from the Rating Agencies of the then current ratings on the Bonds
(including the Class M1, Class M2 and Class B Bonds).
<PAGE>
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 Class A Bond when the same shall become due and
payable (or, after the Class A 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 662/3% in then outstanding principal balance
of the Class A Bonds (or, after the Class A 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 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 shall immediately petition a court of competent
jurisdiction to appoint such separate trustees.
Each Bondholder shall be deemed to have agreed (to the extent it may
legally do so), 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 and to treat its Bonds as debt instruments
for purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income.
Upon an Event of Default, the Holders of the Class A Bonds (and, after
the Class A 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 and, after the Class
M2 Bonds have been paid in full, the Class B 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-_.
<PAGE>
Accordingly, so long as the Class A Bonds (and after the Class A Bonds have then
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 Loans (to the extent not covered by credit
enhancement, if any) will be borne, by virtue of the payment priorities
described herein, first by the Overcollateralization Amount (including amounts
on deposit in the Collateralization Fund), second by the Class B Bonds, third by
the Class M2 Bonds, fourth by the Class M1 Bonds and fifth by the Class A Bonds.
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-__.
Redemption
Optional Redemption. MERIT may, at its option, redeem a Class or
Classes of the Bonds in whole, but not in part, on any Payment Date on or after
the earlier of (i) April 1, 2006, or (ii) the Payment Date on which, after
taking into account payments of principal to be made on such Payment Date, the
aggregate outstanding principal balance of the Bonds is less than 35% of the
aggregate principal balance of the Bonds on the Closing Date. If MERIT does not
exercise its option to redeem the Bonds on the first Payment Date on which it is
permitted to do so, the Class Interest Rates for certain of the Bonds will be
increased as described herein.
Redemption for Tax Reasons. In addition, MERIT may redeem a Class or
Classes of the Bonds in whole, but not in part, at any time upon a determination
by MERIT, based upon an opinion of counsel, that a substantial risk exists that
the Bonds of the Class to be redeemed will not be treated for federal income tax
purposes as evidences of indebtedness.
Redemption Price. Any such redemption will be paid in cash at a price
equal to 100% of the aggregate outstanding principal balance of the Class of
Bonds so redeemed, plus accrued and unpaid interest for the applicable Accrual
Period. At the option of MERIT, an optional redemption of a Class of Bonds may
be effected without retiring such Class of Bonds so that MERIT or a designee has
the ability to own or resell such Class of Bonds. 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 Loans. See "Yield Considerations" on page
S-__.
SECURITY FOR THE BONDS
The Collateral
The collateral for the Bonds will consist of (i) conventional, one- to
four-family fully amortizing first lien mortgage loans (the "Group I Loans") and
(ii) manufactured housing installment sales contracts (the "Initial Group II
Loans") and $___,000,000 (the "Original Pre-Funded Amount"). In addition, the
Bonds will be secured by the deposit in the Collateralization Fund.
The Initial Loans
The Initial Loans include both Adjustable Rate Loans, which provide for
adjustments in their Loan Rate as described below, and Level Payment Loans,
which have fixed annual percentage rates and provide for level monthly payments
over their term sufficient to amortize the principal balance in full. The
Initial Loans provide for allocation of payments according to either (i) the
"actuarial" method (each, an "Actuarial Loan") or (ii) the simple interest
method (each, a "Simple Interest Loan").
<PAGE>
The portion of each monthly payment for any Actuarial Loan 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 Loan 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 Loan (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 Loan 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 Loans
or to the characteristics of the Initial Loans, the calculation is approximate
and is based on the Scheduled Principal Balances of the Initial Loans as of the
Cut-off Date.
All the Initial Loans will have an original term to maturity of not
more than 30 years. The weighted average remaining term to stated maturity of
the Initial Loans is ___ months. Of the Initial Loans, __% are Adjustable Rate
Loans and __% are Level Payment Loans.
__% of the Group I Loans have a weighted average first Interest
Adjustment Date of _________ 1, _____; after the first Interest Adjustment Date,
their Loan Rates adjust semiannually on the basis of the Twelve Month Moving
Average CMT Index. __% of the Group I Loans have a weighted average first
Interest Adjustment Date of ______ 1, ____; after the first Interest Adjustment
Date, their Loan Rates adjust annually on the basis of the One-Year CMT Index.
___% of the Group I Loans have a weighted average first Interest Adjustment Date
of _______ 1, ____; after the first Interest Adjustment Date, their Loan Rates
adjust seminannually on the basis of Six-Month LIBOR. The balance of the Group I
Loans have fixed Loan Rates.
As specified in the related Note, the Loan Rate on each Adjustable Rate
Loan (other than a converted Loan) will adjust on each Interest Adjustment Date
applicable thereto to a rate that is calculated in accordance with (i) the
average of LIBOR for six-month Eurodollar deposits in the London market based on
quotations of major banks as published either by Fannie Mae or The Wall Street
Journal (the "Six-Month LIBOR Index"), (ii) the 12 month moving average yield on
U.S. Treasury securities adjusted to a constant term of maturity of one year as
published by the Federal Reserve Board (the "Twelve-Month Moving Average CMT
Index") or (ii) the weekly average yield on such U.S. Treasury securities as
published by the Federal Reserve Board (the "One-Year CMT Index"). As specified
in the related Note, the Loan Rate of each Adjustable Rate Loan will be adjusted
on each Interest Adjustment Date to a rate equal to the sum (as rounded pursuant
to the applicable rounding convention) of the current Six-Month LIBOR Index or
the current One-Year CMT Index (each, an "Index") and a fixed percentage (the
"Gross Margin"), subject to, in most cases, (i) a maximum periodic increase or
decrease in the Loan Rate of 1% or 2% per annum (a "Periodic Rate Cap") and (ii)
any minimum and maximum lifetime Loan Rates. Adjustments in the Loan Rate are
subject to Periodic Rate Caps, and minimum and maximum lifetime Loan Rates, and,
accordingly, the Loan Rate on any such Adjustable Rate Loan, as adjusted on any
Interest Adjustment Date, may not equal the sum of the applicable Index and the
applicable Gross Margin.
With respect to the Initial Loans, (i) the Loan Rates range from _.__%
to _.__% per annum for the Group I Loans and from _.__% to _.__% for the Initial
Group II Loans, with a weighted average Loan Rate of _.__% per annum (_.__% for
the Group I Loans and _.__% for the Initial Group II Loans). For the Adjustable
Rate Loans, (i) the Gross Margins range from _.__% to _.__%, with a weighted
average Gross Margin of _.__%, (ii) the maximum lifetime Loan Rates range from
__.__% to __.__%, with a weighted average maximum lifetime Loan Rate of __.__%
and (iii) the minimum lifetime Loan Rates range from _.__% to _.__% with a
weighted average minimum lifetime Loan Rate of _.__%. In no case will the
minimum lifetime Loan Rate of an Adjustable Rate Loan be less than the Gross
Margin of such Loan.
<PAGE>
Of the initial loans, __% (__% of the Group I loans and __% of the
Group II loans) are secured by properties located in California. Consequently,
losses and prepayments on the loans and resultant payments on the bonds may be
affected significantly by changes in the housing markets and the regional
economy of California (particularly, in the Los Angeles metropolitan area where
a significant number of properties securing the loans are located), and also by
the occurrence of natural disasters (such as earthquakes, fires and floods) in
California (and such metropolitan area). In addition, _% and _% of the Initial
Loans are secured by properties located in ___ and ______, respectively.
Delinquencies. Delinquencies with respect to the Initial Loans are as
follows:
31 to 60 days 61 to 90 days Total
Group I _.__% _.__% _.__%
Group II _.__ _.__ _.__%
The inclusion of delinquent Loans may affect the rate of defaults and
prepayments on the Loans and the yield on the Bonds.
Underwriting Policies. Notwithstanding anything to the contrary in the
Prospectus, not all the Loans meet Dynex's various credit appraisal and
underwriting standards. The Loans are believed generally to have been originated
pursuant to underwriting standards that generally conform to the underwriting
guidelines of FNMA and FHLMC (where applicable), except that such Loans may have
original principal balances in excess of those permitted by FNMA or FHLMC, may
have been underwritten pursuant to "limited documentation" programs, and may
have been originated at debt-to-income and other ratios in excess of those
permitted by FNMA or FHLMC provided that compensating factors existed at the
time of origination.
Selected Loan Data
Except as otherwise indicated, the Initial Loans and related properties
securing the Loans have the characteristics set forth in the following tables as
of the Cut-off Date. Asterisks (*) in the following tables indicate values
between 0.0% and 0.5%. Whenever reference is made in the tables to a percentage
of the Loans, such percentage is based on the aggregate Scheduled Principal
Balance of the Loans as of the Cut-off Date. Percentages may not sum to 100% due
to rounding.
<PAGE>
Selected Data for Initial Loans
1) Current Scheduled Principal Balance
Current Scheduled
Principal Balance Scheduled Principal Balance(%)
Group I Group II
------- --------
$1 - 100,000
100,001 - 150,000
150,001 - 203,150
203,151 - 250,000
250,001 - 300,000
300,001 - 350,000
350,001 - 400,000
400,001 - 450,000
450,001 - 500,000
500,001 - 550,000
550,001 - 600,000
600,001 - 650,000
650,001 - 700,000
700,001 - 800,000
800,001 - 900,000
900,001 - 1,000,000
1,000,001 - 2,000,000
Totals: 100 100
=== ===
The average Scheduled Principal Balance is $_________ for the Initial Loans,
$___________ for the Group I Loans and $_____________ for the Initial Group II
Loans. The maximum Scheduled Principal Balance is $_______________ for the
Initial Loans, $___________ for the Group I Loans and $___________ for the
Initial Group II Loans. The minimum Scheduled Principal Balance is $________ for
the Initial Loans, $________ for the Group I Loans and $_________ for the
Initial Group II Loans.
2) Current Loan Rates
Current Loan
Rates(%) Scheduled Principal Balance(%)
Group I Group II
------- --------
5.75 6.249
6.25 - 6.499
6.50 - 6.749
6.75 - 6.999
7.00 - 7.249
7.25 - 7.499
7.50 - 7.749
7.75 - 7.999
8.00 - 8.249
8.25 - 8.499
8.50 - 8.749
8.75 - 8.999
9.00 - 9.249
9.25 - 9.499
9.50 - 9.749
9.75 - 9.999
10.00 -10.249
10.25 -10.499
10.50 -10.749
10.75 -10.999
11.00 -13.499
Totals: 100 100
=== ===
The weighted average current Loan Rate per annum is ____% for the Initial Loans,
____% for the Group I Loans and ____% for the Initial Group II Loans. The
weighted average current Loan Rate of the Level Payment Loans and the Adjustable
Rate Loans is ____% and ____% , respectively.
3) Gross Margin on Adjustable Rate Loans
Gross Margin(%) Scheduled Principal Balance(%)
Group I Group II
-------- --------
2.25 - 2.499
2.50 - 2.749
2.75 - 2.999
3.00 - 3.249
3.25 - 3.499
3.50 - 3.749
3.75 - 3.999
4.00 - 5.499
5.50 - 5.999
Totals: 100 100
=== ===
The weighted average Gross Margin is ____% per annum for the Adjustable Rate
Loans.
<PAGE>
4) Remaining Term to Stated Maturity
Remaining Term Scheduled Principal Balance(%)
(Months)
Group I Group II
------- --------
1 - 274
275 - 290
291 - 300
301 - 310
311 - 320
321 - 330
331 - 340
341 - 350
351 - 360
Totals: 100 100
=== ===
The weighted average remaining term to stated maturity is ____ months for the
Initial Loans, ____ months for the Group I Loans, ____ months for the Initial
Group II Loans.
5) Original Loan-to-Value Ratio(1)
Original LTV Scheduled Principal
Ratio(%) Balance(%)
Group I Group II
------- -------
50.00 and below
50.01 - 55.00
55.01 - 60.00
60.01 - 65.00
65.01 - 70.00
70.01 - 75.00
75.01 - 80.00
80.01 - 85.00
85.01 - 90.00
90.01 - 95.00
95.01 - 100.00
Totals: 100 100
=== ===
(1) The Loan-to-Value Ratio of a Loan is equal to the ratio (expressed as a
percentage of the original Scheduled Principal Balance of the Loan and the fair
market value of the property at the time of origination. In the case of Mortgage
Loans, the fair market value of the mortgaged property is the lower of (i) the
purchase price and (ii) the appraised value in the case of purchases and is the
appraised value in all other cases. In the case of Manufactured Home Installment
Sales Contracts, 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. The weighted average original loan-to-value ratio is _____% for the
Initial Loans, _____% for the Group I Loans and __.__% for the Initial Group II
Loans.
6) State Distribution of Properties
State Scheduled Principal Balance(%)
Group I Group II
------- --------
* *
--- ---
Totals: 100 100
=== ===
Others may include: _______________ _____________________ ___________________.
<PAGE>
Mortgage Pool and Other Insurance for Group I Loans
Certain of the Group I Loans are covered by mortgage pool insurance
policies issued by either _________ ______________________________ (as to __% of
the Group I Mortgage Loans), __________________________ (as to ___% of the Group
I Loans) and ______________________________ (as to __% of the Group I Loans).
Each mortgage pool insurance policy provides coverage for certain losses by
reason of default on the portion of the Group I Loans covered by such policy.
The coverage for the policies ranges from ____% to ____% of the initial
principal balances of the Group I Loans reduced by the amount of claims paid to
date. Coverage under one or more of such policies may be reduced
disproportionately as a result of claims paid. In addition, the Group I Loans
have limited coverage for special hazard and bankruptcy risks. The Group II
Loans are generally not covered by mortgage pool insurance policies or any
insurance with respect to special hazard or bankruptcy risks.
Year 2000 Readiness Disclosure
The Master Servicer[s] and the Servicer[s] 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[s] and the Servicer[s] is to be
year 2000 ready. "Year 2000 ready" 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
are currently evaluating their critical systems, devices, applications and
business relationships to determine the extent to which they are in fact "year
2000 ready", and expect to complete their evaluation by _____________.
The Master Servicer and the Servicer[s] intend to have their systems
and applications capable of processing, on and after January 1, 2000, date and
date-related data consistent with the functionality of such systems and
applications and without a material adverse effect upon their performance of
services.
Additional Information
The description in this Prospectus Supplement of the Initial Loans is
calculated as of the close of business on the Cut-off Date. Loans may be removed
prior to closing as a result of incomplete documentation or non-compliance with
representations and warranties made by the Participant, if MERIT deems such
removal necessary or appropriate, and MERIT may substitute other Loans subject
to certain terms and conditions. Neither the substitution of Loans nor the
addition of Loans 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 Commission, together with the Indenture, within
fifteen days after the initial issuance of the Bonds and will provide additional
information with respect to the Initial Loans. A current report on Form 8-K will
also be filed within fifteen days of the end of the funding period with respect
to the Pre-Funded Amount, reflecting the purchase of Subsequent Group II Loans.
Also, MERIT intends to file certain additional yield tables and other
computational materials with the Commission in 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-__. Accordingly, such tables and other materials may
not be relevant to or appropriate for investors other than those specifically
requesting them.
On each Payment Date, information will be available with respect to the
outstanding principal balance of each Class of the Bonds and the applicable
Class Interest Rate. The information may be obtained by telephone from the
corporate trust office of the Trustee. As of the date of this Prospectus
Supplement, that telephone number is (713) 216-2240. The Bond Administrator will
make available on an ongoing basis current information relating to the
Collateral, including (i) Loan delinquencies of 30 days, 60 days and 90 days or
over, (ii) Loans in foreclosure, (iii) REO, (iv) Losses on the Loans, (v) the
remaining Overcollateralization Amount
<PAGE>
Subsequent Group II Loans
The purchase of Subsequent Group II Loans is subject to certain
conditions including, but not limited to the following: (a) each such Subsequent
Group II Loan must satisfy the same representations and warranties as the
Initial Group II Loans; (b) Subsequent Group II Loans may not be selected in a
manner that is reasonably believed to be adverse to the interests of the
Bondholders; (c) each Subsequent Group II Loan must satisfy the following
criteria: (i) such Subsequent Group II Loan may not be 30 or more days
delinquent; (b) the lien securing such Subsequent Group II Loan must be a first
lien; (iv) such Subsequent Group II Loan may not have a loan-to-value ratio
greater than 100% and (d) following the purchase of such Subsequent Group II
Loans, the weighted average Loan Rate, remaining term to maturity and the
weighted average loan-to-value ratio of the Group II Loans may not vary
materially from the weighted average Loan Rate, the remaining term to maturity
and the weighted average loan-to-value ratio of the Initial Group II Loans.
Substitution of Loans
In certain circumstances, a new loan (a "Substitute Loan") may be
pledged to the Trustee in substitution for a defaulted Loan or REO to the extent
that a Master Servicer has determined, in its reasonable business judgment, that
the present value of any potential Loss on such defaulted Loan or REO will be
reduced through the substitution of a Substitute Loan for such defaulted Loan or
REO, and provided that such Substitute Loan (i) is secured by the property that
secures such defaulted Loan or by such REO, (ii) has a Loan Rate that is not
less than the then current market rate for a loan having similar characteristics
(provided, however, that a Substitute Loan may have a Loan Rate less than the
then current market rate so long as the aggregate Scheduled Principal Balance of
all such Substitute Loans on their respective dates of substitution does not
exceed 1.00% of the initial aggregate Scheduled Principal Balance of the Loans),
and (iii) has a maturity date that is not later than nine months prior to the
Maturity Date of the Bonds. The amount, if any, by which the Scheduled Principal
Balance of such defaulted Loan or REO exceeds the Scheduled Principal Balance of
the Substitute Loan would constitute a Loss on such Loan or REO. Upon the pledge
of a Substitute Loan, the Trustee will release such defaulted Loan or the REO
from the lien of the Indenture. See "Security for the Bonds -- Substitution of
Collateral" in the Prospectus.
In addition, MERIT may pledge to the Trustee a Loan in substitution for
such a Loan initially pledged (an "Original Loan") to secure the Bonds in the
event of a breach of a representation or warranty with respect to such Original
Loan or in the case of defective or incomplete documentation with respect to
such Original Loan which materially and adversely affects the value of such
Original Loan. It is anticipated that any substitution for an Original Loan will
not materially change the characteristics of the Loans as set forth above.
Conversion Option
Of the Adjustable Rate Loans, __% are convertible, upon the fulfillment
of certain conditions, from an adjustable to a fixed Loan Rate at the option of
the borrower. In order to be eligible to convert the adjustable Loan Rate on a
convertible Adjustable Rate Loan to a fixed Loan Rate, the borrower generally
must (a) execute and submit to the applicable Servicer certain conversion
documents, including a loan modification agreement, (b) pay the applicable
conversion fee and (c) not (i) be in default under the Note or the security
documents related to such Adjustable Rate Loan or (ii) have been delinquent
thirty days in making any payment under the Note in the previous twelve months.
Furthermore, the borrower must generally complete an updated credit review and,
if the Servicer believes the value of the related property may have declined,
provide an updated appraisal. Upon conversion, the scheduled payment will be
adjusted to provide for fully amortizing, level monthly payments until maturity.
Should interest rates decline so that the fixed Loan Rates applicable upon
conversion are significantly lower than the then current Loan Rates, or are
significantly lower than the applicable maximum lifetime Loan Rates on
convertible Adjustable Rate Loans, borrowers may have a significant financial
incentive to effect conversions.
<PAGE>
The Servicers and/or the Master Servicer of the Loans in certain cases
have the option and in other cases are obligated to purchase converted Loans. If
any converted Group I Loan is purchased, the purchase price will be equal
generally to 100% of the Scheduled Principal Balance of such converted Loan plus
30 days' interest thereon at the applicable Loan Rate in effect immediately
prior to such conversion. Any converted Loan not so purchased will remain
pledged to secure the Bonds, but with a fixed Loan Rate.
See "Maturity and Prepayment Considerations" on page S-__.
SERVICING OF THE COLLATERAL
General
_________ services __% of the Group I Loans; ______________, services
__% of the Group I Loans; _______ services __% of the Group I Loans; and the
balance of the Group I Loans are serviced by other servicers. Dynex Services
("Dynex Services"), ______________, an affiliate of MERIT, services the Initial
Group II Loans.
_________________ serves as master servicer of __% of the Initial
Loans, which constitute the group ___ loans); and Dynex serves as master
servicer of the balance of the Initial Loans, which constitute the Group I Loans
and the group II loans.
Advances
On or before each Payment Date, the applicable servicer will be
obligated (subject to the limitations provided in its servicing agreement) to
make a cash advance with respect to any delinquent loan in an amount equal to
the sum of (i) the scheduled payment on such delinquent loan (net of the
servicing fee, except with respect to the group II loans for which advances are
required to be made only to the extent of the interest portion of a scheduled
payment (without deduction for the servicing fee to the extent provided
herein)), (ii) amounts for the payment of real estate taxes, assessments,
insurance premiums and property protection expenses and (iii) amounts to cover
expenses relating to foreclosure and liquidation. The applicable master servicer
will be obligated to make any required advance if the servicer fails to make
such advance. The bond administrator will be obligated to make any required
advance if the applicable master servicer fails to do so. The trustee will be
obligated to make any required advance if the bond administrator 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 related Servicing Agreement, each
Servicer may, with the approval of the applicable Master Servicer in most cases,
enter into a forbearance or modification agreement with the borrower under a
Loan, provided that such Servicer and, if required, such Master Servicer have
determined in their good faith business judgment that granting such forbearance
or modification will maximize recovery on such Loan to the Trust Estate on a
present value basis. The interests of the applicable Master Servicer in
determining whether to enter into a forbearance or modification agreement (or in
establishing the terms of any such forbearance or modification agreement) may
conflict with the interests of Bondholders.
Events of Default
The applicable Master Servicer will generally have the right pursuant
to the related agreement with a Servicer to terminate any related Servicer in
the event of a breach by such Servicer of any of its obligations thereunder. In
the event of such termination, the applicable Master Servicer generally assumes
certain of such Servicer's servicing obligations, including the obligation to
make Advances (limited as provided herein under "--Advances"), until such time
as a successor servicer is appointed. If the applicable Master Servicer is
unable to act as servicer, the applicable Master Servicer will generally appoint
or petition a court of competent jurisdiction for the appointment of a suitable
loan servicing institution to act as successor servicer under such Servicing
Agreement. Pending such appointment, the applicable Master Servicer will be
obligated to service the related Loans subject to the same limitations as apply
to the applicable Master Servicer's obligation to fulfill the servicing
responsibility of a terminated servicer. Any successor servicer, including the
applicable Master Servicer, will be entitled generally to compensation
arrangements similar to, and not in excess of, those provided to the terminated
Servicer.
<PAGE>
[Other Servicers].
Dynex Services. Dynex Services, a division of Dynex Financial, Inc.
commenced its servicing operations in November 1996. Dynex Financial, Inc.
services all of the manufactured housing contracts it originates or purchases
from its principal office located in Fort Worth, Texas. As of ________ 31, ____,
Dynex Financial, Inc. serviced a portfolio of approximately _____ manufactured
housing loans totaling approximately $_____ million.
The following sets forth at _________ 31, _____, delinquent dollars as
a percentage of the total portfolio including contracts in repossession and
foreclosure:
Period of Delinquency (1) 31, ____
- ------------------------- ---------
31-59 days %
60-89 days %
90 days or more %
Total Delinquency %
Percentage of Total Portfolio Repossessed/Foreclosed %
----------
(1) 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
next month.
Master Servicers
[Other Master Servicers].
Dynex. As of ________ 31, ____, Dynex acted as master servicer for
approximately ___________ loans with an aggregate principal balance of
approximately $___ billion. See "Dynex Capital, Inc." in the Prospectus.
Servicing and Other Compensation and Expenses
The primary compensation payable to each Servicer is the monthly
servicing fee (the "Servicing Fee") applicable to the Loans serviced by such
Servicer, which fee is expressed as one-twelfth of a fixed percentage per annum
(the "Servicing Fee Rate") multiplied by the Scheduled Principal Balance of each
such Loan on the first day of the Due Period preceding each Payment Date. The
Servicing Fee is retained by each Servicer out of the monthly payments on the
Loans except that, so long as Dynex Services is the Servicer of the Group II
Loans, Dynex Services will remit the monthly payments on the Group II Loans
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
Loans, and any interest or other income earned on collections with respect to
the Loans pending remittance to the Master Servicer will be paid to or retained
by the related Servicer as additional servicing compensation. Each Servicer is
obligated to pay certain insurance premiums and certain ongoing expenses
associated with the related Loans and incurred by the Servicer in connection
with its responsibilities under its Servicing Agreement. The Bond Administration
Fee (which will include the Master Servicing Fee for the Group III Loans for
which Dynex is the Master Servicer) will be equal to 0.02% per annum on the
aggregate Scheduled Principal Balance of the Loans. The other Master Servicers'
compensation will range from 0.___% to 0.___%.
<PAGE>
Special Servicer
The Participant may appoint a Special Servicer acceptable to the Rating
Agencies to undertake some of or all the Servicer's obligations with respect to
directly held Loans that are in default. The Special Servicer, if any, may be
entitled to various fees, including, but not limited to, (i) a special servicing
fee expressed as a fixed percentage of the remaining Scheduled Principal Balance
of each specially serviced Loan, (ii) a performance fee applicable to each
liquidated Loan based upon the Liquidation Proceeds of such Loan, or both. See
"Servicing of the Collateral -- Special Servicing Agreement" in the Prospectus.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Stated Maturity Date for each Class the Bonds has been calculated
by adding approximately four years to the last scheduled payment date on the
Loans originally pledged to secure the Loans.
Because the rate of payment (including payments attributable to
prepayments, defaults, liquidations, and repurchases) of principal on the Loans
may exceed the scheduled rate of payments, and could exceed such scheduled rate
by a substantial amount, the actual final payment of principal of the Bonds may
be earlier, and could be substantially earlier, than the Stated Maturity Date of
such Class.
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 Loans is paid, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes payments resulting from refinancings,
liquidations of the Loans due to defaults, casualties, indemnifications and
purchases by or on behalf of MERIT, the Participant or the Servicers, 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 is based on a Constant Prepayment Rate ("CPR"). CPR represents a
constant rate of prepayment on the Loans each month relative to the aggregate
outstanding principal balance of the Loans. MERIT does not make any
representations about the appropriateness of the CPR model.
Factors Affecting Prepayments on the Loans
The rate of payments (including prepayments) on a pool of loans is
influenced by a variety of economic, geographic, social, tax, legal and other
factors. If prevailing interest rates fall significantly below the then current
Loan Rates on the Loans or significantly below the maximum lifetime Loan Rates
on the Adjustable Rate Loans, the rate of prepayments on such Loans would be
expected to increase. Conversely, if prevailing rates rise significantly above
the then current Loan Rates on the Loans or significantly above the maximum
lifetime Loan Rates on the Adjustable Rate Loans, the rate of prepayments would
be expected to decrease. Other factors affecting prepayment of Loans include
changes in borrowers' housing needs, job transfers, unemployment, borrowers' net
equity in the related properties and servicing decisions, as well as Loan terms
and the type of collateral securing a Loan. See "Security for the
Bonds--Selected Loan Data" herein. In addition, any purchase of a converted Loan
will have the same effect as a prepayment in full. The Loans 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 Loans.
Of the Initial Loans, __% are Adjustable Rate Loans. MERIT is not aware
of any publicly available statistics relating to the principal prepayment
experience of adjustable rate loans over an extended period of time, and MERIT's
experience with respect to adjustable rate loans is insufficient to draw any
conclusions with respect to the expected prepayment rates on the Adjustable Rate
Loans. Defaults on Adjustable Rate Loans 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 Loans. Increases in the required monthly payments on
the Adjustable Rate Loans may result in a default rate higher than that on loans
with fixed Loan Rates. MERIT, at its option, may purchase, on any Payment Date,
any Loan that is delinquent in payment by 90 days or more. Any such purchase
must be made at a price equal to the outstanding principal balance of the
related Loan plus accrued and unpaid interest thereon at its Loan 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 Loan in substitution
for a defaulted Loan or REO, as more particularly described in "Security for the
Bonds--Substitution of Loans" herein. The weighted average life of the Bonds may
increase to the extent that MERIT exercises its option to pledge Substitute
Loans to the Trustee for defaulted Loans or REO, because such substitution will
be effected in lieu of foreclosure and disposition of the related properties or
REO and the payment of Liquidation Proceeds to Holders of the Bonds. See "Yield
Considerations" herein.
<PAGE>
The Loan Rates on the Adjustable Rate Loans will adjust periodically
(although not on the same dates), generally based on the current Six-Month LIBOR
Index or current One-Year CMT Index as applicable (which may not rise and fall
consistently with prevailing interest rates or other adjustable rate residential
loans based on other indices), plus the Gross Margins for the Adjustable Rate
Loans (which may be different from the current margins on other adjustable rate
residential loans). As a result, the Loan Rates on the Adjustable Rate Loans 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"
herein.
Of the Adjustable Rate Loans, __% permit assumption by a subsequent
purchaser of the related properties during a specified period and subject to
such purchaser's compliance with certain then existing requirements and
underwriting guidelines, except in the case of any Adjustable Rate Loan that has
converted to a fixed Loan Rate. The Level Payment Loans and any Adjustable Rate
Loan that has converted to a fixed Loan Rate will be subject to
"due-on-sale-clauses" and are not assumable. The weighted average life of each
Class of Bonds will be increased to the extent that the Adjustable Rate Loans
are assumed by purchasers of the related properties in connection with sales of
such properties. Conversely, the weighted average life of each Class of Bonds
will be decreased upon the sale of properties securing non-assumable Loans,
which will result in the prepayment of such Loans. See "Maturity and Prepayment
Considerations" in the Prospectus.
Of the Adjustable Rate Loans, __% provide that the borrower may, during
a specified period of time, convert the adjustable Loan Rate of the related Loan
to a fixed Loan Rate. The conversion option may be exercised during periods of
rising interest rates as borrowers attempt to limit their risk of higher rates.
If borrowers were to exercise their conversion rights in such an interest rate
environment, a purchase of the converted Loans would have the same effect on
holders of the Bonds as a prepayment at a time when prepayments generally would
not be expected. The availability of fixed rate loans at competitive interest
rates during periods of falling rates may also encourage borrowers to exercise
the conversion option. There can be no certainty as to the rate at which
conversions will take place or as to the rate of prepayments in stable or
changing interest rate environments. See "Security for the Bonds--Conversion
Option" herein.
In addition, defaults on Adjustable Rate Loans that lead to foreclosure
and the ultimate liquidation of the related Adjustable Rate Loans may occur with
greater frequency in their early years. Increases in the required monthly
payments on the Adjustable Rate Loans may result in a default rate higher than
that on loans with fixed interest rates. Prepayments, liquidations and purchases
of the Loans will result in payments of principal to Bondholders of amounts that
would otherwise be distributed over the remaining terms of the Loans. See "Risk
Factors--Credit Considerations" in the Prospectus.
Mandatory Prepayment
If not all the Original Pre-Funded Amount is used to acquire Subsequent
Group II Loans, then the Holders of the Bonds then entitled to receive payments
of principal from the Group II Loans will receive a partial prepayment on the
Distribution Date immediately following the end of the Funding Period.
<PAGE>
Although no assurances can be given, MERIT expects that the principal
amount of Subsequent Group II Loans to be purchased will require the application
of substantially all the Original Pre-Funded Amount and that there should be no
material principal prepaid on the Bonds as a result of a failure to purchase
Subsequent Group II Loans.
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 the Adjustable Rate Loans consist of 3
assumed Adjustable Rate Loans and that the Level Payment Loans consist of 5
assumed Level Payment Loans, each with the characteristics set forth in the
following tables:
<TABLE>
<CAPTION>
Remaining Original
Term to Term to Next
Outstanding Stated Stated Interest
Principal Gross Periodic Maturity Maturity Adjustment
Index Balance Loan Rate Net Rate Margin Caps (in months) (in months) Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Group I
12 month
Moving
Average
CMT Index % % % %
1 Year CMT %
Group II
Fixed Rate
Fixed Rate
Fixed Rate
Fixed Rate
Fixed Rate
</TABLE>
It has been further assumed that:
(i) the One-Month LIBOR Index remains constant at ____% and
the Fed Funds Average Rate remains constant at _______%;
(ii) the Six-Month LIBOR Index remains constant at ____%,
Twelve Month Moving Average CMT Index remains constant at ____% per
annum and the One-Year CMT Index remains constant at ____% per annum
for the assumed Adjustable Rate Loans; and the Loan Rate for each
Adjustable Rate Loan remains constant until the next Interest
Adjustment Date for such Adjustable Rate Loan, at which time such Loan
Rate is adjusted to equal its index plus the applicable Gross Margin,
subject to any Periodic Rate Caps;
(iii) the assumed Adjustable Rate Loans are not converted;
(iv) all Scheduled Payments on the assumed Loans are received
timely on the payment date for each Loan, commencing ________ 1, 1999,
and prepayments on such Loans are received on the last day of each
month beginning ________ __, 1999, and include 30 days of interest
thereon;
(v) the Scheduled Payments on the assumed Adjustable Rate
Loans are adjusted on the Interest Adjustment Date, subject to any
Periodic Rate Caps, to equal a fully amortizing payment as described
above;
(vi) there are no defaults or shortfalls on the assumed Loans;
(vii) the assumed Loans prepay monthly at the specified
constant percentages of CPR;
<PAGE>
(viii) the Closing Date for the Bonds is _______ 25, 1999;
(ix) cash distributions are received by the Bondholders on
the 1st day of each month, commencing in _____ 1, 1999;
(x) the initial principal amount of each Class of Bonds is
as set forth on the cover hereof;
(xi) there is no optional redemption of the Bonds (except
with respect to the line entitled "Weighted Average Life with
Redemption") and no increase in the Class Interest Rates of the Bonds
as a result of MERIT's failure to redeem the Bonds when it is permitted
to do so;
(xii) there are no prepayment fees or penalties;
(xiii) there are no interest shortfalls resulting in an
Interest Carryover Amount;
(xiv) all the Original Pre-Funded Amount is applied to the
purchase of Subsequent Group II Loans; and
(xv) the Bond Payment Percentage remains constant at 100%.
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 -- Redemption" on page S-__.
There will be discrepancies between the Loans 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 Loans 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 Loans are not delivered together with all the
required documentation or Loans are repurchased either because of Loans becoming
converted Loans or otherwise, the Bonds will have shorter weighted average lives
than indicated by the DEC Tables, which will adversely affect the yield of such
Bonds to the extent that they are purchased at a premium.
There is no assurance that prepayment of the Loans will conform to any
of the percentages of CPR described in the DEC Tables. Among other things, the
DEC Tables assume that the Loans prepay at the indicated constant rates of CPR,
notwithstanding the fact that such Loans may vary substantially as to geographic
concentration of properties, interest rate and prepayment terms. Variations in
actual prepayment experience for the Loans 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 CPR with respect to each Group of the Initial Loans as indicated
below. See "Maturity and Prepayment Considerations" in the Prospectus.
<TABLE>
<CAPTION>
Prepayment Scenarios
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C>
Group I Loans 0% % % % % % %
Group II Loans 0% % % % % % %
</TABLE>
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%.
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT
April 1 Class 1-A Bonds Scenario
-----------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100
2000 100 0 0
2001 0 0 0 0
2002 0 0 0 0 0 0
2003 0 0 0 0 0 0
2004 0 0 0 0 0 0
2005 0 0 0 0 0 0
2006 0 0 0 0 0 0
2007 0 0 0 0 0 0
2008 0 0 0 0 0 0
2009 0 0 0 0 0 0
2010 0 0 0 0 0 0
2011 0 0 0 0 0 0
2012 0 0 0 0 0 0
2013 0 0 0 0 0 0
2014 0 0 0 0 0 0
2015 0 0 0 0 0 0
2016 0 0 0 0 0 0
2017 0 0 0 0 0 0
2018 0 0 0 0 0 0
2019 0 0 0 0 0 0 0
2020 0 0 0 0 0 0 0
2021 0 0 0 0 0 0 0
2022 0 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption (1)
With Redemption(2)
April 1 Class 1-M1 Bonds Scenario
------------------------------------------
I II III IV V VI VIII
- -- --- -- - -- ----
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 89 73
2001 100 100 100
2002 100
2003 100
2004 100 0 0
2005 100 0 0
2006 100 0 0 0
2007 100 0 0 0 0
2008 100 0 0 0 0
2009 100 0 0 0 0 0
2010 100 0 0 0 0 0
2011 100 0 0 0 0 0 0
2012 100 0 0 0 0 0 0
2013 100 0 0 0 0 0 0
2014 100 0 0 0 0 0 0
2015 100 0 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 89 0 0 0 0 0 0
2020 76 0 0 0 0 0 0
2021 62 0 0 0 0 0 0
2022 46 0 0 0 0 0 0
2023 29 0 0 0 0 0 0
2024 11 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
<PAGE>
April 1 Class 1-M2 Bonds Scenario
-----------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999
2000 0 0 0
2001 0 0 0 0 0
2002 0 0 0 0 0 0
2003 0 0 0 0 0 0
2004 0 0 0 0 0 0
2005 0 0 0 0 0 0
2006 0 0 0 0 0 0
2007 0 0 0 0 0 0
2008 0 0 0 0 0 0
2009 0 0 0 0 0 0
2010 0 0 0 0 0 0
2011 0 0 0 0 0 0
2012 0 0 0 0 0 0
2013 0 0 0 0 0 0
2014 0 0 0 0 0 0 0
2015 0 0 0 0 0 0 0
2016 0 0 0 0 0 0 0
2017 0 0 0 0 0 0 0
2018 0 0 0 0 0 0 0
2019 0 0 0 0 0 0 0
2020 0 0 0 0 0 0 0
2021 0 0 0 0 0 0 0
2022 0 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
April 1 Class 1-B Bonds Scenario
-----------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100
2001 100 100 0
2002 100 0 0
2003 100 0 0 0 0
2004 100 0 0 0 0 0
2005 100 0 0 0 0 0 0
2006 100 0 0 0 0 0 0
2007 100 0 0 0 0 0 0
2008 100 0 0 0 0 0 0
2009 100 0 0 0 0 0 0
2010 100 0 0 0 0 0 0
2011 100 0 0 0 0 0 0
2012 100 0 0 0 0 0 0
2013 100 0 0 0 0 0 0
2014 0 0 0 0 0 0
2015 0 0 0 0 0 0
2016 0 0 0 0 0 0
2017 0 0 0 0 0 0
2018 0 0 0 0 0 0
2019 0 0 0 0 0 0 0
2020 0 0 0 0 0 0 0
2021 0 0 0 0 0 0 0
2022 0 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
- --------------------------------
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.
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT
April 1 Class 2-A Bonds Scenario
------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100
2002 100 100 100 100 100
2003 100 100 100
2004 100 100 91
2005 100 0
2006 100 0 0
2007 100 0 0
2008 100 0 0 0
2009 100 0 0 0 0
2010 100 4 0 0 0 0
2011 100 0 0 0 0 0
2012 100 0 0 0 0 0
2013 100 0 0 0 0 0 0
2014 100 0 0 0 0 0 0
2015 100 0 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 0 0 0 0 0 0
2020 0 0 0 0 0 0
2021 0 0 0 0 0 0
2022 0 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
April 1 Class 2-M1 Bonds Scenario
------------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999
2000
2001
2002
2003
2004
2005
2006 0
2007 0
2008 0 0
2009 0 0 0
2010 0 0 0
2011 0 0 0
2012 0 0 0 0
2013 0 0 0 0
2014 0 0 0 0
2015 0 0 0 0 0
2016 0 0 0 0 0
2017 0 0 0 0 0
2018 0 0 0 0 0 0
2019 0 0 0 0 0 0
2020 0 0 0 0 0 0
2021 0 0 0 0 0 0
2022 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
<PAGE>
April 1 Class 2-M2 Bonds Scenario
------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 100
2003 100 100 100 100 100 100 100
2004 100 100 100 100 100 100
2005 100 100 100 100 100
2006 100 100 100 100 0
2007 100 100 100 0 0
2008 100 100 100 0 0
2009 100 100 0 0 0
2010 100 100 0 0 0
2011 100 0 0 0 0
2012 100 0 0 0 0
2013 100 0 0 0 0 0
2014 100 0 0 0 0 0
2015 100 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 0 0 0 0 0 0
2023 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
April 1 Class 2-B Bonds Scenario
------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 100
2003 100 100 100 100 100 100 100
2004 100 100 100 100 100 100
2005 100 100 100 100 100
2006 100 100 100 100 0
2007 100 100 100 0 0
2008 100 100 100 0 0
2009 100 100 0 0 0
2010 100 100 0 0 0
2011 100 0 0 0 0
2012 100 0 0 0 0
2013 100 0 0 0 0 0
2014 100 0 0 0 0 0
2015 100 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 0 0 0 0 0 0
2023 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average
Life
Without Redemption(1)
With Redemption(2)
- ---------------------------
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.
<PAGE>
The DEC Tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
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 Loans,
which will be affected by the amortization schedules of the Loans and the rate
of principal prepayments thereon (including for this purpose payments resulting
from refinancings, liquidations of the Loans due to default, casualties and
condemnations and repurchases by the Participant). An optional redemption of a
Class of Bonds will have the same effect as a prepayment in full of the Loans
with respect to such Class. No assurance can be given as to the rate of
principal payments or prepayments on the Loans.
The timing of changes in the rate of prepayments on the Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a prepayment of principal of a
Loan, the greater will be the effect on the investor's yield to maturity. As a
result, the effect on an investor's yield of principal prepayments occurring at
a rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Bonds would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments.
If the purchaser of a Bond offered at a discount from its Parity Price
calculates the anticipated yield to maturity of such Bond based on an assumed
rate of payment of principal that is faster than that actually received on the
Loans, the actual yield to maturity will be lower than that so calculated.
Conversely, if the purchaser of a Bond offered at a premium over its Parity
Price calculates the anticipated yield to maturity of such Bond based on an
assumed rate of payment of principal that is slower than that actually received
on the Loans, the actual yield to maturity will be lower than that so
calculated.
Because the rate of principal payments (including prepayments) on the
Loans may significantly affect the weighted average life and other
characteristics of the Bonds, prospective investors are urged to consider their
own estimates as to the anticipated rate of future prepayments on the Loans and
the suitability of the Bonds to their investment objectives. For factors
affecting principal prepayments on the Loans, see "Maturity and Prepayment
Considerations" on page S-_.
In certain circumstances a Substitute Loan may be pledged to the
Trustee in substitution for a defaulted Loan or REO, as more particularly
described in "Security for the Bonds -- Substitution of Loans" on page S-__. The
amount, if any, by which the Scheduled Principal Balance of the defaulted Loan
or REO exceeds the Scheduled Principal Balance of the Substitute Loan would
constitute a Loss on such Loan or REO. Furthermore, to the extent that any
Substitute Loan has payment terms that differ from the original Loan such
difference in payment terms will affect the yield to maturity of investors in
the Bonds. MERIT's ability to pledge Substitute Loans 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 resultant payment of Liquidation Proceeds to Holders of the Bonds.
Investors in the Bonds also should understand that the Class Interest
Rates on the Bonds will remain at a maximum rate equal to the then Applicable
Cap at levels of One-Month LIBOR which, together with the Applicable Spread,
would, absent the Applicable Cap on the Class Interest Rates, result in Class
Interest Rates above the Applicable Cap. Investors should understand that the
timing of changes in the level of One-Month LIBOR may affect the actual yields
to such investors even if the average level is consistent with such investors'
expectations. Each investor must make an independent decision as to the
appropriate LIBOR assumptions to be used in deciding whether to purchase a Bond.
<PAGE>
With respect to the Adjustable Rate Loans, a number of factors affect
the performance of the Six-Month LIBOR Index , the Twelve-Month Moving Average
CMT Index and the One-Year CMT Index and may cause any such index to move in a
manner different from other indices. In a period of rising interest rates,
One-Month LIBOR (or the Fed Funds Average Rate) may rise sooner than the
Six-Month LIBOR Index, the Twelve-Month Moving Average CMT Index or the One-Year
CMT Index. In that event, the Available Funds attributable to interest on the
Loans may not be sufficient to pay Current Interest and Interest Carryover
Amounts on one or more Classes of the Bonds; any Interest Carryover Amount which
could not be paid from Available Funds attributable to interest on the Loans (or
from interest earnings on amounts in the Collateralization Fund) will be payable
on future Payment Dates (with interest) to the extent that such funds are
available for the purpose. In a period of declining rates, the Six-Month LIBOR
Index, the Twelve-Month Moving Average CMT Index or the One-Year CMT Index may
remain higher than other market interest rates, which may result in a higher
level of prepayments of the Loans than of loans that adjust in accordance with
other indices.
A higher than expected rate of default could produce payment delays and
could lead to foreclosures. A foreclosure may produce proceeds upon sale that
are less than the Unpaid Principal Balance of such Loan plus interest accrued
thereon and the expenses of sale. Such a shortfall upon foreclosure would result
in a Loss on such Loan.
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 principal,
respectively, before any payments are made on any Class of Bonds subordinate to
such Class. As a result, the Class B, Class M2 and Class M1 Bonds will be more
sensitive to the rate of delinquencies and defaults on the Loans.
As more fully described herein, losses on the Loans (to the extent not
covered by credit enhancement, if any, and the Overcollateralization Amount)
will be borne, by virtue of the payment priorities described herein, by the
Class B, Class M2 and Class M1 Bonds (in the reverse order of seniority
designation), in that order, until the principal balance of each such Class has
been reduced to zero, before any losses will be allocated to the Class A Bonds.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Based on the facts as they currently exist, in the opinion of Arter &
Hadden LLP, the Bonds will be taxable debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued
thereon, including any original issue discount, will be taxable to Bondholders.
See "Certain Federal Income Tax Considerations" in the Prospectus. No election
will be made to treat MERIT, the Loans or the arrangement by which the Bonds are
issued as a real estate mortgage investment conduit or financial asset
securitization investment trust. Interest income (including original issue
discount and market discount) will accrue on the Bonds as described in "Certain
Federal Income Tax Consequences" in the Prospectus. The Bonds may be issued with
original issue discount for federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Original Issue Discount" in the Prospectus. 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 __% CPR for the Group I Loans and __% CPR for the Group
II Loans (as described under "Maturity and Prepayment Considerations -- Weighted
Average Life of the Bonds" on page S-__). No representation, however, is made
herein as to the rate at which prepayments on the Loans actually will occur.
Bonds owned by domestic building and loan associations and other thrift
institutions will not be considered "loans secured by an interest in real
property" or "qualifying real property loans." Bonds owned by a REIT will not be
treated as "real estate assets" nor will interest on the Bonds be considered
"interest on obligations secured by mortgages on real property." By acceptance
of its Bond, each Bondholder will be deemed to have agreed to treat its Bonds as
debt instruments for purposes of federal and state income tax, franchise tax and
any other tax measured in whole or in part by income.
<PAGE>
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
the Participant.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement dated as of the date hereof (the "Underwriting Agreement") among
_________ and ____________. (the "Underwriters") and the Participant and MERIT,
MERIT has agreed to sell to the Underwriters, and the Underwriters have
severally agreed to purchase from MERIT, the Bonds (other than the Class ___
Bonds) set forth below:
Class
-----
Class 1-A
Class 1-M1
Class 1-M2
Class 1-B
Class 2-A
Class 2-M1
Class 2-M2
Class 2-B
The distribution of such 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 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 such
Bonds may be deemed to be underwriters, and any discounts, commissions or
concessions received by them, and any profit on the resale of the Bonds
purchased by them, may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Act").
The Underwriting Agreement provides that 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.
Some of the Loans may have been the subject of financing provided by
affiliates of one or more of the Underwriters.
LEGAL MATTERS
Certain legal matters relating to the Bonds will be passed upon for
MERIT by Arter & Hadden LLP, 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 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 Bonds might
suffer a lower than anticipated yield.
<PAGE>
A security rating is not a recommendation to buy, sell or hold Bonds
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. In the event that a rating initially assigned to the Bonds is
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to the Bonds. Each
security rating should be evaluated independently of any other security rating.
MERIT has not requested a rating on the Bonds by any rating agency
other than Moody's and Fitch. 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 Bonds by a rating agency
that has not been requested by MERIT to do so may be lower than the rating
assigned by a Rating Agency 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 Bonds are treated as equity for purposes of ERISA, the purchaser
of a Bond could be treated as having acquired a direct interest in the
Collateral securing the Bonds. In that event, the purchase, holding, or resale
of the Bonds could result in a transaction that is prohibited under ERISA or the
Code. Furthermore, regardless of whether the Bonds are treated as equity for
purposes of ERISA, the acquisition or holding of the Bonds by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if
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
Bonds, depending in part upon the type of Plan fiduciary making the decision to
acquire Bonds and the circumstances under which such decision is made. Those
exemptions include, but are not limited to: (i) Prohibited Transaction Class
Exemption ("PTCE") 95-60, regarding investments by insurance company general
accounts; (ii) PTCE 91-38, regarding investments by bank collective investment
funds; (iii) PTCE 90-1, regarding investments by insurance company pooled
separate accounts; or (iv) PTCE 84-14, regarding transactions negotiated by
qualified professional asset managers. Before purchasing Bonds, a Plan subject
to the fiduciary responsibility provisions of ERISA or described in Section
4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult
with its counsel to determine whether the conditions of any exemption would be
met. A purchaser of a Bond should be aware, however, that even if the conditions
specified in one or more exemptions are met, the scope of the relief provided by
an exemption might not cover all acts that might be construed as prohibited
transactions. See "ERISA Considerations" in the Prospectus.
MERIT believes that the Bonds will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
Accordingly, a Plan that acquires a Bond should not be treated as having
acquired a direct interest in the assets of MERIT. Nevertheless, there can be no
complete assurance that the Bonds will be treated as debt obligations without
significant equity features for purposes of the Plan Asset Regulations.
<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 mortgagors whose creditworthiness and repayment ability do not satisfy
FNMA or FHLMC underwriting guidelines. See "Risk Factors -- Credit
Considerations -- Mortgage Loans -- Underwriting Standards and Potential
Delinquencies". 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 multi
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) certain information as to the nature of the Collateral
securing such Series; (v) the redemption features pertaining to the Series; (vi)
additional information with respect to the form of any credit enhancement
securing one or more Classes of Bonds; and (vii) additional information with
respect to the plan of distribution of Bonds of each Class. See "Description of
the Bonds".
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 July __, 1999
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..................................1
RISK FACTORS........................................6
Credit Considerations............................6
Limited Obligations.............................11
Limited Liquidity...............................11
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....................14
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..............17
Redemption......................................18
MATURITY AND PREPAYMENT CONSIDERATIONS.............18
YIELD CONSIDERATIONS...............................18
SECURITY FOR THE BONDS.............................19
General.........................................19
The Collateral..................................19
The Mortgage Loans..............................20
The Model Home Loans............................22
The Manufactured Home Loans.....................22
The Consumer Finance Loans......................23
Substitution of Collateral......................24
Pledge of Additional Collateral and Issuance
of Additional Bonds.............................24
Master Servicer Custodial Account...............25
Collateral Proceeds Account.....................25
Reserve Fund or Accounts........................25
Other Funds or Accounts.........................25
Investment of Funds.............................25
Insurance on the Collateral.....................26
Credit Enhancement..............................28
Bond Insurance and Surety Bonds.................29
ORIGINATION OF THE COLLATERAL......................29
Mortgage Loans and Manufactured Home Loans......29
Model Home Loans................................30
Consumer Finance Loans..........................30
Representations and Warranties..................30
SERVICING OF THE COLLATERAL........................31
General.........................................31
Payments on Collateral..........................32
Advances........................................33
Collection and Other Servicing Procedures.......33
Defaulted Collateral............................34
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon
Defaulted Collateral............................34
Evidence as to Servicing Compliance.............35
Events of Default and Remedies..................35
Master Servicing Agreement......................35
Special Servicing Agreement.....................36
THE INDENTURE......................................36
General.........................................36
Modification of Indenture.......................36
Events of Default...............................37
Authentication and Delivery of Bonds............38
List of Bondholders.............................38
Annual Compliance Statement.....................39
Reports to Bondholders..........................39
Trustee's Annual Report.........................39
Trustee.........................................39
Satisfaction and Discharge of the Indenture.....39
CERTAIN LEGAL ASPECTS OF THE COLLATERAL............40
Mortgage Loans and Model Home Loans.............40
Manufactured Home Loans.........................44
Consumer Finance Loans..........................47
Consumer Protection Laws........................49
Environmental Considerations....................50
Enforceability of Certain Provisions............50
THE ISSUER.........................................51
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............51
General.........................................51
Bonds Treated as Debt Without a REMIC Election..52
REMIC Bonds.....................................53
Sales or Exchanges of Bonds.....................56
Original Issue Discount.........................56
Market Discount.................................60
Premium.........................................61
Reporting and Other Administrative Matters......61
Backup Withholding with Respect to Bonds........61
Foreign Investors in Bonds......................62
STATE TAX CONSIDERATIONS...........................62
ERISA CONSIDERATIONS...............................62
LEGAL INVESTMENT...................................64
USE OF PROCEEDS....................................64
PLAN OF DISTRIBUTION...............................64
LEGAL MATTERS......................................65
FINANCIAL INFORMATION..............................65
ADDITIONAL INFORMATION.............................65
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....65
REPORTS TO BONDHOLDERS.............................66
GLOSSARY...........................................67
<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 Securities Corporation, a wholly-owned,
limited purpose financing subsidiary of Issuer
Holding Corp. ("IHC"), which is a wholly owned
subsidiary of Dynex Capital, Inc. ("Dynex"),
formerly Resource Mortgage Capital, Inc. Neither
IHC nor Dynex has guaranteed, or is otherwise
obligated with respect to, the Bonds of any
Series. See "The Issuer".
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 as 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 one or more of the following
types of Collateral. The Trust Estate for each
Series of Bonds will be more specifically
described in the related Prospectus Supplement.
A. Collateral The Bonds of each
Series may be secured by:
<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 (together
with payments from the Reserve Funds for such
Series) net of applicable servicing, master
servicing, administration and guarantee fees and
insurance premiums, if any, all as specified in
the related Prospectus Supplement, are intended
to be sufficient to make the required payments of
interest on the Bonds of the Series and to pay
the principal of each Class of Bonds not later
than its Stated Maturity Date. See "Security for
the Bonds."
B. Collateral Proceeds
Account................... All distributions (net of servicing and master
servicing fees and other credit enhancement and
administrative costs described herein) on the
Collateral will be remitted to the Collateral
Proceeds Account for the Bonds and will be
available for application to the payment of
principal of and interest on the Bonds on the
related Payment Date to the extent specified in
the Prospectus Supplement. See "Security for the
Bonds -- Collateral Proceeds Account" and " --
Master Servicer Custodial Account."
C. Insurance Policies..... If specified in the Prospectus Supplement for a
Series of Bonds, the Issuer may pledge to the
Trustee payments due under certain mortgage
insurance, hazard insurance and other policies,
if any (collectively, "Insurance Policies"),
including (a) mortgage Insurance Policies
consisting of (i) Primary Mortgage Insurance
Policies that will insure (subject to their
provisions and certain limitations) Mortgage
Loans and Model Home Loans against all or a
portion of any loss sustained by reason of
nonpayments by the Borrowers, (ii) one or more
Pool Insurance Policies 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.
<PAGE>
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 the
Reserve Fund as described in the Prospectus
Supplement. 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."
<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 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."
<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.
<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
General. A Mortgage Loan typically is made based upon a determination
of the Borrower's ability to make Monthly Payments on his Mortgage Loan and upon
the value of the Mortgaged Premises secured thereby. The ability of a Borrower
to make Monthly Payments will be dependent on the availability of jobs and
general economic conditions. The value of an investment in Bonds of a Series may
be adversely affected by a decline in real estate values. If the residential
real estate market in the area of one or more of the Mortgaged Premises should
experience an overall decline in property values, the actual rate of
Delinquencies, Foreclosures and Losses could be higher than those now generally
experienced in the mortgage lending industry. In addition, to the extent that
the Mortgage Loans are underwritten pursuant to underwriting guidelines that are
less stringent than the underwriting guidelines of FNMA and FHLMC with respect
to the Borrower's creditworthiness and repayment ability, the rates of
Delinquencies and Foreclosures experienced on the Mortgage Loans are likely to
be substantially higher than those experienced by mortgage loans underwritten in
accordance with FNMA and FHLMC underwriting guidelines. As a result, Losses on
the Mortgage Loans may be higher than those on mortgage loans originated in
accordance with such guidelines. See "-- Underwriting Standards and Potential
Delinquencies." To the extent that such losses are not covered by applicable
Insurance Policies, if any, or by any credit enhancement as described in the
related Prospectus Supplement, Holders of the Bonds of a Series will bear all
risk of Loss resulting from default by Borrowers and will have to look primarily
to the value of the Mortgaged Premises for recovery of the outstanding principal
and unpaid interest of the defaulted Mortgage Loans. As described in the related
Prospectus Supplement, the risk of Loss associated with such Mortgage Loans may
be allocated disproportionately among the Classes of Bonds that comprise a
Series to the extent that such losses are not covered by applicable Insurance
Policies, Additional Collateral or other credit enhancement. Such Losses could
result in an Event of Default. See "The Indenture -- Events of Default."
As further described in the applicable Prospectus Supplement, Balloon
Payment Mortgage Loans include Mortgage Loans that provide for amortization of
the principal amount over a certain period (for example, 30 years), although all
remaining principal is due at the end of a 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."
<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 FNMA or FHLMC generally will bear higher rates of interest than
mortgage loans that are originated in accordance with FNMA and FHLMC
underwriting guidelines. The Mortgage Loans generally will be underwritten in
accordance with the underwriting standards described for Mortgage Loans under
"Origination of the Collateral -- Mortgage Loans and Manufactured Home Loans,"
which are intended to provide for the origination of single family mortgage
loans for non-conforming credits. A mortgage loan made to a "non-conforming
credit" means a mortgage loan that is ineligible for purchase by FNMA or FHLMC
due to borrower credit characteristics that do not meet FNMA or FHLMC
underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a borrower who may have a record of major derogatory
credit items, such as default on a prior mortgage loan, credit write-offs,
outstanding judgments and prior bankruptcies. Accordingly, the Mortgage Loans
are likely to experience rates of Delinquency and Foreclosure that are higher,
and may be substantially higher, than Mortgage Loans originated in accordance
with FNMA or FHLMC underwriting guidelines. As a result, Losses on the Mortgage
Loans are likely to be higher than Losses on Mortgage Loans originated in
accordance with such guidelines.
<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
FNMA or FHLMC underwriting guidelines, changes in the values of the related
Mortgage Premises may have a greater effect on the Loss experience of the
Mortgage Loans than on mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines. No assurance can be given that the values of
Mortgaged Premises have remained or will remain at the levels in effect on the
dates of origination of the related Mortgage Loans. If the values of the
Mortgaged Premises decline after the dates of origination of the Mortgage Loans,
the rate of Losses on the Mortgage Loans may increase, and such increase may be
substantial.
Model Home Loans
As further described in the related Prospectus Supplement, a Model Home
Loan is a mortgage loan made by the Participant or its Affiliate and secured by
Mortgaged Premises that are leased by the Borrower to a homebuilder for use as a
model home. The leases typically have a term shorter than that of the related
Model Home Loan. Because the Borrower 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
General. A Manufactured Home Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the
Manufactured Home Loan and upon an investment analysis of the related
Manufactured Home designed to determine the permissible Loan size. The ability
of a Borrower to make Monthly Payments will be dependent on the availability of
jobs and general economic conditions. When a Borrower does default on a
Manufactured Home Loan, realization is generally accomplished through
repossession and resale of the related Manufactured Home. Manufactured homes
generally decline in value over time, which may not necessarily be the case with
respect to mortgaged premises securing mortgage loans, and so the Losses
incurred upon repossession and resale of or Foreclosure on Manufactured Homes
securing Manufactured Home Loans generally may be expected to be more 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.
<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.
<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
General. A Consumer Finance Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the Consumer
Finance Loan and upon the purchase price of the related Facilities and the 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.
<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.
<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".
<PAGE>
Modification and Substitution of Collateral
If an item of Collateral is in material default or a payment default is
imminent, the related Servicer, with the consent of the Master Servicer, may
enter into a forbearance or modification agreement with the Borrower. The terms
of any such forbearance or modification agreement may affect the amount and
timing of principal and interest payments on the item of Collateral and,
consequently, may affect the amount and timing of payments on one or more
Classes of the related Series of Bonds. For example, a modification agreement
that results in a lower Loan Rate would lower the Class Interest Rate of any
related Class of Bonds that accrues interest at a rate based on the weighted
average Net Loan Rate of the related Collateral. See "Servicing of the
Collateral -- Defaulted Collateral."
In addition, under certain circumstances, the Issuer may substitute new
Collateral ("Substitute Collateral") for defaulted Collateral. See "Security for
the Bonds -- Substitution of Collateral." The terms of each item of Substitute
Collateral may differ from those of the item of Collateral for which it is
substituted. In particular, the Loan Rate of the item of Substitute Collateral
may be less than that of the item of Collateral for which it is substituted and,
indeed, may be less than the then current market interest rate for loans or
other applicable assets with similar characteristics. The substitution of an
item of Substitute Collateral with a Loan Rate less than that of the item of
Collateral for which it is substituted will reduce the Class Interest Rate of
any related Class of Bonds with a Class Interest Rate based on the Loan Rates or
Net Loan Rates of the related Collateral. Furthermore, any Bondholder that would
be entitled to receive payments based on the Collateral Value of a defaulted
item of Collateral, REO or Repo Property upon Liquidation of the defaulted item
of Collateral may prefer that the defaulted item of Collateral be Liquidated
rather than replaced with an item of Substitute Collateral, particularly if the
item of Substitute Collateral has a Loan Rate less than the then current market
interest rate for loans or other applicable assets with similar characteristics.
See "Security for the Bonds -- Substitution of Collateral."
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".
<PAGE>
Yields realized by Bondholders of Discount Bonds or Premium Bonds may
be extremely sensitive to the rate of principal payments (including for this
purpose, modifications, substitutions, scheduled principal payments, payments
resulting from refinancings, Liquidations due to defaults, casualties,
condemnations and repurchase by the seller of the Collateral securing such
Series). In general, yields on Premium Bonds will be adversely affected by
higher than anticipated rates of principal payments on the Collateral and
enhanced by lower than anticipated rates. Yields on Discount Bonds are likely to
be enhanced by higher than expected rates of principal payments and adversely
affected by lower than expected rates. In certain circumstances, Holders of
certain Classes of Bonds could fail to fully recover their initial investment.
Limited Nature of Ratings
Each Class of Bonds of a Series offered hereby and by means of the
related Prospectus Supplement will be, when issued, rated in one of the four
highest rating categories by one or more Rating Agencies identified in such
Prospectus Supplement. Any such rating is not a recommendation to buy, sell or
hold Bonds and is subject to revision or withdrawal at any time by the Rating
Agency issuing the rating. An investor may obtain further details with respect
to any rating on the Bonds from the Rating Agency issuing the rating. In
addition, any such rating will be based, among other things, on the credit
quality of the Collateral and will represent only an assessment of the
likelihood of receipt by Bondholders of payments with respect to underlying
Collateral. A rating will not represent any assessment of the likelihood that
prepayment experience may differ from prepayment assumptions and, accordingly,
will not represent any assessment of the possibility that 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" and "-- Consumer Protection Laws" and "Certain Legal Aspects of the
Collateral -- Mortgage Loans and Model Home Loans -- Anti-Deficiency Legislation
and Other Limitations on Lenders".
<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.
<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.
<PAGE>
Because transactions in Book-Entry Bonds can be effected only through
the Depository, participating organizations, indirect participants and certain
banks, the ability of a beneficial owner of a Book-Entry Bond to pledge such
Bond to persons or entities that do not participate in the Depository, or
otherwise to take actions in respect of such Bond, may be limited due to the
lack of a physical certificate representing such Bond. Issuance of Book-Entry
Bonds may reduce the liquidity of such Bonds in the secondary trading market
because investors may be unwilling to purchase Book-Entry Bonds for which they
cannot obtain physical certificates.
The Book-Entry Bonds will be issued in fully-registered, certificated
form to beneficial owners of Book-Entry Bonds or their nominees, rather than to
the Depository or its nominee, only if (i) the Issuer advises the Trustee in
writing that the Depository is no longer willing or able to discharge properly
its responsibilities as depository with respect to the Book-Entry Bonds and the
Issuer is unable to locate a qualified successor within 30 days or (ii) the
Issuer, at its option, elects to terminate the book-entry system through the
Depository. Upon the occurrence of either event described in the preceding
sentence, the Trustee is required to notify the Depository, which in turn will
notify all beneficial owners of Book-Entry Bonds through Depository
participants, of the availability of certificated Bonds. Upon surrender by the
Depository of the certificates representing the Book-Entry Bonds and receipt of
instructions for re-registration, the Trustee will reissue the Book-Entry Bonds
as certificated Bonds to the beneficial owners of Book-Entry Bonds.
Neither the Issuer, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Bonds held by the
Depository, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Payments of Principal and Interest
To the extent specified in the related Prospectus Supplement, payments
on the 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".
<PAGE>
Each Class of Bonds will bear interest from the date and at the rate
per annum (the "Class Interest Rate") specified, or determined as specified, in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, interest will be computed on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest on a Class of Bonds consisting
of Current Interest Bonds will be payable on the Payment Dates specified in the
related Prospectus Supplement. Each such payment of interest will include all
interest either accrued to the Accounting Date immediately preceding the Payment
Date on which it is made or to another date specified in such Prospectus
Supplement. Unless interest is accrued to the Payment Date, the effective yield
to the Bondholder will be reduced to a level below the yield that would apply if
interest were accrued to the Payment Date. If specified in the related
Prospectus Supplement, any Class of Bonds may bear interest at a variable rate.
For any variable rate Class of Bonds, the related Prospectus Supplement will set
forth the manner for determining the variable interest rate and the interest
rate change interval. The variable interest rate for a Class of Bonds will not
exceed a maximum rate specified in the related Prospectus Supplement, and the
payments due on the Collateral securing the related Series or Class of Bonds
will be in amounts (taking into account Reserve Funds and other funds and any
redemption rights and obligations) determined to be adequate to pay interest on
such Class of Bonds at the specified maximum interest rate.
If specified in the related Prospectus Supplement, (i) a Class of Bonds
may be a Principal Only Class comprised solely of Principal Only Bonds, which
will not bear interest, and (ii) a Class of Bonds may be a High Coupon Class
comprised solely of High Coupon Bonds, which will receive only relatively small
payments of principal. If specified in the related Prospectus Supplement, a
Class of Bonds may be an Accretion Class, which is comprised solely of Accretion
Bonds on which interest will accrue but will not be paid ("Deferred Interest")
until each Class of Bonds of the Series, if any, with an earlier priority of
payment has been paid in full or as otherwise specified in the related
Prospectus Supplement. Deferred Interest will be added to the principal of each
Class of Accretion Bonds on each Accounting Date until all Classes of Bonds that
have an earlier payment priority are paid in full, and, thereafter, interest
will be paid on the Compound Value of the Accretion Bonds. The Compound Value of
a Class of Accretion Bonds will equal the original principal amount of such
Class, plus Deferred Interest through the Accounting Date preceding the
determination date, less any principal payments made on such Class of Bonds.
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.
<PAGE>
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.
The yield to maturity of any Bond will be affected by the rate and
timing of payments of principal of the Collateral and, to a lesser extent, the
frequency and scope of any modifications or substitutions of Loans. If the
purchaser of a Bond offered at a discount from its Parity Price calculates the
anticipated yield to maturity of the Bond based on an assumed rate of payment of
principal that is faster than that actually received on the Collateral, the
actual yield to maturity will be lower than the calculated yield. If the
purchaser of a Bond offered at a premium over its Parity Price calculates the
anticipated yield to maturity of the Bond based on an assumed rate of payment of
principal that is slower than that actually received on the Collateral, the
actual yield to maturity will be lower than the calculated yield.
The timing of changes in the rate of payment of principal on the
Collateral may significantly affect an investor's actual yield to maturity, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. In general, the earlier a payment of principal
on an item of Collateral, the greater will be the effect on the investor's yield
to maturity. As a result, the effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the Bonds would
not be fully offset by a subsequent commensurate reduction (or increase) in the
rate of principal payments at a later date. Because the rate of principal
payments (including prepayments) on the Collateral may significantly affect the
weighted average life and other characteristics of any Class of Bonds,
prospective investors are urged to consider their own estimates as to the
anticipated rate of future payments of principal on the Collateral and the
suitability of the Class of Bonds to their investment objectives. For factors
affecting principal payments on Loans, including the impact of modifications and
substitutions of Collateral, see "Maturity and Prepayment Considerations" above.
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.
<PAGE>
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
Generally, Mortgage Loans will be secured by first liens on single
family (one-family or two- to four-family) attached or detached residential
property, which may include Second Lien Mortgage Loans.
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.
<PAGE>
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 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.
<PAGE>
Liquidation expenses with respect to defaulted Second Lien Mortgage
Loans will not vary directly with the Unpaid Principal Balances of the Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon a defaulted Second Lien Mortgage Loan having a small remaining
Unpaid Principal Balance as it would in the case of a defaulted mortgage loan
having a large remaining principal balance, the amount realized after expenses
of Liquidation would be smaller as a percentage of the Unpaid Principal Balance
of the defaulted Second Lien Mortgage Loan than it would be the case with the
defaulted mortgage loan having a large Unpaid Principal Balance. Because the
average outstanding principal balance of the Second Lien Mortgage Loans
generally is smaller relative to the size of the average outstanding principal
balance of the loans in a typical pool of conventional, first priority mortgage
loans, Liquidation Proceeds may also be smaller as a percentage of the Unpaid
Principal Balance of a Second Lien Mortgage Loan than would be the case for a
typical conventional, first lien mortgage loan.
Repurchase of Converted Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by Adjustable Rate Mortgage Loans the Note Rates of which
are convertible from an adjustable rate to a fixed rate at the option of the
Borrower upon the fulfillment of certain conditions. Except as otherwise
specified in the related Prospectus Supplement, the Participant may at its
option repurchase any such Adjustable Rate Mortgage Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Adjustable Rate Mortgage Loan, plus 30 days of interest
thereon at the applicable Note Rate. The purchase price will be treated as a
prepayment of the Mortgage Loan. Until a Converted Mortgage Loan is purchased or
sold as described above, it will remain in the Trust Estate with a fixed Note
Rate.
The Model Home Loans
Each Model Home Loan securing a Series of Bonds will be secured by a
first lien on a single family (one- to four- family) attached or detached
residential property that is used as a model home. The Borrower, which may be an
Affiliate of the Participant, will use the proceeds of the Model Home Loan to
purchase the related Mortgaged Premises from a homebuilder and will then lease
the property back to the homebuilder, who will use it as a model home. The
homebuilder will agree pursuant to the lease agreement to pay all taxes,
insurance premiums, utility costs and maintenance costs, and to make lease
payments to the Borrower, during the term of the lease.
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).
<PAGE>
For each Series of Bonds, the Issuer will cause the Manufactured Home
Loans included as security for the related Series to be assigned to the Trustee
named in the related Prospectus Supplement (the "Trustee").
The Manufactured Home Loans securing a Series of Bonds will consist of
conventional manufactured housing installment sales contracts. Each Manufactured
Home Loan will be secured by a Manufactured Home, and some Manufactured Home
Loans may also be secured by a lien on a parcel of real estate ("Real
Property"). Each Manufactured Home Loan will be fully amortizing and, unless
otherwise specified in the Prospectus Supplement for a Series, will bear
interest at a fixed or adjustable Loan Rate. Unless otherwise provided in the
related Prospectus Supplement, the Manufactured Home Loans will have terms of
from 7 to 30 years. Each Manufactured Home Loan will be assumable, subject to
underwriting in accordance with standards customary in the industry.
The Issuer will represent that the Manufactured Homes securing the
Manufactured Home Loans consist of manufactured homes within the meaning of
Title 42 of the United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under Chapter 70 under Title 42 of the
United States Code."
With respect to the Manufactured Home Loans expected to secure a Series
of Bonds, the related Prospectus Supplement will specify, to the extent known
(i) the aggregate principal balance of the Manufactured Home Loans, (ii) the
range of remaining terms to maturity or weighted average remaining term to
maturity of the Manufactured Home Loans, (iii) the current Scheduled Principal
Balance of the largest Manufactured Home Loan and the average Unpaid Principal
Balance of the Manufactured Home Loans, (iv) the weighted average Loan Rate or
the range of Loan Rates borne by the Manufactured Home Loans and (v) the
geographic distribution of the Manufactured Homes.
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.
<PAGE>
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 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.
<PAGE>
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
pledge of Additional Collateral will not affect the Class Interest Rate, Stated
Maturity Date or Payment Dates of any outstanding Bonds of such Series, (c) the
weighted average life of each outstanding Class of Bonds calculated at the
prepayment rate assumed for the pricing of the initial issuance of such Class of
Bonds will not vary by more than plus or minus 0.05 years from the weighted
average life disclosed in the Prospectus Supplement for the initial issuance of
the Bonds of such Series, and (d) the characteristics of the Additional
Collateral and the Collateral as augmented by the Additional Collateral will
conform to the parameters for Additional Collateral disclosed in the Prospectus
Supplement for the initial issuance of Bonds of such Series. However, there can
be no assurance that any pledge of Additional Collateral and issuance of
Additional Bonds would not affect the timing or amount of payments received by
Holders of the outstanding Bonds of that Series. Provided that the conditions
described in the Prospectus Supplement for the outstanding Bonds are satisfied,
the pledge of Additional Collateral and the issuance of Additional Bonds will
not be subject to the prior consent of the Holders of the outstanding Bonds of
such Series.
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.
<PAGE>
Funds in the Collateral Proceeds Account may be invested and, if
invested, shall be invested in the name of the Trustee (in its capacity as such)
in Eligible Investments that mature not later than the Business Day preceding
each Payment Date (except that, if such Eligible Investment is an obligation of
the Trustee, then such Eligible Investment may mature not later than such
Payment Date) and will not be sold or disposed of prior to its maturity. All
income realized from any such investments will accrue to the benefit of the
Master Servicer as additional compensation and may be withdrawn by the Master
Servicer from time to time. However, no withdrawals from the Collateral Proceeds
Account will be permitted if such withdrawals would cause a deficiency in
amounts payable to Bondholders.
Reserve Fund or Accounts
If stated in the Prospectus Supplement for a Series, the Issuer will
deposit cash, certificates of deposit or letters of credit in one or more
Reserve Funds or accounts, which may be used by the Trustee to make any required
payments of principal or interest on the Bonds of the Series to the extent that
funds are not otherwise available. The Series Supplement may limit the pledge of
any Reserve Fund to certain Classes of Bonds. The Issuer may have certain rights
on any Payment Date to cause the Trustee to make withdrawals from the Reserve
Fund for a Series and to pay such amounts in accordance with the instructions of
the Issuer as specified in the related Prospectus Supplement to the extent that
such funds are no longer required to be maintained for the Bondholders.
Other Funds or Accounts
The Bonds of a Series may also be secured by certain other funds and
accounts for the purpose of, among other things, (i) making required payments of
principal or interest on the Bonds of the Series to the extent funds are not
otherwise available, (ii) paying certain administrative, insurance and similar
costs and (iii) accumulating funds that are credited to the Issuer's account
pending their distribution to the Issuer. To the extent such funds and accounts
are material, they will be described in the related Prospectus Supplement.
Investment of Funds
Funds deposited in or remitted to the Collateral Proceeds Account, any
Reserve Fund and any other funds and accounts held under the Indenture for a
Series will be invested by the Trustee, and amounts in the Master Servicer
Custodial Account will be invested by the Master Servicer, in certain eligible
investments ("Eligible Investments") as specified in the Indenture or Indenture
Supplement for the related Series.
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.
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy for a Series will provide that as a condition precedent to
the payment of any claim the insured will be required (a) to advance hazard
insurance premiums on the Mortgaged Premises securing the defaulted Mortgage
Loan or the Manufactured Home securing the defaulted Manufactured Home Loan; (b)
to advance, as necessary and approved in advance by the related insurer, (1)
real estate property taxes, (2) all expenses required to preserve and repair the
Mortgaged Premises or Manufactured Home, or to protect the Mortgaged Premises or
Manufactured Home from waste, so that the Mortgaged Premises or Manufactured
Home is in at least as good a condition as existed on the date upon which
coverage under the Pool Insurance Policy with respect to such Mortgaged Premises
or Manufactured Home first became effective, ordinary wear and tear excepted,
(3) property sales expenses, (4) any outstanding liens on the Mortgaged Premises
or Manufactured Home, and (5) foreclosure costs including court costs and
reasonable attorneys' fees; and (c) if there has been physical loss or damage to
the Mortgaged Premises or Manufactured Home, to restore the Mortgaged Premises
or Manufactured Home to its condition (ordinary wear and tear excepted) as of
the issue date of the Pool Insurance Policy. It also will be a condition
precedent to the payment of any claim relating to a Mortgage Loan under the Pool
Insurance Policy that the insured maintain a Primary Mortgage Insurance Policy
that is acceptable to the Pool Insurer on all Mortgage Loans covered by the Pool
Insurance Policy that have loan-to-value ratios at the time of origination in
excess of 80%. Assuming satisfaction of these conditions, the Pool Insurer will
pay to the insured the amount of the loss, which will generally be: (a) the
amount of the unpaid principal balance of the Mortgage Loan or Manufactured Home
Loan immediately prior to the Approved Sale of the related Mortgaged Premises or
Manufactured Home; (b) the amount of the accumulated unpaid interest on such
Mortgage Loan or Manufactured Home Loan to the date of claim settlement at the
contractual rate of interest; and (c) reimbursable amounts advanced by the
insured as described above, less certain payments (including the proceeds of any
prior Approved Sale and any Primary Mortgage Insurance Policies). The Pool
Insurance Policy may not reimburse the insured for attorneys' fees on a
foreclosed Mortgage Loan in excess of 3% of the unpaid balance of principal and
interest of that Mortgage Loan. As a result, legal expenses in excess of such
reimbursement limitation may be charged as a loss on the related Bonds. An
Approved Sale is (1) a sale of the Mortgaged Premises or Manufactured Home
acquired by the insured because of a default by the Borrower to which sale the
Pool Insurer has given prior approval, (2) a pre-foreclosure, Foreclosure or
trustee's sale of the Mortgaged Premises or Manufactured Home at a price
exceeding the minimum amount specified by the Pool Insurer, (3) the acquisition
of the Mortgaged Premises under the Primary Mortgage Insurance Policy by the
related Mortgage Insurer, or (4) the acquisition of the Mortgaged Premises or
Manufactured Home by the Pool Insurer. If the Pool Insurer elects to take title
to the Mortgaged Premises or Manufactured Home, the insured must, as a condition
precedent to the payment of any such Loss, provide the Pool Insurer with good
and merchantable title to the related Mortgaged Premises or Manufactured Home.
If any property securing a defaulted Mortgage Loan or Manufactured Home is
damaged and the proceeds, if any, from the related Standard Hazard Insurance
Policy or the applicable Special Hazard Insurance Policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
the Pool Insurance Policy, the Servicer or the Master Servicer of the related
Mortgage Loan or Manufactured Home Loan will not be required to expend its own
funds to restore the damaged Mortgaged Premises or Manufactured Home unless it
determines and the Master Servicer agrees (A) that such restoration will
increase the proceeds to the Trust Estate on Liquidation of the Mortgage Loan or
Manufactured Home Loan after reimbursement of the Servicer or the Master
Servicer for its expenses and (B) that such expenses will be recoverable by it
through Liquidation Proceeds or Insurance Proceeds.
The Pool Insurance Policies will generally not insure (and many Primary
Mortgage Insurance Policies may not insure) against loss sustained by reason of
a default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Mortgage Loan or Manufactured Home Loan, including
misrepresentation by the Borrower or the Originator, (ii) failure to construct
Mortgaged Premises or a Manufactured Home in accordance with plans and
specifications, and (iii) a claim in respect of a defaulted Mortgage Loan
occurring when the Servicer of the Mortgage Loan, at the time of default or
thereafter, was not approved by the Mortgage Insurer. A failure of coverage
attributable to one of the foregoing events might result in a breach of the
Participant's representations and warranties described under "Origination of the
Collateral -- Representations and Warranties" 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". 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".
<PAGE>
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.
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;
<PAGE>
(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 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.
<PAGE>
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 FNMA or FHLMC, or (b) the Participant's various credit,
appraisal and underwriting standards and guidelines. The Prospectus Supplement
for a Series of Bonds will disclose the percentage of Mortgage Loans or
Manufactured Home Loans included in the Collateral that are originated using the
Participant's underwriting guidelines and those originated using the
Originator's stricter underwriting guidelines. As discussed further in the
related Prospectus Supplement, the Participant's underwriting guidelines for
Mortgage Loans are less stringent than those applied by FNMA or FHLMC, primarily
in that the Participant's guidelines generally permit the Borrower to have a
higher debt-to-income ratio and a larger number of derogatory credit items than
do the guidelines of FNMA or FHLMC. The Participant will also apply the same
underwriting standards for Manufactured Home Loans, with one exception: in
underwriting a Mortgage Loan, the Participant has an appraisal, described below,
performed on the Mortgaged Premises, while in evaluating a Manufactured Home
Loan, it performs an investment analysis based principally on the invoice cost,
in the case of a new manufactured home, and a national appraisal guide used to
determine retail values, in the case of a used manufactured home.
Both the FNMA and FHLMC underwriting standards and the Participant's
underwriting standards are applied in a manner intended to comply with
applicable federal and state laws and regulations. The purpose of applying these
standards is to evaluate each prospective Borrower's credit standing and
repayment ability and the value and adequacy of the related Mortgaged Premises
as collateral.
The mortgage loans and manufactured housing installment sales contracts
originated under the Participant's underwriting standards generally are based on
loan application packages submitted by mortgage brokerage companies,
manufactured home dealers or consumers for underwriting review, approval and
funding by the Participant or an Affiliate of the Participant. Originators who
apply their own, stricter underwriting standards review a similar loan
application package in their decision whether to approve and fund the loans or
contracts. In general, a prospective Borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
Borrower generally is required to provide a statement of income as well as an
authorization for a credit report that summarizes the Borrower's credit history
with merchants and lenders as well as any suits, judgments or bankruptcies that
are of public record. The Borrower may also be required to authorize
verification of deposits at financial institutions where the Borrower has demand
or savings accounts.
In determining the adequacy of the collateral for a Mortgage Loan, an
appraisal is made of each Mortgaged Premises considered for financing by a
qualified independent appraiser approved by FNMA, FHLMC, the Participant or an
Affiliate of the Participant. The appraiser is required to inspect the property
and verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes and,
if considered applicable by the appraiser, the estimated rental income of the
property and a replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to FNMA or
FHLMC appraisal standards then in effect.
In assessing a possible Manufactured Home Loan, the Participant
determines the amount that it is willing to lend based not on an appraisal but
on an investment analysis based on the invoice price of the Manufactured Home
plus accessories, freight, taxes, insurance and other costs. The use of an
investment analysis in the underwriting of manufactured housing installment
sales contracts is customary in the financing of manufacturing housing. If the
Manufactured Home Loan is also to be secured by Real Property, the Participant
may have the Real Property appraised in the same manner as Mortgaged Premises
are appraised.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
Borrower has sufficient monthly income available (i) to meet the Borrower's
monthly obligations on the proposed mortgage loan or contract (generally
determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the Mortgaged Premises or Manufactured Home (such
as property tax and hazard insurance) and (ii) to meet monthly housing expenses
and other financial obligations and monthly living expenses. The underwriting
standards applied, particularly with respect to the level of income and debt
disclosure on the application and verification, may be varied in appropriate
cases where factors such as low loan-to-value ratios or other favorable
compensating factors exist.
A prospective Borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities (existing or prior). An employment
verification is obtained from an independent source (typically the prospective
Borrower's employer), which verification generally reports the length of
employment with that organization, the prospective Borrower's current salary and
whether it is expected that the prospective Borrower will continue such
employment in the future. If a prospective Borrower is self-employed, the
Borrower may be required to submit copies of signed tax returns. For other than
self-employed Borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
<PAGE>
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 FNMA or FHLMC appraisal
standards then in effect.
Consumer Finance Loans
Each Consumer Finance Loan securing a Series of Bonds will be
originated by the Participant or acquired by the Participant from the
Originator. The Originator will require that an authorized contractor install
the Facilities in the related single family residential property. The Originator
will require a completed loan application from each potential borrower and will
examine the application and base credit decisions primarily on Fair Isaac
("FICO") credit scores. A FICO score represents a numerical weighing of a
borrower's credit characteristics that permits lenders to determine the credit
risk that a borrower presents and the likelihood that a Loan will be repaid.
FICO scores are empirically derived from historical credit data. These
scores estimate, on a relative basis, which loans are most likely to default in
the future. A FICO score is generated through the statistical analysis of a
number of credit-related characteristics or variables. Common characteristics
include number of credit lines (trade lines), payment history, past
delinquencies, severity of delinquencies, current levels of indebtedness, types
of credit and length of credit history. Attributes are the specific values of
each characteristic. A scoreboard (the model) is created with weights or points
assigned to each attribute. Weights are developed by optimizing the combination
of weight values for each characteristic that were most predictive for a
specific data set. An individual applicant's credit score is derived by adding
together the attribute weights for that applicant.
Representations and Warranties
The Issuer generally will acquire Loans from the Participant. The
Participant may act as a Servicer of Loans securing a Series or an unrelated
entity may act as Servicer. The Participant will make certain representations
and warranties with respect to Loans in the agreement by which the Participant
transfers its interest in the Loans to the Issuer. Except as otherwise noted in
the Prospectus Supplement for a Series, the Participant will represent and
warrant, among other things, as follows: (i) that each Loan has been originated
in compliance with all applicable laws, rules and regulations; (ii) that each
Insurance Policy is the valid and binding obligation of the Insurer; and (iii)
that, in the case of each Mortgaged Premises and Manufactured Home, each
Security Instrument constitutes a good and valid first or, if applicable, second
lien on the collateral securing the Loan; and (iv) that the Borrower holds good
and marketable title to the collateral securing the Loan. Except as otherwise
noted in the Prospectus Supplement for a Series, the Participant is required to
submit to the Trustee with each Mortgage Loan a mortgagee title insurance
policy, title insurance binder, preliminary title report, or satisfactory
evidence of title insurance. If a preliminary title report is delivered
initially, the 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.
<PAGE>
SERVICING OF THE COLLATERAL
General
For the Collateral securing each Series, various Servicers, which may
include Dynex or an Affiliate, will provide certain customary servicing
functions pursuant to servicing agreements ("Servicing Agreements"), which will
be pledged to the Trustee to secure the related Bonds. The Servicers will be
entitled to withhold their servicing fees and certain other fees and charges
from payments on the Collateral they service. If so specified in the related
Prospectus Supplement, a Special Servicer may be appointed. The related
Prospectus Supplement will describe the duties and obligations of the Special
Servicer, if any. A Special Servicer will be entitled to a special servicing
fee.
Each Servicer of one- to four-family Mortgage Loans and Model Home
Loans generally will be approved or will utilize a Sub-Servicer that is approved
by the Master Servicer. In determining whether to approve a Servicer, the Master
Servicer will review the credit of the Servicer and, if necessary for the
approval of the Servicer, the Sub-Servicer, including capitalization ratios,
liquidity, profitability and other similar items that indicate financial ability
to perform its obligations. In addition, the Master Servicer's mortgage
servicing personnel will review the Servicer's and any Sub-Servicer's servicing
records and evaluate the ability of the Servicer and Sub-Servicer to comply with
required servicing procedures. The Master Servicer will continue to monitor on a
regular basis the financial position and servicing performance of the Servicer
and, to the extent the Servicer does not meet the foregoing requirements, any
Sub-Servicer.
Each Servicer or Sub-Servicer (subject to the general supervision of
the Servicer) of Collateral other than Mortgage Loans and Model Home Loans must
be approved by the Master 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.
<PAGE>
Forms of Servicing Agreements have been filed as exhibits to, or
incorporated by reference in, the Registration Statement of which this
Prospectus forms a part. The Issuer's rights under each Servicing Agreement with
respect to a Series will be assigned to the Trustee as security for such Series.
The descriptions contained herein do not purport to be complete and are
qualified in their entirety by reference to the form of Servicing Agreement.
Payments on Collateral
Pursuant to the Servicing Agreements with respect to a Series, each
Servicer will be required to establish and maintain one or more separate,
insured (to the available limits) custodial accounts (collectively, the
"Custodial P&I Account") into which the Servicer will be required to deposit on
a daily basis payments of principal and interest received with respect to the
Collateral. To the extent deposits in each Custodial P&I Account are required to
be insured by the FDIC, if at any time the sums in any Custodial P&I Account
exceed the limits of insurance on such account, the Servicer will be required
within one Business Day to withdraw such excess funds from such account and
remit such amounts (i) to a "Servicer Custodial Account," which shall be a
custodial account maintained at a separate institution designated by the Master
Servicer or (ii) to the Master Servicer for deposit in either the Collateral
Proceeds Account for such Series or the Master Servicer Custodial Account. The
amounts deposited pursuant to (i) and (ii) above will be invested in Eligible
Investments.
The Servicing Agreements will require each Servicer, not later than the
Remittance Date, to remit to the Master Servicer Custodial Account amounts
representing Monthly Payments on the Collateral securing a Series received or
advanced by the Servicer that were due during the related Due Period, principal
prepayments, Insurance Proceeds and Liquidation Proceeds received during the
applicable Prepayment Period (as specified in the Indenture for such Series),
with interest to the last day of the calendar month occurring in such Prepayment
Period (subject to certain limitations), and proceeds from the repurchase of
Converted Mortgage Loans, if any, less applicable servicing fees and amounts
representing reimbursement of Advances made by the Servicer. On or before the
related Master Servicer Remittance Date, the Master Servicer will withdraw its
master servicing fees from the Master Servicer Custodial Account and remit to
the Collateral Proceeds Account those amounts allocable to the Bonds for such
Payment Date. In addition, there will be deposited in the Collateral Proceeds
Account for a Series of Bonds any P&I Advances made by the Master Servicer or
the Trustee pursuant to the terms of the Master Servicing Agreement or Indenture
to the extent such amounts were not deposited in the Master Servicer Custodial
Account or received and applied by the Servicer.
Prior to each Payment Date for a Series, the Master Servicer will
furnish to the Trustee and to the Issuer a statement setting forth certain
information with respect to the Collateral securing such Series.
Advances
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.
<PAGE>
Any Advances made by the Servicers, the Master Servicer or the Trustee
with respect to Collateral securing any Series will be intended to enable the
Issuer to make timely payments of principal and interest on the Bonds of the
Series and will be due not later than the Payment Date on which such payments
are scheduled to be made. However, none of the Trustee, the Master Servicer or
any Servicer will insure or guarantee any Series or any Collateral securing any
Series, and their obligations to advance for delinquent payments will be limited
to the extent that such Advances, in the judgment of the Master Servicer or the
Trustee, will be recoverable out of future payments on the Collateral, or
Insurance Proceeds or Liquidation Proceeds of the Collateral, for which the
amounts were advanced.
Collection and Other Servicing Procedures
The Servicing Agreements with respect to a Series will require each
Servicer to make reasonable efforts to collect all payments called for with
respect to the Collateral securing the Series and under the applicable Insurance
Policies with respect to each such Loan and, consistent with the Servicing
Agreement, to follow with respect to Mortgage Loans such collection procedures
as it normally would follow with respect to mortgage loans serviced for FNMA.
The servicing of Manufactured Home Loans and Consumer Finance Loans is
generally similar to the servicing of Mortgage Loans, except that, in general,
servicers of the Manufactured Home Loans and Consumer Finance Loans will place
greater emphasis on making prompt telephone contact with delinquent Borrowers
than is generally customary in the case of the servicing of Mortgage Loans.
The Security Instrument used in originating a Mortgage Loan may, at the
lender's option, contain a "due-on-sale" clause. See "Certain Legal Aspects of
the Collateral -- Mortgage Loans and Model Home Loans -- Due-On-Sale
Provisions". 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.
<PAGE>
The Servicers will not exercise any discretion with respect to changes
in any of the terms of any Loan (including but not limited to the Loan Rate,
whether the term of the Loan is extended for a further period and the specific
provisions applicable to such an extension) or the disposition of REO Property
or Repo Property without the consent of the Master Servicer.
Maintenance of Insurance Policies; Claims Thereunder and
Other Realization Upon Defaulted Collateral
The Servicing Agreements require each Servicer to maintain in full
force and effect, as long as coverage is required under the Servicing Agreement,
Standard Hazard Insurance, Flood Insurance, in certain areas, and, with respect
to Mortgage Loans, any Primary Mortgage Insurance Policy relating to a Loan that
it services.
If any collateral securing a defaulted Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy and any
Flood Insurance Policy are insufficient to restore the damaged property to the
condition that will permit recovery under the related Insurance Policy, the
Servicer will not be required to expend its own funds to restore the damaged
collateral unless it determines that it can recover the expenses from
Liquidation Proceeds or Insurance Proceeds. Each Servicing Agreement and the
Master Servicing Agreement with respect to a Series will require the Servicer or
the Master Servicer, as the case may be, to present claims to the insurer under
any Insurance Policy applicable to the Collateral securing the Series and to
take the reasonable steps necessary to permit recovery under the Insurance
Policy with respect to defaulted Loans or losses on the collateral securing such
Loans.
If recovery under the applicable Insurance Policy is not available, the
Servicer or the Master Servicer nevertheless will be obligated to follow
standard practice and procedures to realize upon defaulted Collateral. See
"Certain Legal Aspects of the Collateral -- Environmental Considerations". 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.
<PAGE>
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.
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.
<PAGE>
THE INDENTURE
The following summaries describe certain provisions of the Indenture.
When particular provisions or terms used in the Indenture are referred to, the
actual provisions (including definitions of terms) are incorporated by reference
as part of such summaries.
General
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds of any Series may be issued thereunder up to
the aggregate principal amount that may be authorized from time to time by the
Issuer. The Indenture provides that additional Bonds may be issued for any
outstanding Class or Series up to the aggregate principal amount authorized from
time to time by the Issuer, subject to the provisions of the related Series
Supplement or supplements thereto.
The Bonds of each Series will be issued in fully-registered
certificated or book-entry form in the authorized denominations for each Class
of Bonds specified in the related Prospectus Supplement. The Bonds of each
Series in certificated form may be transferred or exchanged at the corporate
trust office of the Trustee without the payment of any service charge, other
than any tax or other governmental charge payable in connection therewith.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will make payments of principal of and interest on the Bonds of a Series in
certificated form by checks mailed to registered Bondholders of the Bonds at
their addresses appearing on the books and records of the Issuer, except that
the final payments in retirement of each Class of Bonds of a Series in
certificated form will be made only upon presentation and surrender of such
Bonds at the office or agency of the Issuer maintained for that purpose. If
provided in the related Prospectus Supplement, upon receipt of written
instructions and the payment of any required charge or fee, payments on certain
Bonds of a Series may be made to certain Bondholders of such Bonds by the
Trustee by wire transfer of immediately available funds. Payment and transfer
procedures for Bonds in book-entry form will be as specified herein in
"Description of the Bonds -- Book-Entry Procedures" herein and in the related
Prospectus Supplement.
Modification of Indenture
With the consent of the Holders of not less than a majority in
principal balance of the outstanding Bonds of each Series to be affected or, if
fewer than all Classes of a Series would be affected, of each Class to be
affected, the Trustee and the Issuer may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate provisions of, the Indenture
relating to such Series, or to such Class or Classes, or modify in any manner
the rights of the 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.
<PAGE>
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 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.
<PAGE>
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default will occur and be continuing, the
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any Bondholders of the Bonds
of a Series, unless such Bondholders will have offered to the Trustee reasonable
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, Holders of a majority in
principal amount of the outstanding Senior Bonds (or the most senior of any
Subordinated Bonds if no Senior Bonds are outstanding) of a Series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Bonds of such Series; and the Bondholders of the
majority in principal amount of the outstanding Senior Bonds (or the
Subordinated Bonds if no Senior Bonds are outstanding) of a Series may, in
certain cases, waive any default with respect to such Series.
No Bondholder of any of the Bonds of a Series will have the right to
institute any proceeding with respect to the Indenture, unless (i) such
Bondholder previously has given to the Trustee written notice of an Event of
Default, (ii) the Bondholders of not less than 25% in principal amount of the
outstanding Senior Bonds (or the Subordinate Bonds if no Senior Bonds are
outstanding) of the same Series have made written request upon the Trustee to
institute such proceedings in its own name as Trustee and have offered the
Trustee reasonable indemnity, (iii) the Trustee has for 60 days failed to
institute any such proceeding, and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding Senior Bonds (or
the Subordinated Bonds if no Senior Bonds are outstanding) of a Series.
Except as otherwise provided in the related Prospectus Supplement, at
such time as an Event of Default for a Series is declared and so long as Senior
Bonds of such Series remain outstanding, the Trustee will cease to act on behalf
of the Holders of Subordinated Bonds and will thereafter act only on behalf of
the Holders of the Senior Classes of Bonds. The Issuer is required in such
circumstances to appoint a separate trustee for the Holders of the Subordinated
Bonds. Such trustee may seek to act in a manner adverse to the Holders of the
Senior Bonds, and such action may result in a delay in disposition of the Trust
Estate or the exercise of other remedies and, consequently, a delay in payment
to the Holders of the Senior Bonds. Should the Issuer fail to appoint a separate
trustee within 60 days after such Event of Default, the Trustee will petition a
court of competent jurisdiction to appoint a separate trustee.
Authentication and Delivery of Bonds
The Issuer may from time to time deliver Bonds executed by it to the
Trustee and request that the Trustee authenticate such Bonds. Upon the receipt
of such Bonds and such request, and subject to the Issuer's compliance with
certain conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Issuer may direct.
List of Bondholders
Three or more Bondholders of the Bonds of a Series, each of whom has
owned a Bond of such Series for at least six months, may, by written request to
the Trustee, obtain access to the list of all Bondholders of Bonds of the same
Series or of all Bonds, as specified in the request, maintained by the Trustee
for the purpose of communicating with other Bondholders with respect to their
rights under the Indenture. The Trustee may elect not to afford the requesting
Bondholders access to the list of Bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Bondholders, to all such
Bondholders.
Annual Compliance Statement
The Issuer will be required to file annually with the Trustee a written
statement as to fulfillment of its obligations under the Indenture.
<PAGE>
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.
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.
<PAGE>
Mortgage Loans and Model Home Loans
General
Mortgage Loans and Model Home Loans as described herein are distinct
from Land Secured Loans (which are discussed below under "-- Manufactured Home
Loans -- Foreclosure under Real Property Laws"). A Mortgage Loan or Model Home
Loan is secured by Mortgage Premises on which a single family, (one- to
four-family) attached or detached residential structure is located, whereas a
Land Secured Loan is secured primarily by a Manufactured Home and is secured
only secondarily by Real Property.
The Mortgage Loans and Model Home Loans will be secured by Security
Instruments consisting of either mortgages, deeds of trust, deeds to secure debt
or security deeds, depending upon the prevailing practice in the state in which
the underlying Mortgaged Premises are located. The filing of a mortgage, deed of
trust, deed to secure debt or security deed creates a lien or title interest
upon the real property covered by such instrument and represents the security
for the repayment of an obligation that is customarily evidenced by a promissory
note. It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers. Priority with respect to such
instruments depends on their terms, on the knowledge of the parties to the
instrument and generally on the order of recording with the applicable state,
county or municipal office. There are two parties to a mortgage: the mortgagor,
who is the borrower/owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/owner is the
beneficiary. At origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
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.
<PAGE>
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the principal
amount of the mortgage or deed of trust plus accrued and unpaid interest and the
expenses of foreclosure, in which event the mortgagor's debt will be
extinguished or the lender may purchase for a lesser amount in order to preserve
its right against a borrower to seek a deficiency judgment in states where such
a judgment is available. Thereafter, the lender will assume the burdens of
ownership, including obtaining casualty insurance, paying taxes and making such
repairs at its own expense as are necessary to render the property suitable for
sale. The lender will commonly obtain the services of a real estate broker and
pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any insurance proceeds.
Second Mortgages
Some of the Mortgage Loans may be secured by second mortgages or deeds
of trust, which are junior to first mortgages or deeds of trust held by other
lenders. The rights of the holders of a junior mortgage or a junior deed of
trust are subordinate in lien and in payment to those of the holder of the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive and apply hazard insurance and condemnation
proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the second
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings.
Furthermore, the terms of the second mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust. In the event of
a conflict between the terms of the first mortgage or deed of trust and the
second mortgage or deed of trust, the terms of the first mortgage or deed of
trust will govern. Upon a failure of the mortgagor or trustor to perform any of
its obligations, the senior mortgagee or beneficiary, subject to the terms of
the senior mortgage or deed of trust, may have the right to perform the
obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the second mortgage.
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.
<PAGE>
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.
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.
<PAGE>
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
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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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
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.
<PAGE>
Foreclosure under Real Property Laws
If a Manufactured Home has become attached to real estate to a degree
such that the home would be treated as real property under the laws of the state
in which it is located, it may not be legally permissible for the Servicer to
repossess the home under the provisions of the UCC or other applicable personal
property laws. If so, the Servicer could obtain possession of the home only
pursuant to real estate mortgage foreclosure laws. See "-- Mortgage Loans and
Model Home Loans -- Foreclosure" above. In addition, in order to realize upon
the Real Property securing any Land Secured Loan, the Servicer must proceed
under applicable state real estate mortgage foreclosure laws. The requirements
that the Servicer must meet in order to foreclose on the Real Property securing
a Land Secured Loan, and the restrictions on such foreclosure, are identical to
the requirements and restrictions that would apply to foreclosure of any
Mortgage Loan. For a description of such foreclosure, see "-- Mortgage Loans and
Model Home Loans" above. Mortgage foreclosure generally is accomplished through
judicial action, rather than by private action as permitted under personal
property laws, and real estate laws generally impose stricter notice
requirements and require public sale of the collateral. In addition, real estate
mortgage foreclosure is usually far more time-consuming and expensive than
repossession under personal property laws, and applicable real estate law
generally affords debtors many more protections than are provided under personal
property laws. Rights of redemption under real estate laws generally are more
favorable to debtors than they are under personal property laws, and in many
states antideficiency judgment legislation will be applicable in the real estate
foreclosure context even if it would not apply to repossessions under personal
property laws. If real estate laws apply to a Manufactured Home, to the extent
the Participant has not perfected its security interest in a Manufactured Home
under applicable real estate laws, the Participant's security interest in the
Manufactured Home would be subordinate to a lien on the home recorded pursuant
to applicable real estate laws.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides, subject to certain
conditions described in the next sentence, that state usury limitations shall
not apply to any loan that is secured by a first lien on certain kinds of
manufactured housing. The Manufactured Home Loans would be covered under Title V
if they satisfy certain conditions governing, among other things, the terms of
any prepayments, late charges and deferral fees and requiring 30 days' prior
notice before the institution of any action leading to repossession of or
foreclosure with respect to the related manufactured home.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting a law or constitutional provision that expressly
rejects application of the federal law before April 1, 1983. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
the Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
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.
<PAGE>
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"
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.
<PAGE>
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."
If the goods constitute fixtures and the Trustee's security interest in
the related goods has priority over all other encumbrancers of the affected
single family residential property, on default the Servicer may remove and
repossess the goods (not including the related "ordinary building materials"),
subject to the requirements described in the preceding paragraph. In addition,
the Servicer must reimburse any encumbrancer who is not the debtor for the cost
of repair of any physical damage to the dwelling resulting from the removal of
fixtures, and the person entitled to reimbursement may refuse permission to
remove any fixtures unless the Servicer gives adequate security for the cost of
repair obligation.
If the Trustee's security interest in the goods does not have priority
over all other owners and encumbrancers of the affected real estate, for example
because a construction mortgage has priority, the Servicer may not remove the
goods under any circumstances in the case of a defaulted Consumer Finance Loan.
Each Consumer Finance Loan will be made in an amount equal to the cost
of the purchase and installation of the goods, which amount will include the
cost of labor and may include "ordinary building materials" that cannot be
repossessed. In addition, the value of Facilities, to a greater extent than
Mortgaged Premises, is likely to decrease over time. Either or both of these
factors could cause the net proceeds of any resale on default to be inadequate
to pay off the Unpaid Principal Balance plus accrued and unpaid interest on the
related Consumer Finance Loan. Under applicable laws of most states, the
Servicer might be able to seek a judgment against the debtor for the deficiency,
but obtaining such judgments is seldom economically feasible, and, for that
reason, the Servicer is unlikely to pursue this course of action. In addition,
certain legal prohibitions or restrictions on deficiency judgments and other
laws affording protections to debtors, discussed above under "-- Manufactured
Home Loans -- Enforcement of Security Interests," may apply in the case of
Consumer Finance Loans.
Given that the Consumer Finance Loans involve relatively small amounts,
even with a perfected, first priority security interest, the Servicer is likely
to determine in many cases that the cost of removal of goods, particularly if an
obligation to pay cost of repairs exists, exceeds the net proceeds that could be
expected from a sale and, as a result, decline to remove the goods. If the
Servicer either declines or is not permitted to remove the goods, the UCC
provisions dealing with fixtures do not indicate how the Servicer is to proceed.
It is not clear whether under applicable state law the Trustee would be able to
share in the proceeds of a Foreclosure proceeding brought by an encumbrancer of
the real estate. If the Trustee's security interest in the goods is not a first
priority security interest, there may be little likelihood that any Foreclosure
proceeds would remain after payment of expenses and satisfaction of the senior
encumbrances. The Servicer may have the right to reduce the Trustee's claim to
judgment and proceed against the debtor's assets. For the same reasons that the
Servicer would be unlikely to seek a deficiency judgment in the event of a
repossession and resale, however, a legal proceeding against the debtor
frequently will not be economically feasible.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to prevent a seller of goods pursuant to a consumer
credit contract (and certain related lenders and assignees) from transferring
the contract free of claims by the debtor thereunder against the seller. The
effect of this rule is to subject the assignee of a consumer credit contract to
all claims and defenses that the debtor could have asserted against the seller
under the contract. Assignee liability under this rule (which would be
applicable to the Trust, as pledgee of the Manufactured Home Loans or Consumer
Finance Loan) is limited to amounts paid by the debtor under the pledged Loan;
however, a borrower also may assert the rule to set off remaining amounts due
under such a Loan as a defense against a claim brought by the assignee of the
Loan against the borrower. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending in connection
with one or more types of the Collateral, including the Truth in Lending Act,
the Federal Trade Commission Act, the Magnuson-Moss Warranty 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.
<PAGE>
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
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.
<PAGE>
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;
(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, for application to
payments after December 31, 1999; and
(vii) the regulations concerning amortization of premium (the
"Premium Regulations") effective for debt instruments
acquired after March 2, 1998.
<PAGE>
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 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.
<PAGE>
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:
(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 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.
<PAGE>
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.
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 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
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.
<PAGE>
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
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.
Real Estate Investment Trusts. If the applicable Prospectus Supplement
so provides, a REMIC Mortgage Pool may hold Qualified Mortgages bearing interest
based wholly or partially on mortgagor profits, mortgaged property appreciation,
or similar contingencies. Such interest, if earned directly by a real estate
investment trust ("REIT"), would be subject to the limitations of Code Sections
856(f) and 856(j). Treasury Regulations treat a REIT holding a REMIC Interest
for a principal purpose of avoiding such Code provisions as receiving directly
the income of the REMIC Mortgage Pool, hence potentially jeopardizing its
qualification for taxation as a REIT and exposing such income to taxation as a
prohibited transaction at a 100 percent rate.
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.
<PAGE>
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.
Termination of a REMIC Mortgage Pool. In general, no special tax
consequences will apply to a holder of a REMIC Bond upon the termination of the
REMIC Mortgage Pool by virtue of the final payment or liquidation of the last
Mortgage Asset remaining in the REMIC Mortgage Pool.
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
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".
<PAGE>
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).
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
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 the REMIC Regular Certificate).
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.
<PAGE>
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
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".
<PAGE>
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 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.
<PAGE>
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 Debt 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 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 "REMIC Bond -- 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.
<PAGE>
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 Bonds." A Bondholder may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
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.
<PAGE>
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,
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, 1999, 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.
<PAGE>
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
"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.
<PAGE>
Under the Plan Asset Regulations, two exceptions might be available to
a Recharacterized Class of Bonds. The first (the "Publicly Offered Exception")
is available to a Recharacterized Class of Bonds that is registered under the
Securities Exchange Act of 1934, as amended, freely transferable, and held by
more than 100 unrelated investors. The second is available if, immediately after
the most recent acquisition of a Bond of a Recharacterized Class, benefit plan
investors (which include government plans and individual retirement accounts) do
not own 25% or more of the value of any Class of Recharacterized Bonds (the
"Insignificant Participation Exception"). Prospective Plan investors should be
aware that even if the Look-Through Rule does not apply to a Recharacterized
Class as a result of the applicability of the Publicly Offered Exception or the
Insignificant Participation Exception, the purchase of Bonds of such Class
nonetheless could constitute a prohibited transaction if the Underwriter and
certain of its Affiliates were considered parties in interest or disqualified
persons, such as where the Underwriter is a fiduciary or other service provider
for a Plan. PTCE 75-1 generally exempts purchases by a Plan from an underwriter
who is a party in interest or disqualified person, if, among other things, the
underwriter is not acting as a fiduciary for the Plan in such circumstances.
Such a Plan considering the purchase of Bonds should exercise caution with
respect to such purchase and consult with its counsel regarding the availability
of relief under PTCE 75-1.
Due to the complexity of the rules and penalties under ERISA and the
Code applicable to Plans, potential Plan investors should consult their advisors
and counsel regarding (i) the characterization of each Class of Bonds as debt or
equity for ERISA purposes and (ii) the application of the Publicly Offered
Exception, the Insignificant Participation Exception or other available
exemptions from the prohibited transaction rules of ERISA and the Code.
Potential investors also should be aware that ERISA requires that the assets of
a Plan be valued at their fair market value as of the close of the plan year and
that the Issuer does not plan to provide any valuations to Bondholders.
LEGAL INVESTMENT
As set forth in the related Prospectus Supplement, one or more Classes
of Offered Bonds of any Series may constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are secured by first liens on residential properties and are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including, but not limited to,
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing, under the laws of the
United States or of any State (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to State regulation to the same
extent that under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Bonds of a Series that
are secured by second liens on residential properties will not be treated as
"mortgage related securities" under SMMEA, regardless of the rating assigned
such Bonds.
Under SMMEA, if a State enacted legislation prior to October 4, 1991,
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Bonds will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Several states have enacted legislation overriding SMMEA.
SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in any securities, or require the sale or other disposition of
any securities, so long as such contractual commitment was made or such
securities acquired prior to the enactment of such legislation.
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.
<PAGE>
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
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.
<PAGE>
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Bonds. This Prospectus, which is a part of the
Registration Statement, omits certain information contained in the Registration
Statement pursuant to the rules and regulations of the Commission. The
Registration Statement and the exhibits thereto can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The statements contained in this Prospectus concerning the contents
of any contract or other document referred to are not necessarily complete.
Although such statements disclose all material provisions of such contract or
other document, where such contract or other document is an exhibit to the
Registration Statement, reference is made to such exhibit for a full statement
of the provisions thereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Issuer pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after the date of this
Prospectus and prior to the termination of the offering of the Bonds hereunder
shall be deemed to be incorporated into and made a part of this Prospectus from
the date of filing of such documents.
The Issuer hereby undertakes to provide a copy of any and all
information that has been incorporated by reference into the Registration
Statement (not including exhibits to the information so incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Registration Statements incorporate) upon written or
oral request of any person, without charge to such person, provided that such
request is made to MERIT Securities Corporation, 10900 Nuckols Road, Glen Allen,
Virginia 23060, telephone: (804) 217-5800.
REPORTS TO BONDHOLDERS
The Issuer will cause to be provided to Bondholders the monthly
remittance reports concerning the Trust Estate securing the Bonds and the annual
reports concerning the Issuer. See "The Indenture -- Reports to Bondholders"
herein.
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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.
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"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.
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"Custodial P&I Account" means the account established by each Servicer
into which the Servicer deposits collections of principal and interest on the
Loans.
"Cut-off Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement and used as a basis for identifying the
payments of principal of and interest due on the Loans that are for the benefit
of the Bondholders.
"Delinquency" means that all or part of the Borrower's Monthly Payment
is not paid on or before the related Due Date.
"Discount Bonds" means Bonds that have a purchase price lower than the
Parity Price.
"Due Date" means with respect to a Loan the day of each month on which
the Borrower's Monthly Payment is due as stated in the related Note or Contract.
"Due Period" means with respect to any Payment Date for a Mortgage
Loan, the period commencing on the second day of the calendar month preceding
the calendar month in which the Payment Date occurs and continuing through the
first day of the calendar month in which the Payment Date occurs. "Due Period"
means for any Loan other than a Mortgage a period that will be described in the
related Prospectus Supplement.
"Dynex" means Dynex Capital, Inc., a Virginia corporation.
"Eligible Investments" means those investments permitted under the
Indenture and acceptable to the Rating Agencies.
"Event of Default" means an event of default under the Indenture.
"Facilities" means the facilities, equipment and materials purchased
and installed in a single family (one- to four-family) attached or detached
residential property with the proceeds of a Consumer Finance Loan.
"FHLMC" means Federal Home Loan Mortgage Corporation.
"Flood Insurance" means insurance against flood damage to the
collateral underlying a Loan, required for such collateral located in "flood
hazard" areas identified by the Secretary of HUD or the Director of the Federal
Emergency Management Agency.
"Flood Insurance Policy" means an Insurance Policy that provides Flood
Insurance.
"FNMA" means FNMA.
"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.
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"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.
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"Maximum Rate" means, with respect to an Adjustable Rate Loan, the
maximum lifetime Loan Rate payable on the Loan.
"Model Home" means the Mortgaged Premises securing a Model Home Loan.
"Model Home Loan" means a mortgage loan that is (i) secured by a single
family (one- to four-family), attached or detached, residential property used as
a model home and (ii) pledged to the Trustee as an item of Collateral for a
Series of Bonds.
"Monthly Payment" means with respect to any Loan, the total monthly
payment due in the applicable month under the terms of the related Note or
Contract.
"Mortgage 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.
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"Pool Insurer" means any insurance company or other person that
provides a Pool Insurance Policy for a Series.
"Pool Insurance" means insurance covering (subject to certain
limitations) losses, to the extent not covered by a Primary Mortgage Insurance
Policy, incurred with respect to a Loan by reason of the default of the related
Borrower.
"Pool Insurance Policy" mean an Insurance Policy that provides Pool
Insurance.
"Premium Bonds" means a Class comprised of Bonds that have a purchase
price greater than the related Parity Price.
"Prepayment Period" means with respect to a Loan, as to any Payment
Date, the time period used to identify prepayments or other unscheduled payments
of principal or interest received with respect to the Loan that will be used to
pay Bondholders on that Payment Date.
"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.
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"Remittance Date" means, the date specified in the related Servicing
Agreement by which the funds in the Custodial P&I Account must be remitted to
the Master Servicer Custodial Account, which in no case will be later in any
month than the Master Servicer Remittance Date.
"Repo Disposition" means the receipt by the related Servicer in
connection with a Repo Property of Insurance Proceeds, Condemnation Awards and
other payments and recoveries that the Servicer recovers from the sale or other
final disposition thereof.
"Repo Property" means a Manufactured Home or Facilities (and any
related Real Property) acquired by a Servicer on behalf of the Trustee pursuant
to a repossession, Foreclosure or other similar proceeding in respect of a
related Loan.
"REO" or "REO Property" means Mortgaged Premises acquired by the
Servicer or Special Service on behalf of the 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
<PAGE>
(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:
(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.
<PAGE>
"T&I Advance" means an Advance by the Servicer or Special Servicer of
escrow amounts for tax and insurance payments with respect to any Loan subject
to a Delinquency.
"Title Insurance" means the insurance provided by a Title Insurance
Policy.
"Title Insurance Policy" means an American Land Title Association
(ALTA) mortgage loan title policy form 1970, or other form of Title Insurance
Policy acceptable to the Issuer, including all riders and endorsements thereto.
"Trustee" means the bank, trust company or other fiduciary named in the
Prospectus Supplement for a Series of Bonds as the trustee under the Indenture
pursuant to which the Series is issued.
"Trust Estate" means, with respect to each Series of Bonds, all right,
title and interest pledged or assigned to the Trustee for the Series pursuant to
the Series Supplement in and to benefits occurring to the Issuer from the
Collateral and from any debt service fund, Reserve Fund, Insurance Policy,
Servicing Agreement, Master Servicing Agreement, Additional Collateral and other
credit enhancement that constitutes security for the Series of Bonds.
"UCC" means the Uniform Commercial Code.
"UCC State" means a state in which a lien on a Manufactured Home is
"perfected," pursuant to the provisions of the applicable UCC, by filing UCC-3
financing statements or other appropriate transfer instruments with all
appropriate UCC filing offices.
"Underwriter" means any firm that underwrites a Series of Bonds.
"Unpaid Principal Balance" means with respect to any Loan, the
outstanding principal balance payable by the Borrower under the terms of the
Note or Contract.
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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
their cover pages.
---------------------
TABLE OF CONTENTS
Page
Prospectus Supplement
Terms of the Bonds and the Collateral................
Risk Factors.........................................
Description of the Bonds.............................
Security for the Bonds...............................
Servicing of the Collateral..........................
Maturity and Prepayment Considerations...............
Yield Considerations.................................
Certain Federal Income Tax Consequences.............
Use of Proceeds......................................
Underwriting.........................................
Legal Matters........................................
Ratings..............................................
ERISA Considerations.................................
Page
Prospectus
Prospectus Summary...................................
Risk Factors.........................................
Description of the Bonds.............................
Maturity and Prepayment Considerations...............
Yield Considerations.................................
Security for the Bonds...............................
Origination of the Collateral........................
Servicing of the Collateral..........................
The Indenture........................................
Certain Legal Aspects of the Collateral..............
MERIT................................................
Certain Federal Income Tax Consequences..............
State Tax Considerations.............................
ERISA Considerations.................................
Legal Investment.....................................
Use of Proceeds......................................
Plan of Distribution.................................
Legal Matters .......................................
Financial Information................................
Additional Information...............................
Incorporation of Certain Documents By Reference......
Reports to Bondholders...............................
Glossary.............................................
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 40 days after the date of the
prospectus supplement.
$-,---,---,---
(Approximate)
MERIT Securities
Corporation
Collateralized Bonds, Series __
PROSPECTUS SUPPLEMENT
______ __, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has duly caused this Amendment No. 1 to
Registration Statement No. 333-64385 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Henrico, Commonwealth
of Virginia, on July 19, 1999.
MERIT SECURITIES CORPORATION
By: Thomas H. Potts
/s/ THOMAS H. POTTS
----------------------
Thomas H. Potts
Chairman of the Board
and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Principal Executive Officer:
/s/THOMAS H. POTTS
- -----------------------
Thomas H. Potts
Chairman of the Board
and President July 19, 1999
Principal Financial and Accounting Officer:
/s/LYNN K. GEURIN
- ------------------------
Lynn K. Geurin
Treasurer and Chief
Financial Officer July 19, 1999
Majority of the Board of Directors:
Thomas H. Potts, J. Thomas O'Brien, Jr.,
John C. Stevenson, Jr.
/s/THOMAS H. POTTS
- -------------------------
Thomas H. Potts July 19, 1999
/s/J. THOMAS O'BRIEN, JR.
- -------------------------
J.Thomas O'Brien, Jr. July 19, 1999
/s/JOHN C. STEVENSON, JR.
- -------------------------
John C. Stevenson, Jr. July 19, 1999
