<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 7, 1996)
- --------------------------------------------------------------------------------
LOGO
$100,000,000
EQUIVANTAGE HOME EQUITY LOAN TRUST 1996-2
$38,868,000 6.725% CLASS A-1 FIXED RATE CERTIFICATES
$30,620,000 7.075% CLASS A-2 FIXED RATE CERTIFICATES
$15,083,000 7.475% CLASS A-3 FIXED RATE CERTIFICATES
$15,429,000 8.050% CLASS A-4 FIXED RATE CERTIFICATES*
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1996-2
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE, INC.
SERVICER
------------------------
The Home Equity Loan Asset-Backed Certificates, Series 1996-2 (the
"Certificates") will consist of the Class A-1 Fixed Rate Certificates ("Class
A-1 Certificates"), Class A-2 Fixed Rate Certificates ("Class A-2
Certificates"), Class A-3 Fixed Rate Certificates ("Class A-3 Certificates") and
Class A-4 Fixed Rate Certificates ("Class A-4 Certificates", together with the
Class A-1 Certificates, the Class A-2 Certificates and the Class A-3
Certificates, the "Class A Certificates") and one or more classes of subordinate
certificates (collectively, the "Subordinate Certificates"). Only the Class A
Certificates are offered hereby.
The Certificates will represent undivided ownership interests in a pool of
closed-end mortgage loans (the "Mortgage Loans") held by the EquiVantage Home
Equity Loan Trust 1996-2 (the "Trust"). The Trust will be created pursuant to a
Pooling and Servicing Agreement ("the Pooling and Servicing Agreement") among
EquiVantage Acceptance Corp., in its capacity as the sponsor (the "Sponsor") of
the Trust, EquiVantage Inc., in its capacity as servicer (the "Servicer") of the
Mortgage Loans, and Norwest Bank Minnesota, National Association, as
(cover continued on next page)
FOR A DISCUSSION OF CERTAIN RISK FACTORS REGARDING AN INVESTMENT IN THE CLASS A
CERTIFICATES, SEE "RISK FACTORS" HEREIN AND IN THE ACCOMPANYING PROSPECTUS.
[LOGO]
------------------------
The Underwriter has agreed to purchase the Class A-1 Certificates from the
Sponsor at 99.96875% of the principal amount thereof, the Class A-2 Certificates
from the Sponsor at 99.953125% of the principal amount thereof, the Class A-3
Certificates from the Sponsor at 99.984375% at the principal amount thereof and
the Class A-4 Certificates from the Sponsor at 99.90625% of the principal amount
thereof (representing $99,956,679.22 aggregate proceeds to the Sponsor, before
deducting expenses payable by the Sponsor estimated at $500,000), plus accrued
interest, if any from May 1, 1996, for the Class A Certificates, subject to the
terms and conditions set forth in the Underwriting Agreement. See "Underwriting"
in this Prospectus Supplement.
The Underwriters propose to offer the Class A Certificates from time to time for
sale in negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. For further information with respect to the plan of
distribution and any discounts, commissions or profits on resale that may be
deemed underwriting discounts or commissions, see "Underwriting" in this
Prospectus Supplement.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The Class A Certificates are offered by the Underwriters when, as and if issued
by the Trust, delivered to and accepted by the Underwriters and subject to its
right to reject orders in whole or in part. It is expected that the delivery of
the Class A Certificates in book-entry form will be made through the facilities
of The Depository Trust Company, CEDEL S.A. and Euroclear on or about May 23,
1996 against payment in immediately available funds.
- --------------------------
* The Class A-4 Pass-Through Rate will be subject to certain limitations as
described herein.
PRUDENTIAL SECURITIES INCORPORATED
CS FIRST BOSTON
- ------------------------------------------------------------
The date of this Prospectus Supplement is May 16, 1996
<PAGE>
(cover continued from previous page)
Trustee. On or prior to the Closing Date the Sponsor will acquire the Mortgage
Loans from the Originators, as described herein. The obligations of the Sponsor
and of the Servicer with respect to the Certificates will be limited to their
respective contractual obligations under the Pooling and Servicing Agreement.
The Mortgage Loans will consist of fixed-rate closed-end mortgage loans secured
by first or junior mortgages or deeds of trust (the "Mortgages") on one-to-four
family residential properties (the "Mortgaged Properties") to be conveyed to the
Trust on the Closing Date.
The Class A Certificates initially will be issued in book-entry form. Persons
acquiring beneficial ownership interests in such Class A Certificates
("Beneficial Owners") may elect to hold their interests through The Depository
Trust Company ("DTC") in the United States, or Centrale de Livraison de Valeurs
Mobiliers, S.A. ("CEDEL") or the Euroclear System ("Euroclear"), in Europe. The
Class A Certificates will be offered in Europe and the United States of America.
The Sponsor has obtained a financial guaranty insurance policy (the "Certificate
Insurance Policy") from Financial Guaranty Insurance Company (the "Certificate
Insurer") which will unconditionally and irrevocably guarantee payment of
amounts due to the Owners of Class A Certificates ("Owners") to the extent
described herein.
Distributions of principal and interest payable on the Class A Certificates will
be made on the 25th day of each month or if the 25th day is not a Business Day,
the first Business Day thereafter (each, a "Payment Date"), beginning June 25,
1996.
An election will be made to treat the Trust as one or more REMICs for federal
income tax purposes. As described more fully herein, each Class of Class A
Certificates will constitute a "regular interest" in a REMIC. See "Certain
Federal Income Tax Consequences" in the Prospectus.
Prior to their issuance there has been no market for the Class A Certificates
nor can there be any assurance that one will develop, or if it does develop,
that it will provide the Owners of the Class A Certificates with liquidity or
will continue for the life of the Class A Certificates. Prudential Securities
Incorporated and CS First Boston (the "Underwriters") intend, but are not
obligated, to make a market in the Class A Certificates.
------------------------
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF EQUIVANTAGE ACCEPTANCE CORP.,
EQUIVANTAGE INC. OR ANY ORIGINATOR. NEITHER THE CLASS A CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING
TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS AND A PROSPECTUS
SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), with the Securities and Exchange Commission
(the "Commission") on behalf of the Trust with respect to the Class A
Certificates offered pursuant to the Prospectus dated May 7, 1996 and this
Prospectus Supplement. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, 13th Floor, New York, New York 10048; and at The
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
REPORTS TO THE CERTIFICATEHOLDERS
So long as the Class A Certificates are in book-entry form, monthly and
annual reports concerning the Certificates and the Trust will be sent by the
Trustee to Cede & Co., as the nominee of DTC and as registered holder of the
Class A Certificates pursuant to the Pooling and Servicing Agreement. DTC will
supply such reports to Beneficial Owners in accordance with its procedures. See
"Risk Factors," "Description of the Securities -- Form of Securities" and
" -- Reports to Securityholders" in the Prospectus. To the extent required by
the Securities Exchange Act of 1934, as amended, the Trust will provide
financial information to the Owners of any Class A Certificate which has been
examined and reported upon, with an opinion expressed by, an independent public
accountant; to the extent not so required, such financial information will be
unaudited. The Sponsor has determined that the financial statements of no
entity other than the Certificate Insurer are material to the offering made
hereby. The Trust will be formed to own the Mortgage Loans and to issue the
Certificates. The Trust will have no assets or obligations prior to issuance of
the Certificates and will engage in no activities other than those described
herein. Accordingly, no financial statements with respect to the Trust are
included in this Prospectus Supplement.
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. REFERENCE IS MADE TO THE INDEX OF PRINCIPAL DEFINED
TERMS FOR THE LOCATION IN THE PROSPECTUS OF THE DEFINITIONS OF CERTAIN
CAPITALIZED TERMS.
Issuer EquiVantage Home Equity Loan Trust 1996-2
Securities Offered Class A-1 Fixed Rate Certificates ("Class A-1
Certificates"), Class A-2 Fixed Rate Certificates
("Class A-2 Certificates"), Class A-3 Fixed Rate
Certificates ("Class A-3 Certificates") and Class
A-4 Fixed Rate Certificates ("Class A-4
Certificates", together with the Class A-1
Certificates, Class A-2 Certificates and the Class
A-3 Certificates, the "Class A Certificates").
Sponsor EquiVantage Acceptance Corp., a Delaware
corporation. The Sponsor's principal executive
offices are located at 13111 Northwest Freeway,
Suite 302, Houston, Texas 77040, and its phone
number is (713) 895-1957.
Servicer EquiVantage Inc., a Delaware corporation
("EquiVantage Inc." or "EquiVantage"). The
Servicer's principal executive offices are located
at 13111 Northwest Freeway, Suite 300, Houston,
Texas 77040.
Sub-Servicer Transworld Mortgage Corporation, a Texas
corporation. The Sub-Servicer's principal
executive offices are located at 13111 Northwest
Freeway, Suite 600, Houston, Texas 77040.
Originators The Mortgage Loans to be acquired by the Trust
from the Sponsor will be acquired by the Sponsor
from the Servicer, which has heretofore originated
the Mortgage Loans or acquired the Mortgage Loans
from certain affiliated originators (the
"Affiliated Originators") and one or more
unaffiliated originators (the "Unaffiliated
Originators") (the Affiliated Originators and the
Unaffiliated Originators, herein collectively
called the "Originators"). The Affiliated
Originators include Transworld Mortgage
Corporation. See "The Mortgage Loan Program" in
the Prospectus.
Cut-Off Date The close of business on May 1, 1996.
Closing Date On or about May 23, 1996.
The Certificates The Home Equity Loan Asset-Backed Certificates,
Series 1996-2 (the "Certificates") will consist of
the Class A Certificates and one or more classes
of subordinate certificates (the "Subordinate
Certificates"). The Certificates will be issued
pursuant to a pooling and servicing agreement (the
"Pooling and Servicing Agreement") to be
S-4
<PAGE>
dated as of May 1, 1996 among the Sponsor, the
Servicer and Norwest Bank Minnesota, National
Association, as Trustee (the "Trustee"). Only the
Class A Certificates are offered hereby.
For purposes of receiving distributions with
respect to principal, the Class A Certificates
have been divided into four "sequential pay"
classes. On each Payment Date until the Class A-1
Principal Balance has been reduced to zero, the
Owners of the Class A-1 Certificates will be
entitled to receive 100% of the distribution with
respect to the Class A Principal Distribution
Amount for all Classes of Class A Certificates on
such Payment Date. After the Class A-1
Certificate Principal Balance has been reduced to
zero, the Owners of the Class A-2 Certificates
will be entitled to receive 100% of such
distributions with respect to principal until the
Class A-2 Certificate Principal Balance has been
reduced to zero. After the Class A-2 Certificate
Principal Balance has been reduced to zero, the
Owners of the Class A-3 Certificates will be
entitled to receive 100% of such distributions
with respect to principal until the Class A-3
Certificate Principal Balance has been reduced to
zero. After the Class A-3 Certificate Principal
Balance has been reduced to zero, the Owners of
the Class A-4 Certificates will be entitled to
receive 100% of such distributions with respect to
principal until the Class A-4 Certificate
Principal Balance has been reduced to zero.
The Class A Certificates will represent undivided
ownership interests in a pool of closed-end fixed-
rate, first and junior lien Mortgage Loans (the
"Mortgage Pool") with a maximum remaining term to
maturity of 30 years.
The last scheduled Payment Date for each of the
Class A Certificates is as follows: Class A-1
Certificates, April 25, 2011, the Class A-2
Certificates, June 25, 2015, the Class A-3
Certificates, January 25, 2022, and the Class A-4
Certificates, June 25, 2027. The final scheduled
Payment Date for the Class A-4 Certificates is the
Payment Date in the calendar month thirteen months
after the month in which the final payment on the
Mortgage Loan with the latest maturity occurs. It
is expected that the actual last Payment Date for
each class of Class A Certificates will occur
significantly earlier than such scheduled Payment
Dates; see "Prepayment and Yield Considerations."
The Class A Certificates are issuable in original
principal amounts of a minimum of $1,000, except
that one certificate for each Class of Class A
Certificates may be issued in a lesser amount.
S-5
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The Certificate Insurer does not directly or
indirectly guarantee any specified rate of
prepayments; see "Risk Factors."
The Mortgage Loans Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by the aggregate principal balance of the
Mortgage Pool as of the close of business on April
30, 1996 (such date, the "Statistic Calculation
Date"). The aggregate principal balance of the
Mortgage Loans as of the Statistic Calculation
Date is $95,972,352.53. The Sponsor expects that
the actual pool as of the Closing Date will
represent approximately $100,000,000 in Mortgage
Loans. The Additional Mortgage Loans will
represent Mortgage Loans acquired or to be
acquired by the Sponsor prior to the Closing Date.
In addition, with respect to the pool as of the
Statistic Calculation Date as to which statistical
information is presented herein, some amortization
of the pool will occur prior to the Closing Date.
In addition, certain loans included in the pool as
of the Statistic Calculation Date may prepay in
full, or may be determined not to meet the
eligibility requirements for the final pool, and
may not be included in the final pool As a result
of the foregoing, the statistical distribution of
characteristics as of the Closing Date for the
final Mortgage Loan pool will vary somewhat from
the statistical distribution of such
characteristics as of the Statistic Calculation
Date as presented in this Prospectus Supplement,
although such variance will not be material. In
the event that the Sponsor does not, as of the
Closing Date, have the full amount of Mortgage
Loans which Sponsor expects to sell to the Trust
on such date (I.E., $100,000,000) the Sponsor will
reduce the size of the offering (which will be a
PRO RATA reduction in each Class of Class A
Certificates); the Sponsor does not expect that
the original principal amount of any Class will
increase or decrease by more than 5% as a result
of such non-delivery. Even if the full expected
amount of Mortgage Loans is delivered, certain
adjustments (plus or minus 5%) may occur between
the Class sizes.
92.27% of the Mortgage Loans are home equity
loans, I.E., loans used (x) to refinance an
existing mortgage loan on more favorable terms,
(y) to consolidate debt, or (z) to obtain cash
proceeds by borrowing against the Mortgagor's
equity in the related Mortgaged Property; the
remaining Mortgage Loans are "purchase money"
loans, the proceeds of which were used to purchase
the related Mortgaged Property. The Mortgage
Loans to be sold to the Trust by the Sponsor
consisted, as of the Statistic Calculation Date,
of 1,535 Mortgages and the related Notes on
single-family homes, including investment
properties (which may be condominiums, townhouses,
manufactured housing units or homes in one-to-four
family residences), located in 23
S-6
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states. The Mortgage Loans are secured by liens
on real property of which approximately 98.27% by
principal balance are first liens and 1.73% are
secured by junior liens. The Mortgage Loans in
the Trust are all closed-end mortgage loans in
that the mortgagee is not required to make future
advances thereunder. All of the Mortgage Loans
are Actuarial Loans, as defined herein under "The
Mortgage Pool -- Interest Payments on the Mortgage
Loans."
As of the Statistic Calculation Date, the Mortgage
Loans had an aggregate principal balance of
$95,972,352.53.
The Mortgage Loans are not insured by primary
mortgage insurance policies and there is no pool
insurance insuring the Mortgage Loans; however,
certain distributions due to the Owners of the
Class A Certificates are insured by the
Certificate Insurer pursuant to the Certificate
Insurance Policy. See "Credit Enhancement" in
this Summary and "The Certificate Insurance Policy
and the Certificate Insurer" herein. The Mortgage
Loans are not guaranteed by the Sponsor, the
Servicer, any Originator or any of their
respective affiliates. The Mortgage Loans are
required to be serviced by the Servicer in
accordance with the terms of the Pooling and
Servicing Agreement and with reasonable care,
using that degree of skill and attention that the
Servicer exercises with respect to comparable
mortgage loans that it services for itself and
others. See "Description of the Securities --
Collection and Other Servicing Procedures" in the
Prospectus.
Original Class A-1 Certifi-
cate Principal Balance $38,868,000.
Original Class A-2 Certifi-
cate Principal Balance $30,620,000.
Original Class A-3 Certifi-
cate Principal Balance $15,083,000.
Original Class A-4 Certifi-
cate Principal Balance $15,429,000.
Class A-1 Pass-Through Rate 6.725% per annum.
Class A-2 Pass-Through Rate 7.075% per annum.
Class A-3 Pass-Through Rate 7.475% per annum.
Class A-4 Pass-Through Rate 8.050% per annum or as otherwise described under
"Description of the Certificates -- Class A-4
Pass-Through Rate" herein.
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<PAGE>
Distributions, Generally Distributions on the Certificates are required to
be made on the twenty-fifth day of each calendar
month, or if such day is not a Business Day, the
next succeeding Business Day (each, a "Payment
Date") commencing on June 25, 1996, to the Owners
of Record (see "Description of the Certificates --
General" and "Description of the Certificates --
Payment Dates and Distributions"). With respect
to any Payment Date, the "Owners of Record" of the
Class A Certificates shall be such Owners as of
the last day of the calendar month immediately
preceding the calendar month in which such Payment
Date occurs (or with respect to the first Payment
Date, such Owners as of the Closing Date), whether
or not such day is a Business Day.
A "Business Day" means any day that is not a
Saturday, Sunday or other day on which commercial
banking institutions in New York, Texas or the
city in which the corporate trust office of the
Trustee is located (initially, Minneapolis,
Minnesota) are authorized or obligated by law or
executive order to be closed.
Distributions of Interest For each Payment Date, the interest due with
respect to each of the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3 Certificates
and the Class A-4 Certificates will be the
interest which has accrued thereon at the Class A-
1 Pass-Through Rate, the Class A-2 Pass-Through
Rate, the Class A-3 Pass-Through Rate and the
Class A-4 Pass-Through Rate, respectively, during
the calendar month immediately preceding the
calendar month in which such Payment Date occurs.
Each period referred to in the prior sentence
relating to the accrual of interest is the
"Accrual Period" for the Class A Certificates.
All calculations of interest on the Class A
Certificates will be made on the basis of a
360-day year assumed to consist of twelve 30-day
months.
The Pooling and Servicing Agreement defines the
"Class A Interest Distribution Amount" for each
Class of Class A Certificates with respect to each
Payment Date as being the aggregate amount of
interest accrued on such Class of Class A
Certificates during the related Accrual Period at
the related Pass-Through Rate, together with any
unpaid interest shortfalls relating to such Class
from prior periods.
Distribution of Principal The Owners of each Class of the Class A
Certificates will be entitled to receive certain
monthly distributions of principal on each Payment
Date which generally reflect unscheduled
collections of principal (E.G., prepayments)
received during the related Remittance Period, and
scheduled collections of principal due and
collected during the related Remittance Period.
The "Remittance Period" with respect to any
Payment Date is the period commencing at the
opening of business on the second calendar day of
the month
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preceding the month in which such Payment Date
occurs, and ending at the close of business on the
first calendar day of the month in which such
Payment Date occurs. For purposes of receiving
distributions with respect to principal, the Class
A Certificates have been divided into four
"sequential pay" classes as described in the
second paragraph under "The Certificates" in this
Summary.
An amount equal to the amount of any loss on a
Liquidated Mortgage Loan (a "Realized Loss")
during a Remittance Period may or may not be
distributed to the Owners of each Class of Class A
Certificates on the Payment Date which immediately
follows the event of such loss. However, the
Owners of the Class A Certificates are entitled to
receive ultimate recovery of 100% of the Original
Certificate Principal Balance of the related Class
of Class A Certificates.
The subordination provisions of the Trust result
in a limited acceleration of principal payments to
the Owners of each Class of Class A Certificates.
Such subordination provisions are more fully
described under "Description of the Certificates
-- Overcollateralization Provisions." Such
subordination provisions also have the effect of
accelerating and shortening the weighted average
lives of the Class A Certificates; see "Prepayment
and Yield Considerations." In addition, the
following discussion makes use of a number of
technical defined terms which are defined under
"Description of the Certificates --
Overcollateralization Provisions."
The Pooling and Servicing Agreement defines the
"Class A Principal Distribution Amount" for each
Class of Class A Certificates with respect to each
Payment Date as being the lesser of:
(a) the Available Funds plus any Insured Payment
minus the Class A Interest Distribution
Amount, and
(b) (i) the sum, without duplication of:
(A) the portion of any Subordination Deficit
due from any prior period, together with
interest thereon;
(B) the principal actually collected by the
Servicer with respect to the Mortgage
Loans during the related Remittance
Period;
(C) the Loan Balance of each Mortgage Loan
that either was repurchased by the Sponsor
or an Originator or purchased by the
Servicer or any Sub-Servicer on the
related Remittance
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<PAGE>
Date, to the extent such Loan Balance is
actually received by the Trustee;
(D) any Substitution Amounts delivered by the
Sponsor or an Originator on the related
Remittance Date in connection with a
substitution of a Mortgage Loan, to the
extent such Substitution Amounts are
actually received by the Trustee;
(E) all Net Liquidation Proceeds actually
collected by the Servicer with respect to
the Mortgage Loans during the related
Remittance Period (to the extent such Net
Liquidation Proceeds relate to principal);
(F) the portion of any Subordination Deficit
for such Payment Date;
(G) the proceeds received by the Trustee from
any termination of the Mortgage Pool (to
the extent such proceeds relate to
principal);
(H) the portion of any Subordination Increase
Amount for such Payment Date;
minus
(ii) the portion of any Subordination
Reduction Amount to be applied for
such Payment Date.
The "Loan Balance" is the outstanding principal
balance of each Mortgage Loan on the Cut-Off Date,
less any principal collections or recoveries
relating to such Mortgage Loan included in
previous related Monthly Remittance Amounts.
"Net Liquidation Proceeds" means, with respect to
a Liquidated Mortgage Loan, any amounts (including
the proceeds of any insurance policy other than
the Certificate Insurance Policy) recovered by the
Servicer or any Sub-Servicer with respect to such
Liquidated Mortgage Loan, whether through
Trustee's sale, foreclosure sale or otherwise, net
of liquidation expenses incurred by the Servicer,
unreimbursed Delinquency Advances and certain
other related and unreimbursed Servicer advances.
The "Remittance Date" is any date, as set forth in
the Pooling and Servicing Agreement, on which the
Servicer is required to remit moneys on deposit in
the "Principal and Interest Account" to the
Trustee.
The "Substitution Amount" is the difference
between the Loan Balance of a (x) replaced
Mortgage Loan as of the
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<PAGE>
close of business on the first day of the calendar
month in which such Mortgage Loan is replaced over
(y) the difference between (i) the loan balance of
the replacement Mortgage Loan, as of the date the
Trust acquired it plus accrued and unpaid interest
over (ii) applicable servicing fees.
In no event will the Class A Principal
Distribution Amount for any Class of Class A
Certificates and Payment Date be (x) less than
zero or (y) greater than the then-outstanding
Class A Certificate Principal Balance of the
related Class of Class A Certificates.
With respect to any Class of Class A Certificates
and Payment Date, the sum of the related Class A
Interest Distribution Amount and the related
Class A Principal Distribution Amount with respect
to such Payment Date is the "Class A Required
Distribution Amount" for such Class and Payment
Date.
The actual amount distributed with respect to each
Class of Class A Certificates on any Payment Date
is the "Class A Distribution Amount" for such
Class and Payment Date.
With respect to any Payment Date, the sum of the
Class A Interest Distribution Amount for each
Class of Class A Certificates and the aggregate
amount of the Subordination Deficit, if any, for
each Class with respect to such Payment Date is
the "Insured Distribution Amount" for such Payment
Date.
A "Liquidated Mortgage Loan" is, in general, a
defaulted Mortgage Loan as to which the Servicer
has determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered
(exclusive of any possibility of a deficiency
judgment). Any Realized Loss may or may not be
recovered by the Owners of the related Class of
Class A Certificates on the Payment Date which
immediately follows the event of loss. However,
the Owners of the Class A Certificates are
entitled to receive ultimate recovery of 100% of
the Original Certificate Principal Balance of the
related Class of Class A Certificates.
Insured Payments paid by the Certificate Insurer
do not include Realized Losses until such time as
such aggregate, cumulative Realized Losses have
created a Subordination Deficit, nor do Insured
Payments cover the Servicer's failure to make
Delinquency Advances until such time as the
aggregate, cumulative amount of such unpaid
Delinquency Advances, when added to Realized
Losses, have created a Subordination Deficit.
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A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which (x)
the Class A Certificate Principal Balance, after
taking into account all distributions of principal
with respect to such Class to be made on such
Payment Date (except for any payment to be made as
to principal from the proceeds of the Certificate
Insurance Policy), exceeds (y) the aggregate
principal balances of the Mortgage Loans in the
Mortgage Pool as of the close of business on the
last day of the preceding Remittance Period.
Credit Enhancement The Credit Enhancement provided for the benefit of
the Owners of the Class A Certificates consists of
(x) the overcollateralization mechanics which
utilize the internal cash flows of the Trust and
(y) the Certificate Insurance Policy.
OVERCOLLATERALIZATION
The subordination provisions of the Trust result
in a limited acceleration of the Class A
Certificates relative to the amortization of the
Mortgage Loans in the early months of the
transaction. The accelerated amortization is
achieved by the application of certain excess
interest to the payment of Class A Certificate
principal. This acceleration feature creates
overcollateralization which results from the
excess of the aggregate principal balances of the
Mortgage Loans over the Class A Certificate
Principal Balance. Once the required level of
overcollateralization is reached, and subject to
the provisions described in the next paragraph,
the acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that,
subject to certain floors, caps and triggers, the
required level of overcollateralization may
increase or decrease over time. An increase would
result in a temporary period of accelerated
amortization of the Class A Certificates to
increase the actual level of overcollateralization
to its required level; a decrease would result in
a temporary period of decelerated amortization to
reduce the actual level of overcollateralization
to its required level.
See "Description of the Certificates --
Overcollateralization Provisions."
THE CERTIFICATE INSURANCE POLICY.
The Sponsor will obtain the Certificate Insurance
Policy (the "Certificate Insurance Policy") which
is noncancelable, in favor of the Trustee on
behalf of the Owners of the Class A Certificates.
On each Payment Date, the Certificate Insurer will
be required to make available to the Trustee the
S-12
<PAGE>
amount, if any, by which the Insured Distribution
Amount for each Class of Class A Certificates
exceeds the Available Funds as of such Payment
Date. The Certificate Insurance Policy does not
guarantee to the Owners of the Class A
Certificates any specified rate of Prepayments. A
payment by the Certificate Insurer under the
Certificate Insurance Policy is referred to herein
as an "Insured Payment." See "The Certificate
Insurance Policy and "The Certificate Insurer"
herein and "Description of Credit Enhancement" in
the Prospectus.
The Trustee or paying agent will (i) receive as
attorney-in-fact of each Owner of the Class A
Certificates, any Insured Payment from the
Certificate Insurer and (ii) disburse the same to
each Owner of the related Class A Certificates in
accordance with the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement
will provide that to the extent the Certificate
Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee or a
paying agent), to the Owners of any Class A
Certificates, the Certificate Insurer will be
subrogated to the rights of such Owners of such
Class A Certificates with respect to such Insured
Payments. The Certificate Insurer will receive
reimbursement for such Insured Payment, but only
from the sources and in the manner provided in the
Pooling and Servicing Agreement. Such subrogation
and reimbursement will have no effect on the
Certificate Insurer's obligations under the
Certificate Insurance Policy.
Certificate Insurer Financial Guaranty Insurance Company, a New York
stock insurance company, and any successor
thereto.
Delinquency Advances
and Compensating
Interest The Servicer will be obligated to make Delinquency
Advances to the extent that such Delinquency
Advances, in the Servicer's reasonable judgment,
are recoverable from the related Mortgage Loan.
Delinquency Advances may be funded by the Servicer
from subsequent collections on the Mortgage Loans
generally, and are reimbursable from (i) future
collections on the Mortgage Loan which gave rise
to the Delinquency Advance, (ii) Liquidation
Proceeds for such Mortgage Loan and (iii) from
certain excess moneys which would otherwise be
paid to the owners of the Subordinate Certificates
(the "Subordinate Certificate Owners").
In addition, the Servicer will also be required to
deposit, in the Principal and Interest Account
with respect to any full or partial Prepayment
received on a Mortgage Loan during the related
Remittance Period out of its own funds without any
right of reimbursement therefor, Compensating
Interest. The Servicer will not be required to
pay Compensating
S-13
<PAGE>
Interest with respect to any Remittance Period in
an amount in excess of the aggregate Base
Servicing Fee received by the Servicer for such
Remittance Period.
Book-Entry Registration of
the Class A Certificates The Class A Certificates will initially be issued
in book-entry form. Persons acquiring beneficial
ownership interests in such Class A Certificates
("Beneficial Owners") may elect to hold their
interests through The Depository Trust Company
("DTC"), in the United States, or Centrale de
Livraison de Valeurs Mobiliers, S.A. ("CEDEL") or
the Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the
case may be, will be in accordance with the usual
rules and operating procedures of the relevant
system. So long as the Class A Certificates are
Book-Entry Certificates (as defined herein), such
Class A Certificates will be evidenced by one or
more Class A Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC or
one of the relevant depositories (collectively,
the "European Depositories"). Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through CEDEL or Euroclear, on the other, will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust Company of
New York ("Morgan"), the relevant depositories of
CEDEL or Euroclear, respectively, and each a
participating member of DTC. The Class A
Certificates will initially be registered in the
name of Cede. The interests of the Owners of such
Class A Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a definitive
certificate representing such person's interest,
except in the event that Definitive Certificates
(as defined herein) are issued under the limited
circumstances described herein. All references in
this Prospectus Supplement to any Class A
Certificates reflect the rights of Beneficial
Owners only as such rights may be exercised
through DTC and its participating organizations
for so long as such Class A Certificates are held
by DTC. See "Description of the Class A
Certificates -- Book-Entry Registration of the
Class A Certificates" herein, and Annex I to this
Prospectus Supplement, and "Description of the
Certificates -- Book-Entry Registration" in the
Prospectus.
Monthly Servicing Fee EquiVantage Inc. will retain a Base Servicing Fee
per Mortgage Loan equal to 0.50% per annum (0.75%
per annum if the related Mortgage is in a junior
lien position), payable monthly at one-twelfth the
accrual rate. To the extent that EquiVantage Inc.
serves as Servicer with respect to Mortgage Loans,
if any, sub-serviced by Affiliated or Unaffiliated
Originators, if any, it may retain a portion of
such Base Servicing Fee with respect to such
Mortgage
S-14
<PAGE>
Loans, and any such Sub-Servicer will receive a
portion of such Base Servicing Fee as a Sub-
Servicing Fee with respect to such Mortgage Loans
(such amounts retained by the Servicer, including
any Base Servicing Fee, the "Servicing Fee").
Optional Termination The Owners of the Subordinated Certificates and
the Servicer, acting directly or through a
permitted designee, each will have the right to
purchase from the Trust all the Mortgage Loans
then held by the Trust, at a price at least equal
to par plus accrued interest, on any Remittance
Date on or after the Remittance Date on which the
then-outstanding aggregate Loan Balances of the
Mortgage Loans in the Trust has declined to 10% or
less of the aggregate principal balance of the
Mortgage Loans as of the Cut-Off Date. The first
such Remittance Date on which such option may be
exercised is the "Clean-Up Call Date." The right
of the Subordinate Certificate Owners so to
exercise such optional purchase right is superior
to such right of the Servicer; the Servicer's
right may only be exercised if the Subordinate
Certificate Owners decline to do so. In addition,
the Servicer has the option to purchase from the
Trust any Mortgage Loan which is in default. See
"The Pooling and Servicing Agreement -- Optional
Termination."
Ratings It is a condition of the original issuance of
the Class A Certificates that the Class A
Certificates receive ratings of AAA by
Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ("S&P"),
and Aaa by Moody's Investors Service, Inc.
("Moody's"). A security rating is not a
recommendation to buy, sell or hold
securities, and may be subject to revision or
withdrawal at any time by the assigning
entity. See "Prepayment and Yield
Considerations" and "Ratings" herein and
"Yield Considerations" in the Prospectus.
Federal Tax Aspects For U.S. Federal income tax purposes, an election
will be made to treat the Trust as one or more
REMICs. Each Class of Class A Certificates will
be designated as a "regular interest" in a REMIC
and each Class A Certificate will be treated as a
debt instrument of the Trust for federal income
tax purposes. One of the classes of Subordinate
Certificates will be designated as the "residual
interest" with respect to each REMIC election made
by the Trust. Any other classes of Subordinate
Certificates which may be issued will be
designated as "regular interests." See "Certain
Federal Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations As described under "ERISA Considerations" herein,
the Class A Certificates may be purchased by
employee benefit plans that are subject to ERISA,
as amended, provided that
S-15
<PAGE>
certain conditions are satisfied. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment
Considerations Although upon their initial issuance the Class A
Certificates are expected to be rated AAA by S&P
and Aaa by Moody's, the Class A Certificates will
not constitute "mortgage related securities" for
purposes of SMMEA because the Mortgage Pool
includes junior lien mortgages. Accordingly, many
institutions with legal authority to invest in
comparably rated securities based on first
mortgage loans may not be legally authorized to
invest in the Class A Certificates.
Risk Factors For a discussion of certain factors that should be
considered by prospective investors in the Class A
Certificates, see "Risk Factors" herein and in the
Prospectus.
Certain Legal Matters Certain legal matters relating to the validity of
the issuance of the Certificates will be passed
upon by Dewey Ballantine, New York, New York.
S-16
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Class A Certificates.
RISK OF HIGHER DEFAULT RATES FOR MORTGAGE LOANS WITH BALLOON PAYMENTS.
26.85% of the aggregate principal balance of the Mortgage Loans as of the
Statistic Calculation Date are Balloon Loans. The risk of default for Balloon
Loans may be lower for Loans with a longer term to maturity. All of such
Balloon Loans have Balloon Payments due 15 years after the origination date of
the Balloon Loan. See "Risk Factors -- Risk of Losses Associated with Balloon
Loans" in the Prospectus.
NATURE OF SECURITY. The total amount of a loan generally includes
origination fees, credit life insurance premium, if any, prepaid interest and
other closing costs.
The "Loan-to-Value Ratio" or "LTV" of a Mortgage Loan at any given time is,
with respect to any first lien refinance Mortgage Loans, the percentage equal to
the original balance of the related Mortgage Loan divided by the appraised value
of the related Mortgaged Property (which may be subject to a downward adjustment
by the underwriter). With respect to any Junior Lien Loans, the Combined-Loan-
to-Value Ratio ("CLTV") is the percentage determined by dividing (x) the sum of
the original principal balance of such Mortgage Loan plus the then current
principal balance of all mortgage loans secured by liens on the related
Mortgaged Property having priorities senior to that of the lien which secures
such Mortgage Loan, if any, by (y) the value of the related Mortgaged Property,
based upon the lesser of the appraisal (which may be subject to a downward
adjustment by the underwriter) or purchase price valuation made at the time of
origination of the Mortgage Loan (such value, the "Property Value"). In the
case of a first lien purchase money Mortgage Loan, the lesser of (a) the
appraised value (which may be subject to a downward adjustment by the
underwriter) or (b) the purchase price generally is used to establish the
Property Value. The Sponsor's underwriting guidelines generally provide for a
maximum LTV at origination of 90% for owner-occupied properties and a maximum
LTV at origination for non-owner occupied homes of 80%.
Information is provided under "The Mortgage Pool -- General" with respect
to the LTV's and CLTV's of the Mortgage Loans, as of the Statistic Calculation
Date. As discussed in the Prospectus under "Risk Factors," the value of the
underlying Mortgaged Properties could have been adversely affected by a number
of factors since the respective dates of origination. As a result, there can be
no assurance that the LTV's or CLTV's of the Mortgage Loans, determined as of a
date subsequent to the origination date, will be the same or lower than the
LTV's or CLTV's for the Mortgage Loans, determined as of the origination date.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delay could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of such proceeds by the Trust could occur. Further, the Servicer will
be entitled to deduct from liquidation proceeds received in respect of a fully
liquidated Mortgage Loan all expenses incurred in attempting to recover amounts
due on such Mortgage Loan and not yet repaid, including payments to senior
mortgagees, if any, legal fees, real estate taxes, interest advances and
maintenance and preservation expenses, thereby reducing collections, if any.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the smaller mortgage loan
than would be the case with a larger loan.
Investor-owned properties represent (based solely upon statements made by
the borrowers at the time of origination of the related Mortgage Loan), as a
percentage of the aggregate principal balance of the Mortgage Loans as of the
Statistic Calculation Date, approximately 2.30% of the Mortgage Loans. It is
possible that the
S-17
<PAGE>
rate of delinquencies, foreclosures and losses on mortgage loans secured by
non-owner occupied properties could be higher than for loans secured by the
borrower's residence.
GEOGRAPHIC CONCENTRATION OF MORTGAGE LOANS. Approximately 57.68% of the
aggregate Loan Balances represent Mortgage Loans relating to Mortgaged
Properties located in five states: Ohio, 17.36%; Tennessee, 14.90%; Michigan,
10.29%; Indiana, 7.59%; and North Carolina, 7.54%.
SPONSOR'S MORTGAGE LOAN PROGRAM
The Mortgage Loan pools include loans which were either originated directly
by the Affiliated Originators or purchased by the Affiliated Originators from
others on a loan-by-loan basis and in either case acquired by the Sponsor. The
Sponsor also acquires loans from Unaffiliated Originators in loan-by-loan
acquisitions or in bulk acquisitions of loan portfolios. Such loans are
originated by Unaffiliated Originators either directly or purchased by the
Unaffiliated Originators from others.
Mortgage Loans acquired by the Sponsor in loan-by-loan acquisitions or in
bulk acquisitions from Unaffiliated Originators may have been originated
pursuant to the Sponsor's underwriting guidelines or pursuant to the applicable
guidelines of such Unaffiliated Originators and re-underwritten by the Sponsor
or its designee, pursuant to the Sponsor's underwriting guidelines, and
purchased by the Sponsor. Mortgage Loans not acquired by the Sponsor were
either originated directly or indirectly by Affiliated Originators pursuant to
the Sponsor's underwriting guidelines.
DELINQUENCIES
SPONSOR'S PORTFOLIO. The following table sets forth information relating
to the delinquency and foreclosure experience of the Sub-Servicer for its
servicing portfolio of loans originated or acquired by the Sponsor (the
"Sponsor's Portfolio") for the periods indicated. In addition to the Sponsor's
Portfolio, the Sub-Servicer serviced as of April 30, 1996 approximately 72,547
mortgage loans with an aggregate principal balance as of such date of
approximately $2.8 billion; such loans were not originated or acquired pursuant
to the Sponsor's underwriting guidelines and are being serviced for third
parties, including FNMA, FHLMC and GNMA as well as private investors, on a
contract servicing basis (the "Third-Party Servicing Portfolio"). No loans in
the Third-Party Servicing Portfolio are included in the table relating to the
Sponsor's Portfolio set forth below.
DELINQUENCY EXPERIENCE ON THE SPONSOR'S
PORTFOLIO OF MORTGAGE LOANS(1)
AS OF
APRIL 30, 1996
--------------
Number of mortgage loans . . . . . . . . . . . . . . 4,551
Dollar amount of mortgage loans. . . . . . . . . . . $ 259,515,584
DELINQUENCY PERIOD
30-59 Days
% of number of loans(2). . . . . . . . . . . . . . 1.10%
% of dollar amount of loans(3) . . . . . . . . . . 0.91%
60-89 days
% of number of loans(2). . . . . . . . . . . . . . 0.29%
% of dollar amount of loans(3) . . . . . . . . . . 0.23%
90 days and over
% of number of loans(2). . . . . . . . . . . . . . 1.56%
% of dollar amount of loans(3) . . . . . . . . . . 1.95%
Foreclosed Properties
% of number of loans(2). . . . . . . . . . . . . . 0.37%
% of dollar amount of loans(3) . . . . . . . . . . 0.27%
S-18
<PAGE>
(1) The mortgage loans comprising the Sponsor's Portfolio were originated
beginning in August 1993 and acquired by Sponsor beginning in May 1994.
(2) The number of delinquent or foreclosed mortgage loans as a percentage of
the total "Number of mortgage loans" as of the dated indicated. For
purposes of this table, a loan is considered delinquent if a payment is not
made on the same day in the month following the due date. For example, a
loan with an unpaid May 1 installment would be considered delinquent if the
payment was not received by the close of business on June 1; such loan
would be shown as current in the May delinquency report and as 30 days'
delinquent in the June delinquency report.
(3) The dollar amount of delinquent or foreclosed mortgage loans as a
percentage of the total "Dollar amount of mortgage loans" as of the date
indicated.
The Sponsor's net losses on mortgage loans in 1995 were .02% of the
Sponsor's average portfolio unpaid principal balance of $158,333,635. The
Sponsor had no mortgage loan losses prior to 1995.
While the above delinquency and loan loss experience represents the recent
experience of the Sponsor's Portfolio, there can be no assurance that the future
delinquency and loan loss experience on the Mortgage Loans included in the Pool
will be similar. The Sponsor can neither quantify the impact of any recent
property value declines on the Mortgage Loans nor predict whether, to what
extent or how long such declines may continue. In a period of such decline, the
rates of delinquencies, foreclosures and losses on the Mortgage Loans could be
higher than those heretofore experienced in the mortgage lending industry in
general. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses.
The Originators will represent that not more than 2% of the Mortgage Loans
(by aggregate principal balance as of the Statistic Calculation Date) were
originated pursuant to a "no-income verification" program.
THE MORTGAGE POOL
GENERAL
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate principal balance of the related
Mortgage Loans as of the Statistic Calculation Date.
92.27% of the Mortgage Loans are home equity loans, i.e., loans used (x) to
refinance an existing mortgage loan on more favorable terms, (y) to consolidate
debt, or (z) to obtain cash proceeds by borrowing against the Mortgagor's equity
in the related Mortgaged Property; the remaining Mortgage Loans are "purchase
money" loans, the proceeds of which were used to purchase the related Mortgaged
Property.
The Mortgage Loans to be sold by the Sponsor to the Trust consisted, as of
the Statistic Calculation Date, of 1,535 loans evidenced by promissory notes
(the "Notes") secured by Mortgages on the Mortgaged Properties, which are
located in 23 states. The Mortgaged Properties securing the Mortgage Loans
consist primarily of single-family residences (which may be detached, a rowhouse
or townhouse, part of a two- to four-family dwelling, a condominium unit or a
unit in a planned unit development ("PUD")). The Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) and non-owner occupied
investment properties. The Mortgage Loans consist of 98.27% of loans secured by
first lien mortgages on the related Mortgaged Properties and 1.73% of loans
secured by junior liens on the related Mortgaged Properties.
The Mortgage Loans were required to satisfy the following criteria as of
the Statistic Calculation Date: had remaining terms to maturity of no greater
than 30 years and were not 30 or more days delinquent (except that certain
Mortgage Loans, representing in the aggregate not in excess of 0.13% of the
aggregate principal balance of all Mortgage Loans as of the Statistic
Calculation Date were 30-59 days delinquent).
S-19
<PAGE>
The LTV's or CLTV's described herein were calculated based upon the
Property Values of the related Mortgaged Properties at the time of origination.
No assurance can be given that such Property Values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the Property Values decline such that the
outstanding balances of the Mortgage Loans, together with the outstanding
balances of any Senior Liens, become equal to or greater than the then current
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those heretofore experienced by the
Servicer, as set forth above under "The Portfolio of Mortgage Loans," and in the
mortgage lending industry.
DIFFERENCE BETWEEN STATISTIC CALCULATION DATE AND CLOSING DATE POOL.
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool as of April 30, 1996
(such date, the "Statistic Calculation Date"). This pool aggregated
$95,972,352.53 as of the Statistic Calculation Date. The Sponsor expects that
the actual pool as of the Closing Date will represent approximately $100,000,000
in Mortgage Loans. The additional Mortgage Loans will represent Mortgage Loans
acquired or to be acquired by the Sponsor on or prior to the Closing Date. In
addition, with respect to the pool as of the Statistic Calculation Date as to
which statistical information is presented herein, some amortization of the pool
will occur prior to the Closing Date. Moreover, certain loans included in the
pool as of the Statistic Calculation Date may prepay in full, or may be
determined not to meet the eligibility requirements for the final pool, and may
not be included in the final pool. As a result of the foregoing, the
statistical distribution of characteristics as of the Closing Date for the final
Mortgage Loan pool will vary somewhat from the statistical distribution of such
characteristics as of the Statistic Calculation Date as presented in this
Prospectus Supplement, although such variance will not be material. In the
event that the Sponsor does not, as of the Closing Date, have the full amount of
Mortgage Loans which the Sponsor expects to sell to the Trust on such date
(I.E., $100,000,000) the Sponsor will reduce the size of the offering which will
be a PRO RATA reduction in each Class of Class A Certificates). Unless
otherwise noted, all statistical percentages in this Prospectus Supplement are
measured by the aggregate principal balance of the related Mortgage Loan pool as
of the Statistic Calculation Date; the Sponsor doe not expect that the original
principal amount of any class will increase or decrease by more than 5% as a
result of such non-delivery. Even if the full expected amount of Mortgage Loans
is delivered, certain adjustments (plus or minus 5%) may occur between the class
sizes.
The Mortgage Loans consist of 1,535 loans under which the related Mortgaged
Properties are located in 23 states, as set forth herein. As of the Statistic
Calculation Date, the Mortgage Loans had an aggregate principal balance of
$95,972,352.53, the minimum principal balance of any of the Mortgage Loans was
$9,959.51, the maximum principal balance thereof was $339,864.89 and the average
principal balance of the Mortgage Loans was $62,522.71. As of the Statistic
Calculation Date, Mortgage Rates on the Mortgage Loans ranged from 7.99% to
14.50% per annum, and the weighted average Mortgage Rate of the Mortgage Loans
was 10.43% per annum. As of the Statistic Calculation Date, the original term
to stated maturity of the Mortgage Loans ranged from 60 months to 360 months,
the remaining term to stated maturity ranged from 59 months to 360 months, the
weighted average original term to stated maturity was 260.71 months, the
weighted average remaining term to stated maturity was 259.99 months, the
weighted average seasoning was 0.71 months and the weighted average CLTV was
77.38%. No Mortgage Loan had a stated maturity later than May 1, 2026. 73.15%
of the aggregate principal balance of the Mortgage Loans as of the Statistic
Calculation Date require monthly payments of principal that will fully amortize
the Mortgage Loans by their respective maturity dates, and 26.85% of the
aggregate principal balance of the Mortgage Loans are Balloon Loans.
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<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
STATE MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ----- -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Arizona 1 $ 32,425.08 0.03%
Colorado 1 126,360.05 0.13
Florida 88 5,509,764.18 5.74
Georgia 108 6,581,755.41 6.86
Idaho 4 182,100.00 0.19
Illinois 73 5,973,921.53 6.22
Indiana 145 7,287,042.50 7.59
Iowa 3 65,055.92 0.07
Kentucky 46 2,285,039.85 2.38
Louisiana 87 3,510,533.02 3.66
Maryland 57 5,613,414.94 5.85
Michigan 147 9,876,180.76 10.29
Missouri 1 46,279.59 0.05
Mississippi 39 1,895,864.21 1.98
North Carolina 112 7,232,637.66 7.54
Ohio 283 16,661,238.80 17.36
Oregon 2 198,600.00 0.21
South Carolina 64 3,181,739.08 3.32
Tennessee 213 14,301,316.43 14.90
Texas 1 42,000.00 0.04
Virginia 1 10,856.33 0.01
Washington 57 5,150,227.19 5.37
Wisconsin 2 208,000.00 0.22
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
S-21
<PAGE>
DISTRIBUTION OF CLTV'S*
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
CLTV RATIOS MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ----------- -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
15.01 to 20.00 . . . 1 $25,000.00 0.03%
20.01 to 25.00 . . . 4 94,127.07 0.10
25.01 to 30.00 . . . 6 208,131.25 0.22
30.01 to 35.00 . . . 6 123,442.91 0.13
35.01 to 40.00 . . . 12 295,628.34 0.31
40.01 to 45.00 . . . 15 656,655.35 0.68
45.01 to 50.00 . . . 31 1,261,938.96 1.31
50.01 to 55.00 . . . 19 659,009.31 0.69
55.01 to 60.00 . . . 45 2,005,446.34 2.09
60.01 to 65.00 . . . 83 3,665,238.47 3.82
65.01 to 70.00 . . . 140 6,899,893.28 7.19
70.01 to 75.00 . . . 249 14,162,645.45 14.76
75.01 to 80.00 . . . 526 34,387,709.04 35.83
80.01 to 85.00 . . . 318 24,564,336.11 25.60
85.01 to 90.00 . . . 79 6,786,088.83 7.07
90.01 to 95.00 . . . 1 177,061.82 0.18
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
______________________________
* LTV's used for Senior Lien Loans.
S-21
<PAGE>
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
MORTGAGE RATES MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ----------- -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
7.7501% to 8.0000% . . . 1 $128,750.00 0.13%
8.0001% to 8.2500% . . . 3 196,206.28 0.20
8.2501% to 8.5000% . . . 13 1,039,376.22 1.08
8.5001% to 8.7500% . . . 38 3,207,278.37 3.34
8.7501% to 9.0000% . . . 78 6,180,938.06 6.44
9.0001% to 9.2500% . . . 70 4,028,195.84 4.20
9.2501% to 9.5000% . . . 99 6,162,253.67 6.42
9.5001% to 9.7500% . . . 138 8,848,417.75 9.22
9.7501% to 10.0000%. . . 123 7,478,108.10 7.79
10.0001% to 10.2500% . . 120 8,140,577.78 8.48
10.2501% to 10.5000% . . 134 9,025,577.61 9.40
10.5001% to 10.7500% . . 152 9,421,977.36 9.82
10.7501% to 11.0000% . . 115 6,819,574.03 7.11
11.0001% to 11.2500% . . 93 5,716,537.42 5.96
11.2501% to 11.5000% . . 86 4,985,840.32 5.20
11.5001% to 11.7500% . . 53 2,872,546.95 2.99
11.7501% to 12.0000% . . 51 2,925,833.99 3.05
12.0001% to 12.2500% . . 38 1,910,662.68 1.99
12.2501% to 12.5000% . . 40 2,426,938.43 2.53
12.5001% to 12.7500% . . 26 1,166,729.93 1.22
12.7501% to 13.0000% . . 17 690,297.43 0.72
13.0001% to 13.2500% . . 20 1,038,409.64 1.08
13.2501% to 13.5000% . . 8 386,200.86 0.40
13.5001% to 13.7500% . . 10 705,472.21 0.74
13.7501% to 14.0000% . . 2 122,918.66 0.13
14.0001% to 14.2500% . . 3 133,700.00 0.14
14.2501% to 14.5000% . . 4 213,032.94 0.22
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
MONTHS MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ------ -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
49 to 60 2 $ 53,221.00 0.06%
73 to 84 4 148,713.62 0.15
85 to 96 1 19,730.63 0.02
109 to 120 54 1,439,418.77 1.50
133 to 144 2 68,660.36 0.07
157 to 168 1 31,913.82 0.03
169 to 180 753 44,239,347.58 46.10
229 to 240 182 9,405,878.35 9.80
289 to 300 2 150,000.00 0.16
349 to 360 534 $40,415,468.40 42.11
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%*
----- -------------- ------
</TABLE>
_________________________
* Due to rounding, may not add up.
S-22
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
PRINCIPAL BALANCES MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ------------------ -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
0 to 25,000.00 . . . . . . . 138 $ 2,751,495.62 2.87%
25,000.01 to 50,000.00 . . . 544 21,000,987.19 21.88
50,000.01 to 75,000.00 . . . 475 29,251,713.84 30.48
75,000.01 to 100,000.00. . . 184 15,979,237.63 16.65
100,000.01 to 150,000.00 . . 139 16,418,042.24 17.11
150,000.01 to 202,300.00 . . 40 6,901,329.31 7.19
202,300.01 to 250,000.00 . . 10 2,222,981.81 2.32
250,000.01 to 300,000.00 . . 4 1,106,700.00 1.15
300,000.01 to 350,000.00 . . 1 339,864.89 0.35
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
PROPERTY TYPE MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ------------------ -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Single family Detached . . . .1,388 $87,952,941.08 91.64%
Single family Attached . . . . 51 2,529,912.47 2.64
Two-to-four Family Homes . . . 12 686,288.32 0.72
PUD. . . . . . . . . . . . . . 9 668,665.21 0.70
Condominium. . . . . . . . . . 4 175,500.55 0.18
Manufactured Home. . . . . . . 62 3,114,238.20 3.24
Blanket (2 Units Detached) . . 9 844,806.70 0.88
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
PROPERTY TYPE MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ------------------ -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Owner occupied . . . . . . . 1,482 $93,706,194.71 97.64%
Investor owned . . . . . . . 52 2,207,895.92 2.30
Second home. . . . . . . . . 1 58,261.90 0.06
----- -------------- ------
TOTAL 1,535 $95,972,352.53 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
S-23
<PAGE>
DISTRIBUTION OF TERM OF SEASONING
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
MONTHS OF SEASONING MORTGAGE LOANS THE STATISTIC CALCULATION DATE THE STATISTIC CALCULATION DATE
- ------------------- -------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
0 to 12. . . . . . . . . 1,535 $95,972,352.53 100.00%
</TABLE>
INTEREST PAYMENTS ON THE MORTGAGE LOANS
Each Mortgage Loan provides for monthly payments by the obligor on the
related Note (the "Mortgagor") according to the actuarial method (the "Actuarial
Loans").
Actuarial Loans provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly
payments made by the Mortgagors on the Actuarial Loans either earlier or later
than the scheduled due dates thereof will not affect the amortization schedule
or the relative application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on a Class A
Certificate Owner's yield resulting from the timing of the settlement date and
those considerations discussed below under "Payment Delay Feature of Class A
Certificates"), the yield to maturity on a Class A Certificate will be directly
related to the rate of payment of principal of the Mortgage Loans, including for
this purpose voluntary payment in full of Mortgage Loans prior to stated
maturity (a "Prepayment"), liquidations due to defaults, casualties and
condemnations, and repurchases of Mortgage Loans by the Sponsor, the Originators
or the Servicer. The actual rate of principal prepayments on pools of mortgage
loans is influenced by a variety of economic, tax, geographic, demographic,
social, legal and other factors and has fluctuated considerably in recent years.
In addition, the rate of principal prepayments may differ among pools of
mortgage loans at any time because of specific factors relating to the mortgage
loans in the particular pool, including, among other things, the age of the
mortgage loans, the geographic locations of the properties securing the loans
and the extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Class A
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments. Investors must make their own decisions as
to the appropriate prepayment assumptions to be used in deciding whether to
purchase any of the Class A Certificates. The Sponsor makes no representations
or warranties as to the rate of prepayment or the factors to be considered in
connection with such determination.
PROJECTED PREPAYMENTS AND YIELDS FOR CLASS A CERTIFICATES
If purchased at other than par, the yield to maturity on a Class A
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans. If the actual rate of payments on the Mortgage Loans is slower
than the rate anticipated by an investor who purchases a Class A Certificate at
a discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans is
faster than the rate anticipated by an investor who purchases a Class A
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
S-24
<PAGE>
All of the Mortgage Loans are fixed-rate mortgage loans. The rate of
prepayments with respect to conventional fixed rate mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates on fixed rate mortgage loans,
such mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rate on such mortgage loans.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans. The prepayment experience on non-conventional
home equity loans may differ from that on conventional first mortgage loans,
primarily due to the lower credit quality of the typical borrower. Because the
credit histories of many home equity borrowers may preclude them from other
traditional sources of financing, such borrowers may be less likely to refinance
due to a decline in market interest rates.
The last scheduled Payment Date for the Class A Certificates is as follows:
Class A-1 Certificates, April 25, 2011; Class A-2 Certificates, June 25, 2015;
Class A-3 Certificates, January 25, 2022; and Class A-4 Certificates, June 25,
2027. Such dates are the dates on which the related Class A Certificate
Principal Balance would be reduced to zero, assuming, among other things that
with respect to the Class A-1, the Class A-2 and the Class A-3 Certificates
(i) no Prepayments are received on any of the Mortgage Loans, (ii) each
distribution of principal and interest on each of the Mortgage Loans is timely
received, (iii) no excess interest will be used to make accelerated payments of
principal and (iv) the Mortgage Loans have the applicable characteristics set
forth herein. The final scheduled Payment Date for the Class A-4 Certificates
is the Payment Date in the calendar month thirteen months after the month in
which the final payment on the Mortgage Loan with the latest maturity occurs.
The original principal amounts of the Class A Certificates as of the Closing
Date less all amounts previously distributed to the Owners of such Class A
Certificates (other than the Certificate Insurer) on account of principal shall
be the "Class A Certificate Principal Balance."
The actual final Payment Date with respect to the Class A Certificates
could occur significantly earlier than the final scheduled Payment Date because
(i) Net Monthly Excess Spread will be used to make accelerated payments of
principal (i.e., Subordination Increase Amounts) to the Owners of the Class A
Certificates, which payments will have the effect of shortening the weighted
average lives of the Class A Certificates, (ii) Prepayments are likely to occur
which shall be applied to the payment of the Class A Certificate Principal
Balance and (iii) the Servicer may cause a termination of the Trust on and after
the Clean-Up Call Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Class A Certificates will be influenced by the rate at which principal payments
on the Mortgage Loans are received, which may be in the form of scheduled
amortization, accelerated amortization or prepayments (for this purpose, the
term "prepayment" includes Prepayments and liquidations due to default) or as a
result of an early termination of the Trust.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement with
respect to the Class A Certificates is the Home Equity Prepayment ("HEP")
assumption. HEP assumes that a pool of loans prepays in the first month at a
constant prepayment rate that corresponds in CPR (as defined herein) to one-
tenth the given HEP percentage and increases by an additional one-tenth each
month thereafter until the tenth month, where it remains at a CPR equal to the
given HEP percentage. The Constant Prepayment Rate ("CPR") represents an
assumed constant rate of prepayment each month, expressed as an annual rate,
relative to the then outstanding principal balance of a pool of home equity
loans for the life of such home equity loans. Neither model purports to be
either an historical description of the prepayment experience of any pool of
home equity loans or a prediction of the anticipated rate of prepayment of any
home equity loans, including the Mortgage Loans.
The tables below were prepared on the basis of the assumptions in the
following paragraph ("Structuring Assumptions") and there are discrepancies
between the characteristics of the actual Mortgage Loans and the characteristics
of the Mortgage Loans assumed in preparing the tables. Any such discrepancy may
have an effect upon the percentage of the Class A Certificate Principal Balance
outstanding and weighted
S-25
<PAGE>
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Mortgage Loans have characteristics which differ from those
assumed in preparing the tables set forth below, the distributions of principal
on the Class A Certificates may be made earlier or later than as indicated in
the tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of synthetic mortgage loans having the characteristics set forth
below, (ii) the Closing Date for the Certificates is May 23, 1996,
(iii) distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Payment Date actually occurs, commencing in
June 1996, in accordance with the priorities described herein, (iv) the "Net
Mortgage Rate" is net of the Servicing Fee, and further reduced by the Trustee
Fee, (v) the Mortgage Loans prepay at the specified percentages of HEP (as
defined above), (vi) prepayments include 30 day's interest thereon, (vii) no
early termination of the Trust occurs (except as otherwise indicated with
respect to the Class A-4 Certificates), (viii) the "Specified Subordinated
Amount" (as defined under "Credit Enhancement -- Overcollateralization
Provisions") is set initially as specified in the Pooling and Servicing
Agreement, does not increase above its base level (I.E., does not "step up" as a
result of any loss or delinquency trigger events occurring) and thereafter
decreases in accordance with the provisions of the Pooling and Servicing
Agreement and (ix) no Mortgage Loan is ever delinquent.
MORTGAGE POOL
<TABLE>
<CAPTION>
MORTGAGE RATE ORIGINAL REMAINING ORIGINAL
NET OF THE TERM TO TERM AMORTIZATION
AMORTIZATION PRINCIPAL MORTGAGE SERVICING AND MATURITY MATURITY TERM
METHODOLOGY BALANCE RATE TRUSTEE FEES (IN MONTHS) (IN MONTHS) (IN MONTHS)
- ----------- ------- ---- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
LEVEL $ 1,748,373.64 10.655 10.114 115 114 115
LEVEL 19,176,494.48 10.269 9.757 180 179 180
LEVEL 10,131,612.78 10.304 9.794 240 239 240
LEVEL 42,890,118.60 10.354 9.853 360 359 360
BALLOON 26,809,068.49 10.774 10.274 180 179 360
</TABLE>
The following tables indicate, based on the Structuring Assumptions, the
percentages of the Original Certificate Principal Balance of the Class A-1,
Class A-2, Class A-3 and Class A-4 Certificates that would be outstanding after
each of the dates shown at various percentages of HEP and the corresponding
weighted average life of the Class A Certificates. It is not likely that (i)
all of the Mortgage Loans will have the characteristics assumed and (ii) the
Mortgage Loans will prepay at the specified percentages of HEP or at any other
constant percentage. Moreover, the diverse remaining terms to maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the tables at the specified percentages of HEP, even if the
weighted average remaining term to maturity of the Mortgage Loans is consistent
with the remaining terms to maturity of the Mortgage Loans specified in the
Structuring Assumptions.
S-26
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-1 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-1 PERCENTAGE OF HEP
---------------------------
Payment Date 0% 15% 19% 23% 27% 31%
- ------------ -- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
May 25, 1997 91 64 56 49 41 34
May 25, 1998 87 27 12 0 0 0
May 25, 1999 83 0 0 0 0 0
May 25, 2000 79 0 0 0 0 0
May 25, 2001 75 0 0 0 0 0
May 25, 2002 69 0 0 0 0 0
May 25, 2003 64 0 0 0 0 0
May 25, 2004 57 0 0 0 0 0
May 25, 2005 50 0 0 0 0 0
May 25, 2006 43 0 0 0 0 0
May 25, 2007 35 0 0 0 0 0
May 25, 2008 26 0 0 0 0 0
May 25, 2009 17 0 0 0 0 0
May 25, 2010 6 0 0 0 0 0
May 25, 2011 0 0 0 0 0 0
May 25, 2012 0 0 0 0 0 0
May 25, 2013 0 0 0 0 0 0
May 25, 2014 0 0 0 0 0 0
May 25, 2015 0 0 0 0 0 0
May 25, 2016 0 0 0 0 0 0
May 25, 2017 0 0 0 0 0 0
May 25, 2018 0 0 0 0 0 0
May 25, 2019 0 0 0 0 0 0
May 25, 2020 0 0 0 0 0 0
May 25, 2021 0 0 0 0 0 0
May 25, 2022 0 0 0 0 0 0
May 25, 2023 0 0 0 0 0 0
May 25, 2024 0 0 0 0 0 0
May 25, 2025 0 0 0 0 0 0
May 25, 2026 0 0 0 0 0 0
May 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 8.4 1.4 1.2 1.1 0.9 0.9
Modified Duration
(Years)(1): 5.8 1.3 1.1 1.0 0.9 0.8
First Principal
Payment Date(1): 6/96 6/96 6/96 6/96 6/96 6/96
Last Principal
Payment Date(1): 12/10 4/99 9/98 5/98 2/98 11/97
(1) To maturity.
The weighted average life of the Class A-1 Certificates has been determined by
(a) multiplying the amount of the reduction, if any, of the Class A-1
Certificate Principal Balance on each Payment Date by the number of years from
the date of issuance to such Payment Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the Class A-1
Certificate Principal Balance referred to in clause (a).
S-27
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-2 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-2 PERCENTAGE OF HEP
---------------------------
Payment Date 0% 15% 19% 23% 27% 31%
- ------------ -- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
May 25, 1997 100 100 100 100 100 100
May 25, 1998 100 100 100 97 79 62
May 25, 1999 100 94 69 47 26 7
May 25, 2000 100 61 34 12 0 0
May 25, 2001 100 34 7 0 0 0
May 25, 2002 100 11 0 0 0 0
May 25, 2003 100 0 0 0 0 0
May 25, 2004 100 0 0 0 0 0
May 25, 2005 100 0 0 0 0 0
May 25, 2006 100 0 0 0 0 0
May 25, 2007 100 0 0 0 0 0
May 25, 2008 100 0 0 0 0 0
May 25, 2009 100 0 0 0 0 0
May 25, 2010 100 0 0 0 0 0
May 25, 2011 22 0 0 0 0 0
May 25, 2012 17 0 0 0 0 0
May 25, 2013 11 0 0 0 0 0
May 25, 2014 4 0 0 0 0 0
May 25, 2015 0 0 0 0 0 0
May 25, 2016 0 0 0 0 0 0
May 25, 2017 0 0 0 0 0 0
May 25, 2018 0 0 0 0 0 0
May 25, 2019 0 0 0 0 0 0
May 25, 2020 0 0 0 0 0 0
May 25, 2021 0 0 0 0 0 0
May 25, 2022 0 0 0 0 0 0
May 25, 2023 0 0 0 0 0 0
May 25, 2024 0 0 0 0 0 0
May 25, 2025 0 0 0 0 0 0
May 25, 2026 0 0 0 0 0 0
May 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 15.4 4.5 3.7 3.1 2.6 2.3
Modified Duration
(Years)(1): 9.1 3.7 3.1 2.7 2.3 2.0
First Principal
Payment Date(1): 12/10 4/99 9/98 5/98 2/98 11/97
Last Principal
Payment Date(1): 12/14 12/02 9/01 10/00 2/00 8/99
(1) To maturity.
The weighted average life of the Class A-2 Certificates has been determined by
(a) multiplying the amount of the reduction, if any, of the Class A-2
Certificate Principal Balance on each Payment Date by the number of years from
the date of issuance to such Payment Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the Class A-2
Certificate Principal Balance referred to in clause (a).
S-28
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-3 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-3 PERCENTAGE OF HEP
---------------------------
Payment Date 0% 15% 19% 23% 27% 31%
- ------------ -- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
May 25, 1997 100 100 100 100 100 100
May 25, 1998 100 100 100 100 100 100
May 25, 1999 100 100 100 100 100 100
May 25, 2000 100 100 100 100 83 49
May 25, 2001 100 100 100 68 31 0
May 25, 2002 100 100 69 26 0 0
May 25, 2003 100 84 33 0 0 0
May 25, 2004 100 52 4 0 0 0
May 25, 2005 100 25 0 0 0 0
May 25, 2006 100 2 0 0 0 0
May 25, 2007 100 0 0 0 0 0
May 25, 2008 100 0 0 0 0 0
May 25, 2009 100 0 0 0 0 0
May 25, 2010 100 0 0 0 0 0
May 25, 2011 100 0 0 0 0 0
May 25, 2012 100 0 0 0 0 0
May 25, 2013 100 0 0 0 0 0
May 25, 2014 100 0 0 0 0 0
May 25, 2015 93 0 0 0 0 0
May 25, 2016 76 0 0 0 0 0
May 25, 2017 66 0 0 0 0 0
May 25, 2018 53 0 0 0 0 0
May 25, 2019 40 0 0 0 0 0
May 25, 2020 25 0 0 0 0 0
May 25, 2021 9 0 0 0 0 0
May 25, 2022 0 0 0 0 0 0
May 25, 2023 0 0 0 0 0 0
May 25, 2024 0 0 0 0 0 0
May 25, 2025 0 0 0 0 0 0
May 25, 2026 0 0 0 0 0 0
May 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 22.2 8.2 6.6 5.5 4.7 4.1
Modified Duration
(Years)(1): 10.5 5.9 5.0 4.4 3.8 3.4
First Principal
Payment Date(1): 12/14 12/02 9/01 10/00 2/00 8/99
Last Principal
Payment Date(1): 11/21 7/06 7/04 3/03 3/02 5/01
(1) To maturity.
The weighted average life of the Class A-3 Certificates has been determined by
(a) multiplying the amount of the reduction, if any, of the Class A-3
Certificate Principal Balance on each Payment Date by the number of years from
the date of issuance to such Payment Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the Class A-3
Certificate Principal Balance referred to in clause (a).
S-29
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-4 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-4 PERCENTAGE OF HEP
---------------------------
Payment Date 0% 15% 19% 23% 27% 31%
- ------------ -- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
May 25, 1997 100 100 100 100 100 100
May 25, 1998 100 100 100 100 100 100
May 25, 1999 100 100 100 100 100 100
May 25, 2000 100 100 100 100 100 100
May 25, 2001 100 100 100 100 100 100
May 25, 2002 100 100 100 100 93 65
May 25, 2003 100 100 100 94 64 42
May 25, 2004 100 100 100 69 44 26
May 25, 2005 100 100 81 50 29 15
May 25, 2006 100 100 62 35 18 8
May 25, 2007 100 82 47 24 11 3
May 25, 2008 100 66 35 16 6 0
May 25, 2009 100 52 25 10 2 0
May 25, 2010 100 40 18 6 0 0
May 25, 2011 100 17 5 0 0 0
May 25, 2012 100 13 3 0 0 0
May 25, 2013 100 9 0 0 0 0
May 25, 2014 100 6 0 0 0 0
May 25, 2015 100 3 0 0 0 0
May 25, 2016 100 1 0 0 0 0
May 25, 2017 100 0 0 0 0 0
May 25, 2018 100 0 0 0 0 0
May 25, 2019 100 0 0 0 0 0
May 25, 2020 100 0 0 0 0 0
May 25, 2021 100 0 0 0 0 0
May 25, 2022 90 0 0 0 0 0
May 25, 2023 69 0 0 0 0 0
May 25, 2024 46 0 0 0 0 0
May 25, 2025 20 0 0 0 0 0
May 25, 2026 0 0 0 0 0 0
May 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 27.8 13.5 11.3 9.6 8.2 7.1
Modified Duration
(Years)(1): 10.8 7.9 7.1 6.4 5.7 5.2
First Principal
Payment Date(1): 11/21 7/06 7/04 3/03 3/02 5/01
Last Principal
Payment Date(1): 2/26 2/17 8/13 4/11 2/10 5/08
Weighted Average
Life (Years)(2): 27.1 12.0 9.8 8.1 6.9 6.0
Modified Duration
(Years)(2): 10.7 7.4 6.5 5.8 5.1 4.6
First Principal
Payment Date(2): 11/21 7/06 7/04 3/03 3/02 5/01
Last Principal
Payment Date(2): 11/23 11/08 8/06 11/04 8/03 8/02
(1) To maturity.
(2) To call.
S-30
<PAGE>
The weighted average life of the Class A-4 Certificates has been determined by
(a) multiplying the amount of the reduction, if any, of the Class A-4
Certificate Principal Balance on each Payment Date by the number of years from
the date of issuance to such Payment Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the Class A-4
Certificate Principal Balance referred to in clause (a).
PAYMENT DELAY FEATURE OF CLASS A CERTIFICATES
The effective yield to the Owners of the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the Class A-4 Certificates will be
lower than the yield otherwise produced by the Class A-1 Pass-Through Rate, the
Class A-2 Pass-Through Rate, the Class A-3 Pass-Through Rate and the Class A-4
Pass-Through Rate, respectively, and purchase price of such Certificates because
principal and interest distributions will not be payable to such holders until
at least the twenty-fifth day of the month following the month of accrual
(without any additional distribution of interest or earnings thereon in respect
of such delay).
USE OF PROCEEDS
The Sponsor will sell the Mortgage Loans to the Trust concurrently with the sale
of the Class A Certificates and the net proceeds from the sale of the Class A
Certificates will be applied to the purchase of the Mortgage Loans. Such net
proceeds will (together with the Subordinate Certificates retained by the
Sponsor or its affiliates) represent the purchase price paid by the Trust to the
Sponsor for the sale of the Mortgage Loans to the Trust. Such amount will be
determined as a result of the pricing of the Class A Certificates through the
offering described in this Prospectus Supplement. The net proceeds to be
received from the sale of the Mortgage Loans will be added to the Sponsor's
general funds and will be available for general corporate purposes, including
the purchase of new mortgage loans.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Statistic Calculation Date. Between the Statistic
Calculation Date and the Cut-Off Date some amortization of the pool may occur.
In addition, certain loans included in the pool as of the Statistic Calculation
Date may prepay in full, or may be determined not to meet the eligibility
requirements for the final pool. Finally, the Sponsor may add, remove or
replace loans in the final pool which were not contained in the pool as of the
Statistic Calculation Date.
THE SPONSOR, THE SERVICER AND THE SUB-SERVICER
The Sponsor, EquiVantage Acceptance Corp. is a wholly-owned subsidiary of the
Servicer. The Sub-Servicer, Transworld Mortgage Corporation, is an affiliate of
the Sponsor and the Servicer. See "The Sponsor and the Transferor" in the
Prospectus. Transworld Mortgage Corporation is an approved servicer for FHA,
VA, GNMA, FHLMC and FNMA as well as other major private investors.
The Servicer will employ the Sub-Servicer to service the Mortgage Loans.
Pursuant to the Pooling and Servicing Agreement, the Servicer may enter into
Sub-Servicing Agreements with qualified sub-servicers with respect to the
servicing of all or any portion of the Mortgage Loans and affiliates of the
Servicer which are qualified to service mortgage loans and are qualified
Sub-Servicers. No Sub-Servicing Agreements discharge the Servicer from its
servicing obligations. See "Mortgage Loan Program -- Sub-Servicers" in the
Prospectus. As of April 30, 1996, the Sub-Servicer was servicing 4,551 Mortgage
Loans in the Sponsor's Servicing Portfolio representing an aggregate outstanding
principal balance of approximately $259.5 million. In addition to the Sponsor's
Portfolio, the Sub-Servicer serviced as of April 30, 1996 approximately 72,547
mortgage loans with an aggregate principal balance as of such date of
approximately $2.8 billion; such loans were not originated or acquired pursuant
to the Sponsor's underwriting guidelines and are being serviced for third
parties, including FNMA, FHLMC, GNMA as well as private investors, on a contract
servicing basis.
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The Sub-Servicer is a party to C.A. No. H-94-1825; Resolution Trust Corporation
(the "RTC") as Receiver of Commonwealth Federal Savings Association et. al.
(Plaintiffs) vs. Transworld Mortgage Corporation et. al. (Defendants), in the
United States District Court for the Southern District of Texas, Houston
Division (the "RTC Lawsuit"). The RTC Lawsuit relates to certain services
provided by the Sub-Servicer in connection with the acquisition of assets by the
Sub-Servicer from an RTC controlled entity. A judgment was entered in the RTC
Lawsuit in September 1995, which was generally in favor of the RTC; however, the
judgment has been stayed pending an appeal in the United States Court of Appeals
for the Fifth Circuit. The Sub-Servicer does not expect the outcome of the RTC
Lawsuit to have a material adverse effect on the Sub-Servicer's financial
position, its operations or its ability to perform its obligations with respect
to the Mortgage Loans.
The Trustee and the Certificate Insurer may remove the Servicer, and the
Servicer may resign, only in accordance with the terms of the Pooling and
Servicing Agreement. No removal or resignation shall become effective until the
Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Pooling and Servicing
Agreement, in whole or in part, unless it shall have first obtained the written
consent of the Trustee and the Certificate Insurer, which consent is required
not to be unreasonably withheld; provided, however, that any assignee must meet
the eligibility requirements for a successor servicer set forth in the Pooling
and Servicing Agreement.
The Certificate Insurer (or with the consent of the Certificate Insurer, the
majority Certificateholders) may, pursuant to the Pooling and Servicing
Agreement, remove the Servicer upon the occurrence of the events described in
clauses (i) through (x) below and may remove the Servicer upon the occurrence
and continuation beyond the applicable cure period of an event described in
clause (ii), (iii), (iv) or (vi) below:
(i) The Servicer shall (a) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian or similar entity with
respect to itself or its property, (b) admit in writing its inability to
pay its debts generally as they become due, (c) make a general
assignment for the benefit of creditors, (d) be adjudicated a bankrupt
or insolvent, (e) commence a voluntary case under the federal bankruptcy
laws of the United States of America or file a voluntary petition or
answer seeking reorganization, an arrangement with creditors or an order
for relief or seeking to take advantage of any insolvency law or file an
answer admitting the material allegations of a petition filed against it
in any bankruptcy, reorganization or insolvency proceeding or (f) cause
corporate action to be taken by it for the purpose of effecting any of
the foregoing; or
(ii) If without the application, approval or consent of the Servicer, a
proceeding shall be instituted in any court of competent jurisdiction,
under any law relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking in respect of the Servicer an order for
relief or an adjudication in bankruptcy, reorganization, dissolution,
winding up, liquidation, a composition or arrangement with creditors, a
readjustment of debts, the appointment of a trustee, receiver,
conservator, liquidator or custodian or similar entity with respect to
the Servicer or of all or any substantial part of its assets, or other
like relief in respect thereof under any bankruptcy or insolvency law,
and, if such proceeding is being contested by the Servicer in good
faith, the same shall (a) result in the entry of an order for relief or
any such adjudication or appointment or (b) continue undismissed or
pending and unstayed for any period of thirty (30) consecutive days; or
(iii) The Servicer shall fail to perform any one or more of its obligations
under the Pooling and Servicing Agreement (other than its obligations
referenced in clauses (vi) and (vii) below) and shall continue in
default thereof for a period of thirty (30) days after the earlier to
occur of (x) the date on which an individual authorized to act for the
Servicer in connection with the Pooling and Servicing Agreement (an
"Authorized Officer") knows or reasonably should know of such failure or
(y) receipt by the Servicer of a written notice from the Trustee, any
Owner, the Sponsor or the Certificate Insurer of said failure; or
(iv) The Servicer shall fail to cure any breach of any of its representations
and warranties set forth in the Pooling and Servicing Agreement which
materially and adversely affects the interests of the Owners or
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Certificate Insurer for a period of thirty (30) days after the earlier
of (x) the date on which an Authorized Officer knows or reasonably
should know of such breach or (y) receipt by the Servicer of a written
notice from the Trustee, any Owner, the Sponsor or the Certificate
Insurer of such breach; or
(v) If the Certificate Insurer pays out any money under the Certificate
Insurance Policy, or if the Certificate Insurer otherwise funds any
shortfall with its own money, because the amounts available to the
Trustee (other than from the Certificate Insurer) are insufficient to
make required distributions on the Class A Certificates; or
(vi) The failure by the Servicer to make any required Servicing Advance for a
period of 30 days following the earlier of (x) the date on which an
Authorized Officer knows or reasonably should know of such failure or
(y) receipt by the Servicer of a written notice from the Trustee, any
Owner, the Sponsor or the Certificate Insurer of such failure; or
(vii) The failure by the Servicer to make any required Delinquency Advance, to
pay any Compensating Interest or to pay over any Monthly Remittance
Amount or other amounts required to be remitted by the Servicer pursuant
to this Agreement; or
(viii) The delinquency or loss experience of the Mortgage Pool exceeds certain
levels specified in the Pooling and Servicing Agreement; or
(ix) The Certificate Insurer determines that the performance of the Servicer
(or any Sub-Servicer) is not in compliance with the Sub-Servicer's
general servicing standards for similar mortgage loans and the Sub-
Servicer's servicing and collection guidelines, which non-compliance is
reasonably likely to have a material adverse effect on the servicing of
the Mortgage Loans; or
(x) Certain events of merger or consolidation occur, which events fail to
meet certain conditions required by the Certificate Insurer.
The Certificate Insurer may allow a reasonable extended cure period upon
the Servicer's prompt and diligent pursuit of a cure of the default described in
clause (iii) above or of the breach described in clause (iv) above.
Upon removal or resignation of the Servicer, the Trustee will be required
to appoint a successor Servicer approved by the Certificate Insurer. If such
successor servicer is unable or not qualified to so serve, the Trustee may
solicit bids for a successor servicer and, pending the appointment of a
successor Servicer as a result of soliciting such bids, will be required to
serve as Servicer. If the Trustee is unable to obtain a qualifying bid and is
prevented by law from acting as servicer, the Trustee will be required to
appoint, or petition a court of competent jurisdiction to appoint, an eligible
successor. Any successor is required to be a housing and home finance
institution, bank or mortgage servicing institution which is acceptable to the
Certificate Insurer and is experienced in servicing loans of a type similar to
the Mortgage Loans and has shareholders' equity of not less than the amount
specified in the Pooling and Servicing Agreement and which is acceptable to the
Certificate Insurer and shall assume all or any part of the responsibilities,
duties or liabilities of the Servicer. The successor servicer may, at its
option, and shall, if so directed by the Certificate Insurer, terminate the Sub-
Servicer.
THE ORIGINATORS
The Servicer, EquiVantage Inc., originated the Mortgage Loans or acquired
the Mortgage Loans from Affiliated Originators (including the Sub-Servicer) and
Unaffiliated Originators including various retail mortgage lenders. EquiVantage
is a home equity lender based in Houston, Texas which typically originates or
purchases mortgage loans on a flow basis from retail correspondents and brokers.
EquiVantage correspondents and brokers are subjected to an approval process,
including but not limited to verification that appropriate local, state and
federal requirements for licensing are obtained and maintained. They are
required to execute a correspondent agreement with EquiVantage prior to closing
any loans, which agreement contains certain
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representations and warranties related to the origination of the loans.
Appraisers and closing agents are also subjected to an approval process
including verification that certification and licensing requirements are
obtained and maintained. To maintain uniformity, loans (other than loans
acquired through bulk purchases) generally are closed utilizing EquiVantage loan
closing documents which are generated by its central loan closing department.
All loans are underwritten by EquiVantage prior to funding or purchase.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates and the
Subordinate Certificates. The Certificates will be issued by EquiVantage Home
Equity Loan Trust 1996-2, a trust to be organized under the laws of the State of
New York. The Subordinate Certificates will be retained by the Sponsor or
affiliates thereof, and are not being offered hereby.
The Certificates will not represent an interest in or obligation of, nor
are the Mortgage Loans guaranteed by, the Sponsor or the Servicer, nor will they
be insured or guaranteed by the Federal Deposit Insurance Corporation (the
"FDIC") or any other governmental agency or instrumentality.
Persons in whose name a Certificate is registered in the Register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Class A Certificates are in book-entry form with DTC, the only "Owner" of
the Class A Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No person acquiring a beneficial interest in
a Class A Certificate (a "Beneficial Owner") will be entitled to receive a
definitive certificate representing such person's interest in the Trust, except
in the event that Physical Certificates are issued under limited circumstances
set forth in the Pooling and Servicing Agreement. All references herein to the
Owners of Class A Certificates shall mean and include the rights of Beneficial
Owners, as such rights may be exercised through DTC and its participating
organizations, except as otherwise specified in the Pooling and Servicing
Agreement. See "Description of the Securities -- Form of Securities" in the
Prospectus.
Each Class of Class A Certificates will evidence the right to receive on
each Payment Date the Class A Distribution Amount for such Class of Class A
Certificates, in each case until the Class A Certificate Principal Balance has
been reduced to zero. The Subordinate Certificate Owners will be entitled to
receive distributions of residual Net Monthly Excess Spread.
PAYMENT DATES AND DISTRIBUTIONS
On each Payment Date, the Trustee will be required to distribute to the
Owners of Record of the Class A Certificates as of the related Record Date such
Owner's Percentage Interest in the amounts required to be distributed to the
Owners of each Class of Class A Certificates on such Payment Date. For so long
as any Class A Certificate is in book-entry form with DTC, Cede & Co. will be
the only "Owner" of such Class A Certificate. See " -- Book Entry Registration
of the Class A Certificates" herein. The "Percentage Interest" of each Class A
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Class A Certificate as of the
Cut-Off Date by the Class A Certificate Principal Balance as of the Cut-Off
Date.
The Pooling and Servicing Agreement will require that the Trustee create
and maintain a Distribution Account. See "Description of the Securities --
Payments on Mortgage Loans; Deposits to Distribution Account" in the Prospectus.
On each Remittance Date the Servicer is required to withdraw from the
Principal and Interest Account and remit to the Trustee, for deposit in the
Distribution Account, the Monthly Remittance Amount. The "Monthly Remittance
Amount" is the sum of the amounts representing scheduled interest, unscheduled
collections of principal (E.G., prepayments) received during the related
Remittance Period and scheduled collections of
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principal due and collected during the related Remittance Period, plus any
related loan purchase prices relating to the Sponsor's or any Originator's
required purchase of Mortgage Loans from the Trust, Substitution Amounts,
Delinquency Advances and Compensating Interest, less the sum of certain amounts
the Servicer is permitted to withdraw from the Principal and Interest Account,
as described in the Prospectus under "Description of the Securities --
Withdrawals from the Principal and Interest Account."
BOOK ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
The Class A Certificates will be book-entry certificates (the "Book-Entry
Certificates"). The Beneficial Owners may elect to hold their Class A
Certificates 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 in such systems. The Book-Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. 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 depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
definitive Certificates are issued, it is anticipated that the only "Owner" of
such Class A Certificates will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be Owners as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
Participants. While such Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Class A Certificates.
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Class A Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not Participants may transfer
ownership of Class A Certificates only through Participants and indirect
participants by instructing such Participants and indirect participants to
transfer such Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Class A Certificates, which account is
maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of such Class A
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
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Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Certain Federal Income Tax
Consequences -- Foreign Investors" and " -- Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation Procedures --
Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to this
Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
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Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear Securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing
funds to the Beneficial Owners of the Book-Entry Certificates that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Class A
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates, to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of such
Book-Entry Certificates, may be limited due to the lack of physical certificates
for such Book-Entry Certificates. In addition, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take
any action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through
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DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DISTRIBUTIONS
Distributions on the Certificates are required to be made on each Payment
Date, commencing on June 25, 1996, to the Owners on the related Record Date in
an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholders' Class of such
Certificates on such Payment Date. See "Description of the Securities --
Distributions" in the Prospectus.
OVERCOLLATERALIZATION
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Pooling and
Servicing Agreement requires that, on each Payment Date, certain excess cash
flows, consisting of (i) the excess of (x) the interest which is collected on
the Mortgage Loans during a Remittance Period (net of the Servicing Fee, the
Trustee's Fee and the Certificate Insurer's premium) plus any Delinquency
Advances and Compensating Interest over (y) the interest which accrues on the
Class A Certificates during the related Accrual Period (such excess, the "Total
Monthly Excess Spread"), less (ii) any portion of the Total Monthly Excess
Spread which is used to cover any shortfalls in Available Funds on such Payment
Date or used to reimburse the Certificate Insurer on account of outstanding
Reimbursement Amounts (such excess cash flows being the "Net Monthly Excess
Spread"), be applied on such Payment Date as an accelerated payment of principal
on the Class A Certificates, but only to the limited extent hereafter described.
This application has the effect of accelerating the amortization of the
Class A Certificates relative to the amortization of the Mortgage Loans. To the
extent that any Net Monthly Excess Spread is not so used, the Pooling and
Servicing Agreement provides that it will be used to reimburse the Servicer or
the Trustee with respect to any amounts owing to them.
With respect to the Mortgage Pool and Payment Date, the excess, if any, of
(x) the aggregate principal balances of the Mortgage Loans as of the close of
business on the last day of the preceding Remittance Period over (y) the
aggregate Class A Principal Balance of the Class A Certificates issued as of
such Payment Date (and following the making of all distributions on such Payment
Date) is the "Subordinated Amount" as of such Payment Date. Pursuant to the
Pooling and Servicing Agreement, the Certificate Insurer has required that the
Net Monthly Excess Spread be applied as an accelerated payment of principal on
the Class A Certificates until the related Subordinated Amount has increased to
the level required by the Pooling and Servicing Agreement.
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Any amount of Net Monthly Excess Spread actually applied as an accelerated
payment of principal is a "Subordination Increase Amount." The required level
of the Subordinated Amount with respect to a Payment Date is the "Specified
Subordinated Amount" with respect to such Payment Date. The actual specified
Subordinated Amount level is further subject to certain floors, caps and
triggers which may increase or decrease it above or below its generally required
level. Upon the occurrence of certain trigger events all Net Monthly Excess
Spread may be required to be applied to increase the level of
overcollateralization.
In the event that the required level of the Specified Subordinated Amount
is permitted to decrease or "step down" on a Payment Date in the future, the
Pooling and Servicing Agreement provides that a portion of the amount which
would otherwise be distributed as principal to the Owners of the Class A
Certificates on such Payment Date shall be distributed to the Subordinate
Certificate Owners on such Payment Date. This has the effect of decelerating
the amortization of the Class A Certificates relative to the amortization of the
Mortgage Loans, and of reducing the Subordinated Amount. With respect to any
Payment Date, the excess, if any, of (x) the Subordinated Amount that would
apply to the Mortgage Pool on such Payment Date after taking into account all
distributions to be made on such Payment Date (except for any distributions of
Subordination Reduction Amounts as described in this sentence) over (y) the
related Specified Subordinated Amount is the "Excess Subordinated Amount" with
respect to such Payment Date. If, on any Payment Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (I.E., the Subordinated Amount is
or would be greater than the Specified Subordinated Amount), then any amounts
relating to principal which would otherwise be distributed to the Owners of the
Class A Certificates on such Payment Date shall instead be distributed to the
Subordinate Certificate Owners in an amount equal to the lesser of (x) the
Excess Subordinated Amount and (y) the amount available for distribution on
account of principal with respect to the Class A Certificates on such Payment
Date; such amount being the "Subordination Reduction Amount" with respect to
such Payment Date. As a technical matter regarding the cash flow structure of
the Trust, Subordination Reduction Amounts may result even prior to the
occurrence of any decrease or "step-down" in the Specified Subordinated Amount.
This is because the Owners of the Class A Certificates will generally be
entitled to receive 100% of collected principal, even though the Class A
Certificate Principal Balance will, following the accelerated amortization
resulting from the application of the Net Monthly Excess Spread, represent less
than 100% of the Mortgage Pool's aggregate principal balance. In the absence of
the provisions relating to Subordination Reduction Amounts, the foregoing may
otherwise increase the Subordinated Amount above its Specified Subordinated
Amount requirements even without the further application of any Net Monthly
Excess Spread.
The Pooling and Servicing Agreement provides that, on any Payment Date, all
amounts collected on account of principal (other than any such amount applied to
the payment of a Subordination Reduction Amount) during the prior Remittance
Period will be distributed to the Owners of the Class A Certificates on such
Payment Date. If any Mortgage Loan became a Liquidated Mortgage Loan during
such prior Remittance Period, the Net Liquidation Proceeds related thereto and
allocated to principal may be less than the principal balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Realized Loss." In
addition, the Pooling and Servicing Agreement provides that the principal
balance of any Mortgage Loan which becomes a Liquidated Mortgage Loan shall
thenceforth equal zero. The Pooling and Servicing Agreement does not contain
any rule which requires that the amount of any Realized Loss be distributed to
the Owners of the Class A Certificates on the Payment Date which immediately
follows the event of loss, I.E., the Pooling and Servicing Agreement does not
require the current recovery of losses. However, the occurrence of a Realized
Loss will reduce the Subordinated Amount, which, to the extent that such
reduction causes the Subordinated Amount to be less than the Specified
Subordinated Amount applicable to the related Payment Date, will require the
payment of a Subordination Increase Amount on such Payment Date (or, if
insufficient funds are available on such Payment Date, or subsequent Payment
Dates, until the Subordinated Amount equals the related Specified Subordinated
Amount). The effect of the foregoing is to allocate losses to the Subordinate
Certificate Owners by reducing, or eliminating entirely, payment of Monthly
Excess Spread and of Subordination Reduction Amounts which such Subordinate
Certificate Owners would otherwise receive.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICY. The Pooling
and Servicing Agreement defines a "Subordination Deficit" with respect to a
Payment Date to be the amount, if any, by which (x) the Class A Certificate
Principal Balance of the Class A Certificates issued as of such Payment Date,
and following the
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making of all distributions to be made on such Payment Date (except for any
payment to be made as to principal from proceeds of the Certificate Insurance
Policy), exceeds (y) the aggregate principal balances of the Mortgage Loans as
of the close of business on the last day of the preceding Remittance Period.
The Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the Certificate Insurance Policy not later than the third
Business Day prior to any Payment Date as to which the Trustee has determined
that a Subordination Deficit will occur for the purpose of applying the proceeds
of such Insured Payment as a payment of principal to the Owners of the Class A
Certificates on such Payment Date. The Certificate Insurance Policy is thus
similar to the subordination provisions described above insofar as the
Certificate Insurance Policy guarantees ultimate, rather than current, payment
of the amounts of any Realized Losses to the Owners of the related Class A
Certificates. Investors in the Class A Certificates should realize that, under
extreme loss or delinquency scenarios applicable to the Mortgage Pool, they may
temporarily receive no distributions of principal.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the subordination provisions and by
the Certificate Insurance Policy is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Certificate Insurance Policy to guarantee or insure that
any particular rate of prepayment is experienced by the Trust.
CLASS A DISTRIBUTIONS AND INSURED PAYMENTS TO THE OWNERS OF THE CLASS A
CERTIFICATES
No later than the third Business Day prior to each Payment Date the Trustee
will be required to determine the amount to be on deposit in the Distribution
Account on such Payment Date, but net of the Servicing Fee, the Trustee's Fee,
the Certificate Insurer's premium, and the amount of any Insured Payment (such
amount being the "Available Funds"). If the amount of the Insured Distribution
Amount for any Payment Date exceeds the related Available Funds for such Payment
Date, the Trustee will be required to draw the amount of such insufficiency from
the Certificate Insurer under the Certificate Insurance Policy. The Trustee
will be required to deposit to the Distribution Account the amount of any
Insured Payment made by the Certificate Insurer. The Pooling and Servicing
Agreement provides that amounts which cannot be distributed to the Owners of the
Certificates as a result of proceedings under the United States Bankruptcy Code
or similar insolvency laws will not be considered in determining the amount of
Available Funds with respect to any Payment Date.
FLOW OF FUNDS
On each Payment Date, the Trustee shall distribute to the extent of the
Available Funds on deposit in the Distribution Account and the amount of any
Insured Payment for such Payment Date as follows:
(a) to the Certificate Insurer, the premium amount then due;
(b) to the Trustee, an amount equal to the Trustee's Fees then due to
it;
(c) from the Available Funds then on deposit in the Distribution
Account, to the Certificate Insurer the lesser of (x) the excess
of (i) the amount then on deposit in the Distribution Account
over (ii) the Insured Distribution Amount for such Payment Date
and (y) the Reimbursement Amount as of such Payment Date;
(d) from remaining amounts then on deposit in the Distribution
Account, together with the amount of any related Insured Payment,
to the Owners of the Class A-1 Certificates, an amount equal to
the Class A-1 Distribution Amount, to the Owners of the Class A-2
Certificates, an amount equal to the Class A-2 Distribution
Amount, to the Owners of the Class A-3 Certificates, an amount
equal to the Class A-3 Distribution Amount, to the Owners of the
Class A-4 Certificates, an amount equal to the Class A-4
Distribution Amount;
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(e) from remaining amounts then on deposit in the Distribution
Account, to the Servicer and/or the Trustee, reimbursement for
certain permitted reimbursable amounts; and
(f) following the making by the Trustee of all allocations, transfers
and disbursements described above, from amounts then on deposit
in the Distribution Account, the Trustee shall distribute to the
Subordinate Certificate Owners, the amount remaining on such
Payment Date, if any.
CLASS A-4 PASS-THROUGH RATE
The Class A-4 Pass-Through Rate will be 8.050% per annum, subject to the
Class A-4 Net Funds Cap Rate. The Pooling and Servicing Agreement defines the
"Class A-4 Net Funds Cap Rate," as of any Payment Date, to be the weighted
average of the Mortgage Rates on the Mortgage Loans during the preceding
Remittance Period, less (w) the Servicing Fee, (x) the premiums due to the
Certificate Insurer with respect to the Certificate Insurance Policy, (y)
certain administrative amounts, expressed as an annual percentage of the
principal balances of the Mortgage Loans, calculated as of the first day of the
related Remittance Period.
CERTAIN ACTIVITIES
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Description of the Securities -- Reports To The
Securityholders" in the Prospectus for information regarding reports to the
Owners.
THE CERTIFICATE INSURANCE POLICY
The Sponsor will obtain the Certificate Insurance Policy, issued by the
Certificate Insurer, in favor of the Owners of the Class A Certificates. The
Certificate Insurance Policy provides for 100% coverage of the related Insured
Distribution Amount.
The Certificate Insurance Policy unconditionally guarantees the payment of
Insured Payments on the Class A Certificates. The Certificate Insurer is
required to make Insured Payments to the Trustee as paying agent on the later of
the Payment Date or on the business day next following the day on which the
Certificate Insurer shall have received telephonic or telegraphic notice,
subsequently confirmed in writing, or written notice by registered or certified
mail, from the Trustee that an Insured Payment is due.
The Pooling and Servicing Agreement will provide that the "Available Funds"
does not include Insured Payments and does not include any amounts that can be
distributed to the Owners of any Class A Certificates by the Trustee as a result
of final, non-appealable proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate which pays to the bankruptcy court as a
"voidable preference" under the United States Bankruptcy Code any amounts
("Preference Amounts") theretofore received by such Owner on account of such
Class A Certificate will be entitled to receive reimbursement for such amounts
from the Certificate Insurer, but only after (i) delivering a copy to the
Trustee of a final, nonappealable order (a "Preference Order") of a court having
competent jurisdiction demanding payment of such amount to the bankruptcy court
and (ii) assigning such Owner's claim with respect to such Preference Order to
the Certificate Insurer. In no event shall the Certificate Insurer pay more
than one Insured Payment in respect of any Preference Amount.
The Certificate Insurance Policy is non-cancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee.
The Certificate Insurance Policy does not guarantee to the owners of the
Class A Certificates any specific rate of prepayments of principal of the
Mortgage Loans.
Pursuant to the Pooling and Servicing Agreement, the Certificate Insurer is
subrogated to the rights of the Owners of the Class A Certificates to the extent
of any such payment under the Certificate Insurance Policy.
THE CERTIFICATE INSURER
GENERAL
Financial Guaranty Insurance Company, as the Certificate Insurer, considers
its role in providing insurance to be credit enhancement rather than credit
substitution. The Certificate Insurer only insures securities that it considers
to be of investment grade quality. With respect to each category of obligations
considered for insurance, the Certificate Insurer has established and maintains
its own underwriting standards that are based on those aspects of credit quality
that the Certificate Insurer deems important for the category and that take into
account criteria established for the category typically used by rating agencies.
Credit criteria for evaluating securities include economic and social trends,
debt management, financial management and legal and administrative factors, the
adequacy of anticipated cash flow, including the historical and expected
performance of assets pledged for payment of securities under varying economic
scenarios, underlying levels of protection such as insurance or
overcollateralization, and, particularly in the case of long-term municipal
securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of debt service on the insured debt securities and timely interest and
ultimate principal payments due in respect of pass-through securities such as
the Class A Certificates. If the issuer of a security insured by the
Certificate Insurer defaults on its obligations to pay such debt service or, in
the case of a pass-through security, available funds are insufficient to pay the
insured amounts, the Certificate Insurer will make scheduled insured payments,
without regard to any acceleration of the securities which may have occurred,
and will be subrogated to the rights of security holders to the extent of its
payments. The claims paying ability of the Certificate Insurer is rated Aaa,
AAA and AAA by Moody's, S&P and Fitch Investors Service, Inc. ("Fitch"),
respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semi-annual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
The Certificate Insurer, a New York stock insurance corporation, is a
monoline financial guaranty insurance company which, since January 1984, has
been a leading insurer of bonds issued by municipal governmental subdivisions
and agencies thereof. The Certificate Insurer also insures a variety of
non-municipal structured debt obligations. The Certificate Insurer is
authorized to write insurance in 50 states and the District of Columbia and is
also authorized to carry on general insurance business in the United Kingdom and
to write credit and guaranty insurance in France. The Certificate Insurer is
subject to regulation by the State of New York Insurance Department.
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The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Certificate Insurer.
The Certificate Insurer and its holding company, FGIC Corporation, are
subject to regulation by each jurisdiction in which the Certificate Insurer is
licensed to write insurance. These regulations vary from jurisdiction to
jurisdiction, but generally require insurance holding companies and their
insurance subsidiaries to register and file certain reports, including
information concerning their capital structure, ownership and financial
condition and require prior approval by the insurance department of their state
of domicile, of changes in control, of dividends and other intercorporate
transfers of assets and of transactions between insurance companies, their
parents and affiliates. The Certificate Insurer is required to file quarterly
and annual statutory financial statements and is subject to statutory
restrictions concerning the types and quality of investments, the use of policy
forms, premium rates and the size of risk that it may insure, subject to
reinsurance. Additionally, the Certificate Insurer is subject to triennial
audits by the State of New York Insurance Department.
As of December 31, 1995 and December 31, 1994, the Certificate Insurer had
written directly or assumed through reinsurance, guaranties of approximately
$180.0 billion and $160.2 billion par value of securities, respectively (of
which approximately 88 percent constituted guaranties of municipal bonds), for
which it had collected gross premiums of approximately $1.95 billion and $1.78
billion, respectively. As of December 31, 1995, the Certificate Insurer had
reinsured approximately 18 percent of the risks it had written, 41 percent
through quota share reinsurance and 59 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth capitalization of the Certificate Insurer as
of December 31, 1994 and December 31, 1995, respectively, on the basis of
generally accepted accounting principles. No material adverse change in the
capitalization of the Certificate Insurer has occurred since December 31, 1995.
December 31, December 31,
1994 1995
(in millions) (in millions)
------------- -------------
Unearned Premiums $ 757 $ 728
Other Liabilities 261 304
Stockholder's Equity
Common Stock 15 15
Additional Paid-in Capital 334 334
Unrealized Gains (Losses) (42) 64
Foreign Currency
Translation Adjustment (1) (2)
Retained Earnings 974 1,137
------ ------
Total Stockholder's Equity 1,280 1,548
------ ------
Total Liabilities and
Stockholder's Equity $2,298 $2,580
------ ------
------ ------
For further financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer included as Appendix
A of this prospectus supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance
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Company, 115 Broadway, New York, New York 10006, Attention: Corporate
Communications Department. The Certificate Insurer's telephone number is
(212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of
information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurance Policy" and "The
Certificate Insurer" and in Appendix A and Appendix B.
An indemnification agreement among the Certificate Insurer, the Sponsor and
Prudential Securities Incorporated provides that each of the parties to such
agreement will indemnify each other for certain liabilities under the 1933 Act.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement and the Prospectus, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
FORMATION OF THE TRUST
On the Closing Date, the Trust will be created and established pursuant to
the Pooling and Servicing Agreement. On such date, the Sponsor will sell
without recourse the Mortgage Loans to the Trust and the Trust will issue the
Class A Certificates to the Owners thereof.
The property of the Trust shall include all money, instruments and other
property to the extent such money, instruments and other property are subject or
intended to be held in trust for the benefit of the Owners, and all proceeds
thereof, including, without limitation, (i) the Mortgage Loans, (ii) such
amounts, including eligible investments, as from time to time may be held by the
Trustee in the Distribution Account, and by the Servicer in the Principal and
Interest Account (except as otherwise provided in the Pooling and Servicing
Agreement), each to be created pursuant to the Pooling and Servicing Agreement,
(iii) any Mortgaged Property, the ownership of which has been effected on behalf
of the Trust as a result of foreclosure or acceptance by the Servicer of a deed
in lieu of foreclosure and that has not been withdrawn from the Trust, (iv) any
insurance policies relating to the Mortgage Loans and any rights of the Sponsor
or the Affiliated Originators under any insurance policies, (v) Net Liquidation
Proceeds with respect to any Liquidated Loan and (vi) the Certificate Insurance
Policy (collectively, the "Trust Estate").
SALE OF MORTGAGE LOANS
The Servicer will sell the Mortgage Loans to the Sponsor on or prior to the
Closing Date pursuant to one or more Master Mortgage Loan Transfer Agreements,
together with the related Conveyance Agreement, between the Servicer and the
Sponsor (the "Master Transfer Agreements"). In the Master Transfer Agreements
the Servicer will make certain representations and warranties; the Sponsor
subsequently will assign its rights to enforce such representations and
warranties to the Trustee.
Pursuant to the Pooling and Servicing Agreement, the Sponsor on the Closing
Date will sell without recourse to the Trustee in trust all right, title and
interest of the Sponsor in each Mortgage Loan listed on the schedule delivered
to the Trustee on the Closing Date (the "Schedule of Mortgage Loans") and all
its right, title and interest in all principal collected and all interest due on
each such Mortgage Loan on or after the Cut-Off Date; provided, however, that
the Sponsor will reserve and retain all its right, title and interest in
principal collected (including Prepayments) and interest due on each Mortgage
Loan prior to the Cut-Off Date.
In connection with the sale of the Mortgage Loans on the Closing Date, the
Sponsor will be required to deliver to the Trustee, as document custodian, a
file (a "Mortgage Loan File") consisting of (i) the original Notes, endorsed by
the Originator thereof to the order of the Trustee, (ii) originals or certified
copies of all
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intervening assignments, showing a complete chain of title from origination to
the Originator, if any, including warehousing assignments, with evidence of
recording (or transmittal for recordation) thereon, (iii) originals of all
assumption and modification agreements if any, and, (iv) either: (a) the
original Mortgage, with evidence of recording thereon, (b) a true and accurate
copy of the Mortgage where the original has been transmitted for recording,
until such time as the original is returned by the public recording office or
(c) a copy of the Mortgage certified by the public recording office in those
instances where the original recorded Mortgage has been lost. The Pooling and
Servicing Agreement also provides that the Certificate Insurer will require
assignments of mortgages prepared and recorded in the name of the Trustee
(unless the Trustee and the Certificate Insurer receive an acceptable opinion of
counsel concluding that such recordation is not necessary to protect the
Trustee's interests in the related Mortgage Loans).
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policy
of all amounts required to be paid such Owners upon the later to occur of
(a) the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate, or
(ii) any time when a Qualified Liquidation of the Trust Estate is effected.
OPTIONAL TERMINATION
BY THE SUBORDINATE CERTIFICATE OWNERS AND THE SERVICER. At their option,
the Subordinate Certificate Owners and the Servicer acting directly or through
one or more affiliates each have the right and may determine to purchase from
the Trust all of the Mortgage Loans and other property then held by the Trust,
and thereby effect early retirement of the Certificates, on and after the Clean-
Up Call Date. The right of the Subordinate Certificate Owners so to exercise
such optional purchase right is superior to such right of Servicer; the Servicer
may exercise its right if the Subordinate Certificate Owners decline to do so.
In addition, the Pooling and Servicing Agreement provides that the Servicer has
the option to purchase from the Trust any Mortgage Loan which is in default.
UPON LOSS OF REMIC STATUS. Following a final determination by the Internal
Revenue Service, or by a court of competent jurisdiction, in each case from
which no appeal is taken within the permitted time for such appeal, or if any
appeal is taken, following a final determination of such appeal from which no
further appeal can be taken to the effect that the Trust does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code (the "Final
Determination"), at any time on or after the date which is 30 calendar days
following such Final Determination, (i) the Owners of a majority in Percentage
Interest represented by the Class A Certificates then outstanding may direct the
Trustee to adopt a plan of complete liquidation with respect to the Trust and
(ii) the Certificate Insurer may notify the Trustee of the Certificate Insurer's
determination to purchase from the Trust all Mortgage Loans and other property
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any Mortgage Loan then remaining in the Trust, and thereby effect the early
retirement of the Certificates. Upon receipt of such notice or direction, the
Trustee will be required to notify the Subordinate Certificate Owners of the
determination of the Certificate Insurer or the Owners of the Class A
Certificates to liquidate (the "Termination Notice"). The Owners of a majority
of the Percentage Interest represented by the Subordinate Certificates then
outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "Purchase Option Period"), at their option, purchase from the Trust
all Mortgage Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining
in the Trust as of the date of such purchase plus one month's interest on such
amount at the weighted average Class A Pass-Through Rate.
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If, during the Purchase Option Period, the Subordinate Certificate Owners
have not exercised the option described above, then upon the expiration of the
Purchase Option Period the Certificate Insurer will be obligated so to purchase
the Trust Estate within 60 days after the expiration of the Purchase Option
Period or the Trustee will sell the Mortgage Loans and distribute the proceeds
of the liquidation thereof.
Following a Final Determination, the Owners of a majority of the Percentage
Interest represented by the Subordinate Certificates then outstanding may, at
their option (and upon delivery to the Owners of the Class A Certificates of an
opinion of counsel experienced in U.S. Federal income tax matters selected by
the Subordinate Certificate Owners, which opinion will be required to be
reasonably satisfactory in form and substance to a majority of the Percentage
Interests represented by the Class A Certificates then outstanding, to the
effect that the effect of the Final Determination is to substantially increase
the probability that the gross income of the Trust will be subject to federal
taxation), purchase from the Trust all Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the Trust Estate at a purchase
price equal to the aggregate Class A Principal Balance as of the date of such
purchase plus interest accrued on the Class A Certificates since the prior
Payment Date at the weighted average Pass-Through Rate. The Pooling and
Servicing Agreement provides that the foregoing opinion shall be deemed
satisfactory unless a majority of the Percentage Interest of the Class A
Certificates give the Subordinate Certificate Owners notice that such opinion is
not satisfactory within thirty days after receipt of such opinion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Class A Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and
in the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC ELECTIONS
The Trustee will cause one or more REMIC elections to be made with respect
to the Trust for federal income tax purposes. Qualification as a REMIC requires
ongoing compliance with certain conditions. Dewey Ballantine, special tax
counsel, will advise that, in its opinion, for federal income tax purposes,
assuming (i) the REMIC elections are made and (ii) compliance with the Pooling
and Servicing Agreement, each class of Class A Certificates will be treated as a
"regular interest" in a REMIC. For federal income tax purposes, regular
interests in a REMIC are treated as debt instruments issued by the REMIC on the
date on which those interests are created, and not as ownership interests in the
REMIC or its assets. Owners of Class A Certificates that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Class A Certificates under an accrual method. The Class A
Certificates may be issued with "original issue discount" for federal income tax
purposes. The prepayment assumption to be used in determining whether the
Class A Certificates are issued with original issue discount and the rate of
accrual of original issue discount is 23% HEP, as described under "Prepayment
and Yield Considerations". No representation is made that any of the Mortgage
Loans will prepay at this rate or any other rate. See "Certain Federal Income
Tax Consequences -- Discount and Premium -- ORIGINAL ISSUE DISCOUNT" in the
Prospectus.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Class A Certificates should
consult with counsel with respect to the consequences under ERISA and the Code
of the Plan's acquisition and Ownership of such Certificates.
S-46
<PAGE>
The DOL has issued to each of Prudential Securities Incorporated and CS
First Boston an individual prohibited transaction exemption, Prohibited
Transaction Exemption 90-32 and Prohibited Transaction Exemption 89-90,
respectively (the "Exemptions"), which generally exempt from the application of
the prohibited transaction provisions of Section 406(a), Section 406(b)(1),
Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the Code, the initial purchase, the
servicing, management, operation and holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemptions. The loans covered by the Exemptions include mortgage loans such as
the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from either S&P, Moody's, Duff & Phelps Credit Rating Co.
("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the Underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the Originator and the Sponsor
pursuant to the assignment of the loans to the Trust Estate represents not
more than the fair market value of such loans; the sum of all payments made
to and retained by any Servicer represents not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or D&P for at
least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
the Plan's acquisition of certificates.
Moreover, the Exemptions provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust; provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons
S-47
<PAGE>
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to Plans sponsored by the Sponsor, the Certificate
Insurer, the Underwriters, the Trustee, the Servicer, any other servicer, any
obligor with respect to Mortgage Loans included in the Trust Estate constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust Estate, or any affiliate of such parties (the "Restricted
Group").
As of the date hereof, there is no single Mortgage Loan included in the
Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemptions, and the potential consequences in their specific circumstances,
prior to making an investment in the Class A Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the Class A
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
RATINGS
It is a condition of the original issuance of the Class A Certificates that
they receive ratings of AAA by S&P and Aaa by Moody's. The ratings assigned to
the Class A Certificates will be based on the claims-paying ability of the
Certificate Insurer. Explanations of the significance of such ratings may be
obtained from Moody's Investors Service, Inc., 99 Church Street, New York, New
York 10007 and Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., 25 Broadway, New York, New York 10004. Such ratings will be
the views only of such rating agencies. There is no assurance that any such
ratings will continue for any period of time or that such ratings will not be
revised or withdrawn. Any such revision or withdrawal of such ratings may have
an adverse effect on the market price of the Class A Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Although upon their initial issuance the Class A Certificates are expected
to be rated AAA by S&P and Aaa by Moody's, the Class A Certificates will not
constitute "mortgage related securities" for purposes of SMMEA because the
Mortgage Pool includes first and junior liens. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the Class A
Certificates.
Institutions subject to the jurisdiction of the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the
National Credit Union Administration or state banking or insurance authorities
should review applicable rules, supervisory policies and guidelines of these
agencies before purchasing any of the Class A Certificates, since the Class A
Certificates may be deemed to be unsuitable investments under one or more of
these rules, policies and guidelines and certain restrictions may apply to such
investments. It should also be noted that certain states have enacted
legislation limiting to varying extends the ability of certain entities (in
particular, insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the Class A Certificates constitute legal investments for
such investors. See "Legal Investment" in the Prospectus.
S-48
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Class A Certificates, the Sponsor has agreed to cause the Trust
to sell to each of the Underwriters named below, and each of the Underwriters
has severally agreed to purchase, the principal amount or percentage interest of
the Class A Certificates set forth opposite its name below:
<TABLE>
<CAPTION>
Percentage Percentage Percentage Percentage
Interest of Interest of Interest of Interest of
Class A-1 Class A-2 Class A-3 Class A-4
Underwriter Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Prudential Securities Incorporated . . 50% 50% 50% 50%
CS First Boston. . . . . . . . . . . . 50% 50% 50% 50%
</TABLE>
The Underwriters are collectively committed to purchase all of the Class A
Certificates if any Class A Certificates are purchased. The Underwriters intend
to act as market makers in the Class A Certificates, subject to applicable
provisions of federal and state securities laws and other regulatory
requirements, but are under no obligation to do so. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Class
A Certificates may be deemed to be underwriters, and any discounts or
commissions received by them and any profit on the resale of the Class A
Certificates by them may be deemed to be underwriting discounts or commissions,
under the Securities Act.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933, or
contribute to payments which the Underwriters may be required to make in respect
thereof.
EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A, as of December 31, 1995 and 1994
and for each of the years in the three year period ended December 31, 1995, have
been included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing in Appendix A, upon the authority of
such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon by Dewey Ballantine, New York, New York.
S-49
<PAGE>
INDEX OF PRINCIPAL PROSPECTUS SUPPLEMENT DEFINITIONS
PAGE
----
1933 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Accredited investor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Actuarial Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Affiliated Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Available Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Beneficial Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Beneficial Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Book-Entry Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
CEDEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Class A Certificate Principal Balance. . . . . . . . . . . . . . . . . . . . .25
Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 4
Class A Distribution Amount. . . . . . . . . . . . . . . . . . . . . . . . . .11
Class A Interest Distribution Amount . . . . . . . . . . . . . . . . . . . . . 8
Class A Principal Distribution Amount. . . . . . . . . . . . . . . . . . . . . 9
Class A Required Distribution Amount . . . . . . . . . . . . . . . . . . . . .11
Class A-1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 4
Class A-1 Pass-Through Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Class A-2 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 4
Class A-2 Pass-Through Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Class A-3 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 4
Class A-3 Pass-Through Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Class A-4 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Class A-4 Net Funds Cap Rate . . . . . . . . . . . . . . . . . . . . . . . . .41
Class A-4 Pass-Through Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Clean-Up Call Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
CLTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cooperative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
CPR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
D&P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
DTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DTC Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
EquiVantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
EquiVantage Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Euroclear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Euroclear Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
European Depositaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
European Depositories. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Final Determination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Fitch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
S-50
<PAGE>
Global Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
HEP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Insured Distribution Amount. . . . . . . . . . . . . . . . . . . . . . . . . .11
Insured Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Loan Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Master Transfer Agreements . . . . . . . . . . . . . . . . . . . . . . . . . .44
Monthly Remittance Amount. . . . . . . . . . . . . . . . . . . . . . . . . . .34
Morgan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Mortgage Loan File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgagor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Net Limitation Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Net Monthly Excess Spread. . . . . . . . . . . . . . . . . . . . . . . . . . .38
Non-U.S. Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Original Class A-1 Certificate Principal Balance . . . . . . . . . . . . . . . 7
Original Class A-2 Certificate Principal Balance . . . . . . . . . . . . . . . 7
Original Class A-3 Certificate Principal Balance . . . . . . . . . . . . . . . 7
Original Class A-4 Certificate Principal Balance . . . . . . . . . . . . . . . 7
Original issue discount. . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 34
Owners of Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Pooling and Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . 1
Preference Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Preference Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Property Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
PUD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Purchase Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Realized Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reimbursement Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Relevant Depositary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
REMIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Remittance Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Remittance Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Residual interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
S&P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Schedule of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . .44
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Servicing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Specified Subordinated Amount. . . . . . . . . . . . . . . . . . . . . . . . .39
Sponsor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sponsor's Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Statistic Calculation Date . . . . . . . . . . . . . . . . . . . . . . . . . . 6
S-51
<PAGE>
Structuring Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Subordinate Certificate Owners . . . . . . . . . . . . . . . . . . . . . . . .13
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Subordinated Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Subordination Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Subordination Increase Amount. . . . . . . . . . . . . . . . . . . . . . . . .39
Subordination Reduction Amount . . . . . . . . . . . . . . . . . . . . . . . .39
Substitution Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Termination Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Third-Party Servicing Portfolio. . . . . . . . . . . . . . . . . . . . . .18, 31
Total Monthly Excess Spread. . . . . . . . . . . . . . . . . . . . . . . . . .38
Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S. Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4
Unaffiliated Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Weighted average life. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
S-52
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered EquiVantage
Home Equity Loan Trust 1996-2 Class A-1, Class A-2, Class A-3 and Class A-4
Certificates (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities
through any of DTC, CEDEL or Euroclear. The Global Securities will be tradeable
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
I-1
<PAGE>
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by
the Relevant Depository to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depository, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of CEDEL Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). In the event that the CEDEL Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended
I-2
<PAGE>
value date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by
U.S. Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME
(FORM 4224). A Non-U.S. Person (as defined below), including a
non-U.S. corporation or bank with a U.S. branch, for which the interest income
is effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8.
Form 1001 may be filed by Certificate Owners or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
I-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
I-4
<PAGE>
APPENDIX A
AUDITED FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
KPMG Peat Marwick LLP
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditor's Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- -------------------------------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Report of Independent Auditors. . . . . . . . . . . 1
Balance Sheets. . . . . . . . . . . . . . . . . . . 2
Statements of Income. . . . . . . . . . . . . . . . 3
Statements of Stockholder's Equity. . . . . . . . . 4
Statements of Cash Flows. . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . 6
<PAGE>
[PEAT MARWICK LLP - LETTERHEAD]
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
As described in notes 6 and 2, respectively, in 1993, the Company changed its
methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.
KPMG PEAT MARWICK LLP
January 19, 1996
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
- -------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $2,141,584 $1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 --
Prepaid expenses and other assets 12,627 12,243
---------- ----------
Total assets $2,580,302 $2,298,210
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
---------- ----------
Total liabilities 1,032,421 1,018,487
---------- ----------
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available-
for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
---------- ----------
Total stockholder's equity 1,547,881 1,279,723
---------- ----------
Total liabilities and stockholder's equity $2,580,302 $2,298,210
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Gross premiums written $ 97,288 $ 161,940 $ 291,052
Ceded premiums (19,319) (46,477) (49,914
--------- --------- --------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
--------- --------- --------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
--------- --------- --------
Total revenues 256,438 284,553 301,595
--------- --------- --------
EXPENSES:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
--------- --------- --------
Total expenses 19,806 43,597 87,022
--------- --------- --------
Income before provision for Federal income taxes 236,632 240,956 214,573
--------- --------- --------
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
--------- --------- --------
Total Federal income tax expense 48,754 51,225 52,221
--------- --------- --------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
--------- --------- --------
Net cumulative effect of change in
accounting principle -- -- 3,008
--------- --------- --------
Net income $ 187,878 $ 189,731 $ 165,360
--------- --------- --------
--------- --------- --------
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS)
NET UNREALIZED
GAINS (LOSSES) ON
ADDITIONAL FIXED MATURITY FOREIGN
COMMON PAID-IN SECURITIES AVAILABLE- CURRENCY RETAINED
STOCK CAPITAL FOR-SALE, NET OF TAX ADJUSTMENT EARNINGS
-------- ------- -------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $324,639 $7,267 $(1,597) $618,615
Net income -- -- -- -- 165,360
Capital contribution -- 21,872 -- -- --
Adjustment to common stock par value 12,500 (12,500) -- -- --
Unrealized gains on fixed maturity securities
previously held at market, net of tax of ($713) -- -- (1,325) -- --
Implementation of change in accounting for
adoption of SFAS 115, net of tax of $45,643 -- -- 84,766 -- --
Foreign currency translation adjustment -- -- -- (668) --
------- -------- -------- --------- ----------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income -- -- -- -- 189,731
Unrealized losses on fixed maturity securities
available-for-sale, net of tax of ($71,336) -- -- (132,481) -- --
Foreign currency translation adjustment -- -- -- 1,044 --
------- -------- -------- --------- ----------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income -- -- -- -- 187,878
Dividend paid -- -- -- -- (25,000)
Unrealized gains on fixed maturity securities
available for sale, net of tax of $56,839 -- -- 105,558 -- --
Foreign currency translation adjustment -- -- -- (278) --
------- -------- -------- --------- ----------
Balance, December 31, 1995 $15,000 $334,011 $ 63,785 $ (1,499) $1,136,584
------- -------- -------- --------- ----------
------- -------- -------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $187,878 $189,731 $165,360
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax -- -- (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
--------- ---------- ---------
Net cash provided by operating activities 94,546 184,489 277,448
--------- ---------- ---------
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) 721,908) (1,090,550)
Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
--------- ---------- ---------
Net cash used in investing activities (71,113) (184,150) (298,335)
--------- ---------- ---------
FINANCING ACTIVITIES:
Dividends paid (25,000) -- --
Capital contribution -- -- 21,872
--------- ---------- ---------
Net cash provided by financing activities (25,000) -- 21,872
--------- ---------- ---------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
--------- ---------- ---------
Cash at end of year $ 199 $ 1,766 $ 1,427
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 88% of the
business written since inception by the Company has been municipal bond
insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's
insurance policies do not provide for accelerated payment of the principal
of, or interest on, the bond insured in the case of a payment default. If
the issuer of a Company-insured bond defaults on its obligation to pay debt
service, the Company will make scheduled interest and principal payments as
due and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1995 presentation. Significant
accounting policies are as follows:
INVESTMENTS
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related accounting
treatment for each respective category. The Company has determined that
its fixed maturity securities portfolio should be classified as
available-for-sale. Under SFAS 115, securities held as available-for-sale
are recorded at fair value and unrealized holding gains/losses are recorded
as a separate component of stockholder's equity, net of applicable income
taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are
determined on the basis of specific identification.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
PREMIUM REVENUE RECOGNITION
Premiums are earned over the period at risk in proportion to the amount of
coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related unearned
premiums, net of premium credits allowed against the premiums charged for
insurance of refunding issues and applicable acquisition costs, are earned
immediately. Unearned premiums represent the portion of premiums written
related to coverage yet to be provided on policies in force.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees
involved in underwriting, marketing and policy issuance functions, rating
agency fees, state premium taxes and certain other underwriting expenses,
offset by ceding commission income on premiums ceded to reinsurers (see
Note 6). Net acquisition costs are deferred and amortized over the period
in which the related premiums are earned. Anticipated loss and loss
adjustment expenses are considered in determining the recoverability of
acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments
due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such
reserves amounted to $77.8 million and $98.7 million at December 31, 1995
and 1994, respectively. As of December 31, 1995 and 1994, such reserves
included $28.8 million and $71.0 million, respectively, established based
on an evaluation of the insured portfolio in light of current economic
conditions and other relevant factors. Loss and loss adjustment expenses
include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in
1994. The reserve for loss and loss adjustment expenses is necessarily
based upon estimates, however, in management's opinion the reserves for
loss and loss adjustment expenses is adequate. However, actual results
will likely differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included
in taxable income upon their release from the reserves or upon earlier
release of such amounts from such reserves to cover excess losses as
permitted by insurance regulators. The amounts deducted are allowed as
deductions from taxable income only to the extent that U.S. government
non-interest bearing tax and loss bonds are purchased and held in an amount
equal to the tax benefit attributable to such deductions.
-7-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income
over their estimated service lives. Office furniture and equipment are
depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated over
three years. Maintenance and repairs are charged to expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing
at December 31, 1995 and 1994 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at
December 31, 1995 and 1994 was $1.5 million and $1.2 million, respectively,
net of tax, and is reported as a separate component of stockholder's
equity.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by
state insurance regulatory authorities. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related risk
rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as incurred
rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged directly
against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable income
for which income taxes are currently payable, while under GAAP taxes
are also provided for differences between the financial reporting and
the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments; and
(g) all fixed income investments are carried at amortized cost rather than
at fair value for securities classified as available-for-sale under
GAAP.
-8-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a statutory-
basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------ -------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
------ ------ ------ ------- ------ ------
S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $187,878 $1,547,881 $189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve - (386,564) - (328,073) - (252,542)
Non-admitted assets - (5,731) - (7,566) - (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax - (63,785) - 41,773 - (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance - - - (266) - -
Contingency reserve tax deduction (see Note 2) - 78,196 - 55,496 - 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 - 9,716
-------- ---------- -------- -------- -------- ---------
Statutory-basis amount $166,906 $1,001,521 $179,348 $893,734 $185,145 $ 777,097
-------- ---------- -------- -------- -------- ---------
-------- ---------- -------- -------- -------- ---------
</TABLE>
-9-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1995 COST GAINS LOSSES VALUE
- ---- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 71,182 $ 1,696 -- $ 72,878
Obligations of states and political
subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments 30,270 152 550 29,872
----------- ----------- --------- ----------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 -- -- 91,032
----------- ----------- --------- ----------
Total $2,134,485 $100,306 $2,175 $2,232,616
----------- ----------- --------- ----------
----------- ----------- --------- ----------
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1995, by contractual maturity date, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR
1995 COST VALUE
---- ------------ ------------
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
------------ ------------
Total $ 2,134,485 $ 2,232,616
------------ ------------
------------ ------------
-10-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREASLIZED
AMORITIZED HOLDING HOLDING FAIR
1994 COST GAINS LOSSES VALUE
- ---- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments 103,666 400 (4,765) 99,301
----------- -------- ------------ ------------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 -- -- 75,674
----------- -------- ------------ ------------
Total $ 2,029,851 $ 26,217 $ (90,484) $ 1,965,584
----------- -------- ------------ ------------
----------- -------- ------------ ------------
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were $836.1
million, $550.5 million, and $789.0 million, respectively. For 1995, 1994
and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million
respectively, and gross losses of $5.5 million, $12.3 million and $1.0
million respectively, were realized on such sales.
Net investment income of the Company is derived from the following sources
(in thousands):
<TABLE>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income from fixed maturity securities $112,684 $108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
-------- -------- ---------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
-------- -------- ---------
Net investment income $120,398 $109,828 $ 99,920
-------- -------- ---------
-------- -------- ---------
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
</TABLE>
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax
sharing agreement with GE Capital, taxes are allocated to the Company and
the Parent based upon their respective contributions to consolidated net
income. The Company's effective federal corporate tax rate (20.6 percent
in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the
corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the Company
for 1995, 1994 and 1993 is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------- ------- -------
Current tax expense $28,913 $43,484 $59,505
Deferred tax expense 19,841 7,741 (7,284)
------- ------- -------
Federal income tax expense $48,754 $51,225 $52,221
------- ------- -------
------- ------- -------
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $82,821 $84,334 $75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
------- ------- -------
Provision for income taxes $48,754 $51,225 $52,221
------- ------- -------
------- ------- -------
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities at december 31, 1995 and 1994 are presented
below (in thousands):
1995 1994
-------- ---------
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available-for-sale -- $ 22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
-------- ---------
Total gross deferred tax assets 18,434 52,439
-------- ---------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 34,346 --
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
-------- ---------
Total gross deferred tax liabilities 117,605 75,079
-------- ---------
Net deferred tax liability $ 99,171 $ 22,640
-------- ---------
-------- ---------
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are
deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it will
realize the benefits of these deductible differences and has not established
a valuation allowance at December 31, 1995 and 1994. The company anticipates
that the related deferred tax asset will be realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 million, respectively.
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a
facultative basis. This process serves to limit the Company's exposure on
risks underwritten. In the event that any or all of the reinsuring
companies were unable to meet their obligations, the Company would be
liable for such defaulted amounts. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral under reinsurance agreements in the form of
letters of credit and trust agreements in various amounts with various
reinsurers totaling $33.7 million that can be drawn on in the event of
default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent a
payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial statements,
an initial adjustment of $4.6 million, before applicable income taxes, has
been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $1.1 million, $0.3 million
and $9.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
-14-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Balance at January 1, $98,746 $96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
-------- -------- -------
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 --
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
-------- -------- -------
Total Incurred (8,426) 3,646 42,894
-------- -------- -------
Paid related to:
Current year (197) (382) --
Prior years (5,515) (920) (670)
-------- -------- -------
Total Paid (5,712) (1,302) (670)
-------- -------- -------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
-------- -------- -------
Balance at December 31, $77,808 $98,746 $96,098
-------- -------- -------
-------- -------- -------
</TABLE>
The changes in incurred portfolio reserves principally relate to business
written in prior years. The changes are based upon an evaluation of the insured
portfolio in light of current economic conditions and other relevant factors.
-15-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the management
of the Company's investment portfolio; and telecommunication service
charges. Approximately $3.2 million, $3.2 million and $1.0 million in
expenses were incurred in 1995, 1994 and 1993, respectively, related to
such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides
first loss protection in the event of default. Gross premiums written on
these issues amounted to $1.3 million in 1995, $2.5 million in 1994, and
$3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written in 1995 and 1994 and 2 percent in 1993).
(9) COMPENSATION PLANS
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans.
Expenses incurred by the Company under compensation plans and bonuses
amounted to $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and
1993, respectively, before deduction for related tax benefits.
(10) DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus
after such dividend may not be less than the minimum required paid-in
capital, which was $2.1 million in 1995 and 1994, and (b) dividends may not
exceed the lesser of 10 percent of its surplus or 100 percent of adjusted
net investment income, as defined by New York insurance law, for the 12
month period ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State Insurance Department.
At December 31, 1995 and 1994, the amount of the Company's surplus
available for dividends was approximately $100.2 million and $89.3 million,
respectively.
During 1995, the company paid dividends of $25 million. No dividends were
paid during 1994 or 1993.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(11) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial
instruments:
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
SHORT-TERM INVESTMENTS: Short-term investments are carried at cost, which
approximates fair value.
CASH, RECEIVABLE FOR SECURITIES SOLD, AND PAYABLE FOR SECURITIES PURCHASED:
The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial Assets
<S> <C> <C> <C> <C>
Cash
On hand and in demand accounts $ 199 $ 199 $1,766 $1,766
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
FINANCIAL GUARANTIES: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves.
Estimated fair values of these guaranties are based on amounts currently
charged to enter into similar agreements (net of applicable ceding
commissions), discounted cash flows considering contractual revenues to be
received adjusted for expected prepayments, the present value of future
obligations and estimated losses, and current interest rates. The
estimated fair values of such financial guaranties range between $412.8
million and $456.2 million compared to a carrying value of $540.6 million
as of December 31, 1995 and between $518.1 million and $565.9 million
compared to a carrying value of $585.1 million as of December 31, 1994.
-17-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade quality.
The Company has established and maintains its own underwriting standards
that are based on those aspects of credit that the Company deems important
for the particular category of obligations considered for insurance.
Credit criteria include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to
make payment prior to any payment by the Company. The types and extent of
collateral pledged varies, but may include residential and commercial
mortgages, corporate debt, government debt and consumer receivables.
As of December 31, 1995, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $98.7 billion, net
of reinsurance of $20.7 billion. The Company's insured portfolio as of
December 31, 1995 was broadly diversified by geography and bond market
sector with no single debt issuer representing more than 1% of the
Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1995, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
---------
Total $98,660.3
---------
---------
-18-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The company is authorized to do business in 50 states, the district of columbia,
and in the United Kingdom and France. Principal exposure outstanding at
december 31, 1995 by state, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-------------
California $ 10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
----------
Sub-total 59,518.2
Other states and International 39,142.1
----------
Total $98,660.3
----------
----------
(12) COMMITMENTS
Total rent expense was $2.2 million, $2.6 million and $2.4 million in 1995,
1994 and 1993, respectively. For each of the next five years and in the
aggregate as of December 31, 1995, the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one
year approximate (in thousands):
YEAR AMOUNT
---- ------
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-------
Total minimum future rental payments $16,844
-------
-------
-19-
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the "Securities") that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (a "Mortgage Pool") of one- to four-family residential
mortgage loans, or certificates of interest or participation therein, to be
acquired by such Trust from EquiVantage Acceptance Corp. (the "Sponsor"). The
Mortgage Loans were or will be acquired by the Sponsor from affiliated or
unaffiliated entities as described herein. See "The Mortgage Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets described
herein and in the related Prospectus Supplement (collectively with respect to
each Trust, the "Trust Estate") will be held by the related Trust for the
benefit of the holders of the related series of Securities (the
"Securityholders") pursuant to a Pooling and Servicing Agreement to the extent
and as more fully described herein and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Pool will consist of one or more of the various types of Mortgage Loans
described under "The Mortgage Pools."
Each series of Securities will include one or more classes. The Securities
of any particular class may represent beneficial ownership interests in the
related Mortgage Loans held by the related Trust, or may represent debt secured
by such Mortgage Loans, as described herein and in the related Prospectus
Supplement. A series may include one or more classes of Securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. The rights of one or more classes of Securities of
any series may be senior or subordinate to the rights of one or more of the
other classes of Securities. A series may include two or more classes of
Securities which differ as to the timing, sequential order, priority of payment,
interest rate or amount of distributions of principal or interest or both.
Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
THE SPONSOR'S, THE SERVICER'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS
WITH RESPECT TO A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING
REQUIREMENTS RELATING THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND
WARRANTIES MADE BY THE SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS DESCRIBED IN
THE RELATED PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF
SECURITIES WILL NAME TRANSWORLD MORTGAGE CORPORATION, AN AFFILIATE OF THE
SPONSOR, AS SERVICER (THE "SERVICER") WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR
MORE SUB-SERVICERS (THE "SUB-SERVICER(S)"). THE PRINCIPAL OBLIGATIONS OF THE
SERVICER WILL BE PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH
INCLUDE ITS LIMITED OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF
DELINQUENCIES IN PAYMENTS ON THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO
PREPAYMENT OF MORTGAGE LOANS). SEE "DESCRIPTION OF THE SECURITIES."
If so specified in the related Prospectus Supplement, the Trust Estate for
a series of Securities may include any combination of a mortgage pool insurance
policy, letter of credit, financial guaranty insurance policy, bankruptcy bond,
special hazard insurance policy, reserve fund or other form of credit
enhancement. In addition to or in lieu of the foregoing, credit enhancement
with respect to certain classes of Securities of any series may be provided by
means of subordination, cross-support among Mortgage Assets as defined herein or
over-collateralization. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Securities entitled to
principal payments will depend on the priority of payment of such class and the
rate of payment (including prepayments, defaults, liquidations and repurchases
of Mortgage Loans) of the related Mortgage Loans. A rate of principal payment
lower or higher than that anticipated may affect the yield on each class of
Securities in the manner described herein and in the related Prospectus
Supplement. The various types of Securities, the different classes of such
Securities and certain types of Mortgage Loans in a given Mortgage Pool may have
different prepayment risks and credit risks. The Prospectus Supplement for a
series of Securities will contain information as to (i) types, maturities and
certain statistical information relating to credit risks of the Mortgage Loans
in the related Mortgage Pool, (ii) projected prepayment and yields based upon
certain specified assumptions for a series of Securities and (iii) priority of
payment and maturity dates of the Securities. See "Yield Considerations." A
Trust may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
AN INVESTOR SHOULD CAREFULLY REVIEW THE INFORMATION UNDER "RISK FACTORS"
HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT
CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF
SECURITIES.
(COVER CONTINUED ON NEXT PAGE)
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
RELATED SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE SPONSOR, THE SERVICER, ANY ORIGINATOR OR ANY OF THEIR
AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE
SERVICER, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK FACTORS."
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement. There will be no
secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO
CONSUMMATE SALES OF SECURITIES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The date of this Prospectus is May 7, 1996.
<PAGE>
One or more separate elections may be made to treat a Trust, or one or more
segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. If applicable,
the Prospectus Supplement for a series of Securities will specify which class or
classes of the related series of Securities will be considered to be regular
interests in a REMIC and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. Alternatively, a Trust may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of secured debt.
See "Certain Federal Income Tax Consequences" herein.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
CAPTION PAGE
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . 3
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Limited Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Limited Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Limitations, Reduction and Substitution of Credit Enhancement . . . . . . . . . . . . 13
Risks of the Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Geographic Concentration of Mortgaged Properties. . . . . . . . . . . . . . . . . . . 15
Legal Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Yield and Prepayment Considerations . . . . . . . . . . . . . . . . . . . . . . . . . 16
Book-entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Status of the Mortgage Loans in the Event of Bankruptcy of
the Sponsor or an Originator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Limitations on Interest Payments and Foreclosures . . . . . . . . . . . . . . . . . . 17
Security Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
THE TRUSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
The Mortgage Loans--General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
THE MORTGAGE POOLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Mortgage Pools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MORTGAGE LOAN PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Underwriting Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Sponsor's Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Qualifications of Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Representations by Originators. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Sub-Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
DESCRIPTION OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
General Payment Terms of Securities . . . . . . . . . . . . . . . . . . . . . . . . . 34
Form of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Assignment of Mortgage Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Forward Commitments; Pre-Funding. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Payments on Mortgage Loans; Deposits to Distribution Account. . . . . . . . . . . . . 38
Withdrawals from the Principal and Interest Account . . . . . . . . . . . . . . . . . 40
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Principal and Interest on the Securities. . . . . . . . . . . . . . . . . . . . . . . 41
Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Reports to Securityholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Collection and Other Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . 44
Realization upon Defaulted Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . 45
SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
DESCRIPTION OF CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Letter of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Mortgage Pool Insurance Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Special Hazard Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Bankruptcy Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Financial Guaranty Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . 49
Other Insurance, Guarantees and Similar Instruments or Agreements . . . . . . . . . . 50
Cross-Collateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
CAPTION PAGE
Maintenance of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Reduction or Substitution of Credit Enhancement . . . . . . . . . . . . . . . . . . . 51
HAZARD INSURANCE; CLAIMS
THEREUNDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Hazard Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
THE SPONSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
THE SERVICER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
THE MASTER SERVICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Servicing and Other Compensation and Payment of Expenses; Originator's Retained Yield 53
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Removal and Resignation of the Servicer . . . . . . . . . . . . . . . . . . . . . . . 54
Resignation of the Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . 55
Rights Upon Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Termination; Retirement of Securities . . . . . . . . . . . . . . . . . . . . . . . . 56
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
YIELD CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
MATURITY AND PREPAYMENT CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 59
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND RELATED MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Foreclosure on Shares of Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . 63
Rights of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Anti-Deficiency Legislation and Other Limitations on Lenders. . . . . . . . . . . . . 64
Environmental Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Enforceability of Certain Provisions. . . . . . . . . . . . . . . . . . . . . . . . . 65
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Alternative Mortgage Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Soldiers' and Sailors' Civil Relief Act of 1940 . . . . . . . . . . . . . . . . . . . 67
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . 67
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Grantor Trust Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
REMIC Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Discount and Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Backup Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
ERISA CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Plan Asset Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Prohibited Transaction Class Exemption. . . . . . . . . . . . . . . . . . . . . . . . 81
Tax Exempt Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Consultation With Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
LEGAL INVESTMENT MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
METHODS OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
INDEX OF PRINCIPAL DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
</TABLE>
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by each respective trust pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering of the securities of such trust
offered hereby shall be deemed to be incorporated by reference into this
Prospectus when delivered with respect to such trust. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to EquiVantage Acceptance Corp., 13111 Northwest Freeway, Suite 300,
Houston, Texas 77040 (telephone number (713) 895-1900).
3
<PAGE>
SUMMARY OF PROSPECTUS
THE FOLLOWING SUMMARY OF CERTAIN PERTINENT INFORMATION 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
SECURITIES CONTAINED IN THE PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED
IN CONNECTION WITH THE OFFERING OF SUCH SERIES. CAPITALIZED TERMS USED IN THIS
SUMMARY THAT ARE NOT OTHERWISE DEFINED SHALL HAVE THE MEANINGS ASCRIBED THERETO
IN THIS PROSPECTUS. AN INDEX INDICATING WHERE CERTAIN TERMS USED HEREIN ARE
DEFINED APPEARS AT THE END OF THIS PROSPECTUS.
SECURITIES OFFERED . . Mortgage Loan Asset-Backed Securities.
SPONSOR OF THE TRUSTS. EquiVantage Acceptance Corp.. See "The Sponsor."
ORIGINATORS. . . . . . The Sponsor acquires the Mortgage Loans from one or
more institutions, including the Servicer,
affiliated with the Sponsor ("Affiliated
Originators") or institutions unaffiliated with the
Sponsor ("Unaffiliated Originators") (the Affiliated
Originators and the Unaffiliated Originators
collectively referred to as the "Originators").
SERVICER . . . . . . . Transworld Mortgage Corporation. See "The Servicer".
MASTER SERVICER. . . . A Master Servicer may be specified in the related
Prospectus Supplement for the related series of
Securities. See "The Master Servicer".
SUB-SERVICERS. . . . . Affiliated Originators may act as Sub-Servicers for
Mortgage Loans acquired by the Sponsor from such
Affiliated Originators unless servicing is released
to the Servicer or has been transferred to a
servicer approved by the Servicer. Unaffiliated
Originators may or may not act as Sub-Servicers for
Mortgage Loans acquired by the Sponsor from such
Unaffiliated Originators. In addition, third-party
unaffiliated contract servicers may act as
Sub-Servicers. See "Mortgage Loan Program--
Sub-Servicers."
TRUSTEE. . . . . . . . The trustee (the "Trustee") for each series of
Securities will be specified in the related
Prospectus Supplement.
THE SECURITIES . . . . ISSUANCE OF SECURITIES. Each series of Securities
will be issued at the direction of the Sponsor by a
separate Trust (each, a "Trust"). The primary
assets of each Trust will consist of a segregated
pool (each a "Mortgage Pool") of one-to-four family
residential mortgage loans, home improvement loans
which may be partially insured by the FHA, home
equity revolving lines of credit, condominium
mortgage loans ("Condominium Loans"), mortgage loans
on manufactured housing which constitute real
property under applicable state law, mortgage loans
on cooperative apartments ("Cooperative Loans")
and/or other residential mortgage loans described in
the related Prospectus Supplement (collectively, the
"Mortgage Loans") or certificates of interest or
participation therein, acquired by such Trust from
the Sponsor. The Sponsor will acquire the Mortgage
Loans from one or more of the Originators. The
Securities issued by any Trust may represent
beneficial ownership interests in the related
Mortgage Loans held by the related Trust, or may
represent debt secured by such Mortgage Loans, as
described herein and in the related Prospectus
Supplement. Securities which represent beneficial
ownership interests in the related Trust will be
referred to as "Certificates" in the related
Prospectus Supplement; Securities
4
<PAGE>
which represent debt issued by the related Trust
will be referred to as "Notes" in the related
Prospectus Supplement.
Each Trust will be established pursuant to an
agreement (each, a "Trust Agreement") by and between
the Sponsor and the Trustee named therein. Each
Trust Agreement will describe the related pool of
assets to be held in trust (each such asset pool,
the "Trust Estate"), which will include the related
Mortgage Loans and, if so specified in the related
Prospectus Supplement, may include any combination
of a mortgage pool insurance policy, letter of
credit, financial guaranty insurance policy, special
hazard policy, reserve fund or other form of credit
enhancement.
The Mortgage Loans held by each Trust will be
serviced by the Servicer pursuant to a servicing
agreement (each, a "Servicing Agreement") by and
between the Servicer and the related Trustee.
With respect to Securities that represent debt issued
by the related Trust, the related Trust will enter
into an indenture (each, an "Indenture") by and
between such Trust and the trustee named on such
Indenture (the "Indenture Trustee"), as set forth in
the related Prospectus Supplement. Securities that
represent beneficial ownership interests in the
related Trust will be issued pursuant to the related
Trust Agreement.
In the case of any individual Trust, the contractual
arrangements relating to the establishment of the
Trust, the servicing of the related Mortgage Loans
and the issuance of the related Securities may be
contained in a single agreement, or in several
agreements which combine certain aspects of the
Trust Agreement, the Servicing Agreement and the
Indenture described above (for example, a pooling
and servicing agreement, or a servicing and
collateral management agreement). For purposes of
this Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust means,
collectively, and except as otherwise specified, any
and all agreements relating to the establishment of
the related Trust, the servicing of the related
Mortgage Loans and the issuance of the related
Securities.
SECURITIES WILL BE RECOURSE TO THE ASSETS OF THE
RELATED TRUST ONLY. The sole source of payment for
any series of Securities will be the assets of the
related Trust (I.E., the related Trust Estate). The
Securities will not be obligations, either recourse
or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax
Consequences"), of the Sponsor, the Master Servicer,
if applicable, the Servicer, any Originator or any
Person other than the related Trust. In the case of
Securities that represent beneficial ownership
interests in the related Trust Estate, such
Securities will represent the ownership of such
Trust Estate; with respect to Securities that
represent debt issued by the related Trust, such
Securities will be secured by the related Trust
Estate. Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement,
certain types of credit enhancement, such as a
financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of
the issuer of such credit enhancement.
OBLIGOR CONCENTRATION. The Sponsor does not expect
that the assets of any Trust (exclusive of any form
of credit enhancement, as
5
<PAGE>
described below) will represent more than a DE
MINIMUS level of obligor concentration (or
concentration among any affiliated group of
obligors). In the event that any Trust includes a
loan or group of loans with the same obligor or
affiliated group of obligors which represent 20% or
more of the principal amount of Securities issued
with respect to such Trust, the related Prospectus
Supplement will contain the financial statements of
such obligor or affiliated group as may be required
by the rules of the Commission. In the event that
any Trust includes a loan or group of loans with the
same obligor or affiliated group of obligors which
represent more than 10% but less than 20% of the
principal amount of Securities issued with respect
to such Trust, the related Prospectus Supplement
will contain such information, including financial
information, sufficient to enable investors to
assess the credit quality of such loan(s).
GENERAL NATURE OF THE SECURITIES AS INVESTMENTS. The
Securities will consist of two basic types: (i)
Securities of the fixed-income type ("Fixed-Income
Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class
of Equity Securities will be offered pursuant to
this Prospectus or any Prospectus Supplement related
hereto. Fixed-Income Securities will generally be
styled as debt instruments, having a principal
balance and a specified interest rate ("Interest
Rate"). Fixed-Income Securities may be either
beneficial ownership interests in the related
Mortgage Loans held by the related Trust, or may
represent debt secured by such Mortgage Loans. Each
series or class of Fixed-Income Securities may have
a different Interest Rate, which may be a fixed or
adjustable Interest Rate. The related Prospectus
Supplement will specify the Interest Rate for each
series or class of Fixed-Income Securities, or the
initial Interest Rate and the method for determining
subsequent changes to the Interest Rate.
A series may include one or more classes of
Fixed-Income Securities ("Strip Securities")
entitled (i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest distributions,
with disproportionate, nominal or no principal
distributions. In addition, a series may include
two or more classes of Fixed-Income Securities that
differ as to timing, sequential order, priority of
payment, Interest Rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both on
any class may be made upon the occurrence of
specified events, in accordance with a schedule or
formula, or on the basis of collections from
designated portions of the related Mortgage Pool,
which series may include one or more classes of
Fixed-Income Securities ("Accrual Securities"), as
to which certain accrued interest will not be
distributed but rather will be added to the
principal balance (or nominal principal balance, in
the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as
hereinafter defined and in the manner described in
the related Prospectus Supplement.
If so provided in the related Prospectus Supplement,
a series of Securities may include one or more other
classes of Fixed-Income Securities (collectively,
the "Senior Securities") that are senior to one or
more other classes of Fixed-Income Securities
(collectively, the "Subordinate Securities") in
respect of certain
6
<PAGE>
distributions of principal and interest and
allocations of losses on Mortgage Loans. In
addition, certain classes of Senior (or Subordinate)
Securities may be senior to other classes of Senior
(or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive
the proceeds of the related Trust Estate after all
required payments have been made to the
Securityholders of the related Fixed-Income
Securities (both Senior Securities and Subordinate
Securities), and following any required deposits to
any reserve account which may be established for the
benefit of the Fixed-Income Securities. Equity
Securities may constitute what are commonly referred
to as the "residual interest," "seller's interest"
or the "general partnership interest," depending
upon the treatment of the related Trust for federal
income tax purposes. As distinguished from the
Fixed-Income Securities, the Equity Securities will
not be styled as having principal and interest
components. Any losses suffered by the related
Trust will first be absorbed by the related class of
Equity Securities, as described herein and in the
related Prospectus Supplement.
No Class of Equity Securities will be offered
pursuant to this Prospectus or any Prospectus
Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to
a separate Registration Statement to be filed by the
Sponsor. In addition, the Sponsor and its
affiliates may initially or permanently hold any
Equity Securities issued by any Trust.
GENERAL PAYMENT TERMS OF SECURITIES. As provided in
the related Pooling and Servicing Agreement and as
described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments
on their Securities on specified dates ("Payment
Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or
semiannually, as described in the related Prospectus
Supplement; Payment Dates with respect to Equity
Securities will occur as described in the related
Prospectus Supplement.
The related Prospectus Supplement will describe a
date (the "Record Date") preceding each Payment
Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the
purpose of receiving payments on the next succeeding
Payment Date.
Each Pooling and Servicing Agreement will describe a
period (a "Remittance Period" or "Due Period")
antecedent to each Payment Date; collections
received on or with respect to the related Mortgage
Loans during the related Remittance Period will be
required to be remitted by the Servicer to the
related Trustee prior to the related Payment Date,
and will be used to fund payments to Securityholders
on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling
and Servicing Agreement may provide that all or a
portion of the principal collected on or with
respect to the related Mortgage Loans may be applied
by the related Trustee to the acquisition of
additional Mortgage Loans during a specified period
(rather than be used to fund payments of principal
to Securityholders during such period) with the
result that the related
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Securities will possess an interest-only period,
also commonly referred to as a revolving period,
which will be followed by an amortization period.
Any such interest-only or revolving period may, upon
the occurrence of certain events to be described in
the related Prospectus Supplement, terminate prior
to the end of the specified period and result in the
earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related
Prospectus Supplement, the related Pooling and
Servicing Agreement may provide that all or a
portion of such collected principal may be retained
by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a
specified period prior to being used to fund
payments of principal to Securityholders.
The result of such retention and temporary investment
by the Trustee of such principal would be to slow
the amortization rate of the related Securities
relative to the amortization rate of the related
Mortgage Loans, or to attempt to match the
amortization rate of the related Securities to an
amortization schedule established at the time such
Securities are issued. Any such feature applicable
to any Securities may terminate upon the occurrence
of events to be described in the related Prospectus
Supplement, resulting in the current distribution of
principal payments to the specified Securityholders
and an acceleration of the amortization of such
Securities.
Unless otherwise specified in the related Prospectus
Supplement, neither the Securities nor the
underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or
instrumentality or the Sponsor, the Servicer, the
Master Servicer, if applicable, any Sub-Servicer, if
applicable, any Originator or any of their
affiliates.
NO INVESTMENT
COMPANIES. . . . . . Neither the Sponsor nor any Trust will register as an
"investment company" under the Investment Company
Act of 1940, as amended (the "Investment Company
Act").
CROSS-COLLATERALIZATION Unless otherwise provided in the related Pooling and
Servicing Agreement and described in the related
Prospectus Supplement, the source of payment for
Securities of each series will be the assets of the
related Trust Estate only. However, as may be
described in the related Prospectus Supplement, a
Trust Estate may include the right to receive moneys
from a common pool of credit enhancement which may
be available for more than one series of Securities,
such as a master reserve account or a master
insurance policy. Notwithstanding the foregoing,
unless specifically described otherwise in the
related Prospectus Supplement, no collections on any
Mortgage Loans held by any Trust may be applied to
the payment of Securities issued by any other Trust
(except to the limited extent that certain
collections in excess of amounts needed to pay the
related Securities may be deposited in a common,
master reserve account that provides credit
enhancement for more than one series of Securities).
THE MORTGAGE POOLS . . Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool will consist
primarily of Mortgage Loans
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secured by liens on one- to four-family residential
properties ("Mortgages"), located in any one of the
fifty states, the District of Columbia, Puerto Rico
or any other Territories of the United States (the
"Mortgaged Properties"). All Mortgage Loans will
have been acquired by the related Trust from the
Sponsor. All Mortgage Loans will have been
originated either by (i) the Servicer or one or more
Affiliated Originators other than the Servicer,
generally pursuant to standard underwriting
guidelines described herein, as modified from time
to time ("Sponsor's Guidelines"); (ii) one or more
Unaffiliated Originators, generally pursuant to the
Sponsor's Guidelines; (iii) certain Unaffiliated
Originators, generally pursuant to such Unaffiliated
Originators' underwriting guidelines approved by the
Sponsor ("Approved Guidelines"); and (iv)
Originators of Mortgage Loans, subsequently
purchased in whole or in part by the Sponsor or an
Affiliated Originator as bulk acquisitions ("Bulk
Acquisitions"), generally pursuant to such
Originators' underwriting guidelines. See "Mortgage
Loan Program." For a description of the types of
Mortgage Loans that may be included in the Mortgage
Pools, see "The Mortgage Pools--The Mortgage Loans."
A Current Report on Form 8-K will be available to
purchasers or underwriters of the related series of
Securities and will generally be filed, together
with the related Pooling and Servicing Agreement,
with the Securities and Exchange Commission within
fifteen days after the initial issuance of such
series.
FORWARD COMMITMENTS;
PRE-FUNDING. . . . . A Trust may enter into an agreement (each, a "Forward
Purchase Agreement") with the Sponsor whereby the
Sponsor will agree to transfer additional Mortgage
Loans to such Trust following the date on which such
Trust is established and the related Securities are
issued. Any Forward Purchase Agreement will require
that any Mortgage Loans so transferred to a Trust
conform to the requirements specified in such
Forward Purchase Agreement. If a Forward Purchase
Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the
related Trustee will be required to deposit in a
segregated account (each, a "Pre-Funding Account")
all or a portion of the proceeds received by the
Trustee in connection with the sale of one or more
classes of Securities of the related series;
subsequently, the additional Mortgage Loans will be
transferred to the related Trust in exchange for
money released to the Sponsor from the related
Pre-Funding Account in one or more transfers. Each
Forward Purchase Agreement will set a specified
period during which any such transfers must occur.
The Forward Purchase Agreement or the related
Pooling and Servicing Agreement will require that,
if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of
such specified period, then any remaining moneys
will be applied as a mandatory prepayment of the
related class or classes of Securities as specified
in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus
Supplement, the specified period for the acquisition
by a Trust of additional Mortgage Loans will not
exceed three months from the date such Trust is
established.
CREDIT ENHANCEMENT . . If so specified in the Prospectus Supplement, the
Trust Estate with respect to any series of
Securities may include any one or any combination of
a letter of credit, mortgage pool insurance policy,
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special hazard insurance policy, bankruptcy bond,
financial guaranty insurance policy, reserve fund or
other type of credit enhancement to provide full or
partial coverage for certain defaults and losses
relating to the Mortgage Loans. Credit support also
may be provided in the form of the related class of
Equity Securities, and/or by subordination of one or
more classes of Fixed-Income Securities in a series
under which losses in excess of those absorbed by
any related class of Equity Securities are first
allocated to any Subordinate Securities up to a
specified limit, cross-support among groups of
Mortgage Assets or overcollateralization. Unless
otherwise specified in the related Prospectus
Supplement, any mortgage pool insurance policy will
have certain exclusions from coverage thereunder,
which will be described in the related Prospectus
Supplement, which may be accompanied by one or more
separate credit enhancements that may be obtained to
cover certain of such exclusions. To the extent not
set forth herein, the amount and types of coverage,
the identification of any entity providing the
coverage, the terms of any subordination and related
information will be set forth in the Prospectus
Supplement relating to a series of Securities. See
"Description of Credit Enhancement" and
"Subordination."
ADVANCES . . . . . . . The Servicer, directly or through Sub-Servicers, if
applicable, may be obligated to make certain cash
advances with respect to certain delinquent
scheduled payments on the Mortgage Loans.
Generally, the Servicer will only be obligated to
make any such advance to the extent that the
Servicer believes that such amounts will be
recoverable by it. The nature and extent of any
such advancing requirements will be described in the
related Prospectus Supplement. Any such advance
made by the Servicer with respect to a Mortgage Loan
is recoverable by it as provided herein under
"Description of the Securities--Advances" either
from recoveries on the specific Mortgage Loan or,
with respect to any advance subsequently determined
to be nonrecoverable, out of funds otherwise
distributable to the holders of the related series
of Securities, which may include the holders of any
Senior Securities of such series.
As may be set forth in the related Prospectus
Supplement, the Servicer will be required to
advance Compensating Interest as defined hereafter
under "Description of the Securities--Advances."
In addition, unless otherwise specified in the
related Prospectus Supplement, the Servicer will be
required to pay all "out of pocket" costs and
expenses incurred in the performance of its
servicing obligations, but only to the extent that
the Servicer reasonably believes that such amounts
will ultimately be recoverable. See "Description of
the Securities--Advances."
OPTIONAL TERMINATION . The Servicer, the Sponsor, or, if specified in the
related Prospectus Supplement, the holders of the
related class of Equity Securities or the credit
enhancer may at their respective option effect early
retirement of a series of Securities through the
purchase of the Mortgage Loans and other assets in
the related Trust Estate under the circumstances and
in the manner set forth herein under "The Pooling
and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus
Supplement.
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MANDATORY TERMINATION. The Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may
be required to effect early retirement of a series
of Securities by soliciting competitive bids for the
purchase of the related Trust Estate or otherwise,
under other circumstances and in the manner
specified in "The Pooling and Servicing Agreement--
Termination; Retirement of Securities" and in the
related Prospectus Supplement.
LEGAL INVESTMENT . . . Not all of the Mortgage Loans in a particular
Mortgage Pool may represent first liens.
Accordingly, as disclosed in the related Prospectus
Supplement, certain classes of Securities offered
hereby and by the related Prospectus Supplement may
not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, if so, will
not be legal investments for certain types of
institutional investors under SMMEA.
Institutions whose investment activities are subject
to legal investment laws and regulations or to
review by certain regulatory authorities may be
subject to additional restrictions on investment in
certain classes of Securities. Any such institution
should consult its own legal advisors in determining
whether and to what extent a class of Securities
constitutes legal investments for such investors.
See "Legal Investment" herein.
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, that is subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (each
such entity, a "Plan") should carefully review with
its legal advisors whether the purchase or holding
of Securities could give rise to a transaction that
is prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. Investors
are advised to consult their counsel and to review
"ERISA Considerations" herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ("Grantor Trust Securities") in a Trust
treated as a grantor trust under applicable
provisions of the Code, (ii) "regular interests"
("REMIC Regular Securities") or "residual interests"
("REMIC Residual Securities") in a Trust treated as
a REMIC (or, in certain instances, containing one or
more REMIC's) under Sections 860A through 860G of
the Code, (iii) debt issued by a Trust ("Debt
Securities") or (iv) interests in a Trust which is
treated as a partnership ("Partnership Interests").
Investors are advised to consult their tax advisors
and to review "Certain Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
REGISTRATION OF
SECURITIES . . . . . Securities may be represented by global securities
registered in the name of Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC"), or
another nominee. In such case, Securityholders will
not be entitled to receive definitive securities
representing such holders' interests, except in
certain
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circumstances described in the related Prospectus
Supplement. See "Description of the Securities--
Form of Securities" herein.
RATINGS. . . . . . . . Each class of Fixed-Income Securities offered
pursuant to the related Prospectus Supplement will
be rated in one of the four highest rating
categories by one or more "national statistical
rating organizations," as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange
Act"), and commonly referred to as "Rating
Agencies." Such ratings will address, in the opinion
of such Rating Agencies, the likelihood that the
related Trust will be able to make timely payment of
all amounts due on the related Fixed-Income
Securities in accordance with the terms thereof.
Such ratings will neither address any prepayment or
yield considerations applicable to any Securities
nor constitute a recommendation to buy, sell or hold
any Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect to
any Securities will be set forth in the related
Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY. There can be no assurance that a secondary market for
the Securities of any series or class will develop or, if it does develop, that
it will provide Securityholders with liquidity of investment or that it will
continue for the life of the Securities of any series. The Prospectus
Supplement for any series of Securities may indicate that an underwriter
specified therein intends to establish a secondary market in such Securities;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
LIMITED OBLIGATIONS. The Securities will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, the Servicer, any Originator (as defined herein) or any
person other than the related Trust. Notwithstanding the foregoing, and as to
be described in the related Prospectus Supplement, certain types of credit
enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such credit
enhancement. The only obligations of the foregoing entities with respect to the
Securities or the Mortgage Loans will be the obligations (if any) of the
Sponsor, the related Originators and the Servicer pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans, the
Servicer's servicing obligations and the Master Servicer's secondary servicing
obligations under the related Pooling and Servicing Agreement (including their
respective limited obligation to make certain advances in the event of
delinquencies on the Mortgage Loans, but only to the extent deemed recoverable)
and, if and to the extent expressly described in the related Prospectus
Supplement, certain limited obligations of the Sponsor, the Servicer, the Master
Servicer, the applicable Sub-Servicer, or another party in connection with a
purchase obligation ("Purchase Obligation") or an agreement to purchase or act
as remarketing agent with respect to a Convertible Mortgage Loan upon conversion
to a fixed rate. Except as described in the related Prospectus Supplement,
neither the Securities nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality, or by the Sponsor, the
Master Servicer, the Servicer, any Sub-Servicer or any of their affiliates.
Proceeds of the assets included in the related Trust Estate for each series of
Securities (including the Mortgage Loans and any form of credit enhancement)
will be the sole source of payments on the Securities, and there will be no
recourse to the Sponsor or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With
respect to each series of Securities, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement may be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a mortgage pool
insurance policy; a special hazard insurance policy; a bankruptcy bond; a
reserve fund; a financial guaranty insurance policy or other type of credit
enhancement to provide partial coverage for certain defaults and losses relating
to the Mortgage Loans. Credit enhancement also may be provided in the form of
the related class of Equity Securities, subordination of one or more classes of
Fixed-Income Securities in a series under which losses in excess of those
absorbed by any related class of Equity Securities are first allocated to any
Subordinate Securities up to a specified limit, cross-support among Mortgage
Assets and/or overcollateralization. See "Subordination" and "Description of
Credit Enhancement" herein. Regardless of the form of credit enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such credit enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, credit enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
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RISKS OF THE MORTGAGE LOANS
RISK OF THE LOSSES ASSOCIATED WITH JUNIOR LIENS. Certain of the Mortgage
Loans will be secured by junior liens ("Junior Lien Loans") subordinate to the
rights of the mortgagee or beneficiary under each related senior mortgage or
deed of trust. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee or beneficiary are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee secured by a junior lien may not
foreclose on the related mortgaged property unless it forecloses subject to the
related senior mortgage or mortgages, in which case it must either pay the
entire amount of each senior mortgage to the applicable mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on each senior
mortgage in the event of default thereunder. In servicing junior lien loans in
its portfolio, it has been the practice of the Servicer to satisfy each such
senior mortgage at or prior to the foreclosure sale only to the extent that it
determines any amounts so paid will be recoverable from future payments and
collections on such junior lien loans, from liquidation of the property securing
the senior mortgage or otherwise. The Trusts will not have any source of funds
to satisfy any such senior mortgage or make payments due to any senior
mortgagee. See "Certain Legal Aspects of Mortgage Loans and Related Matters--
Foreclosure."
RISK OF LOSSES ASSOCIATED WITH DECLINING REAL ESTATE VALUES. An investment
in securities such as the Securities that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans
may be affected by, among other things, a decline in real estate values and
changes in the borrowers' financial condition. No assurance can be given that
values of the Mortgaged Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of any senior liens, the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the nonconforming credit mortgage lending
industry. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Properties on which the Trust holds Junior Lien Loans before
having any effect on the interest of the related senior mortgagee. In addition,
in the case of Mortgage Loans that are subject to negative amortization, due to
the addition to principal balance of deferred interest ("Deferred Interest"),
the principal balances of such Mortgage Loans could be increased to an amount
equal to or in excess of the value of the underlying Mortgaged Properties,
thereby increasing the likelihood of default. To the extent that such losses
are not covered by the applicable credit enhancement, holders of Securities of
the series evidencing interests in the related Mortgage Pool will bear all risk
of loss resulting from default by Mortgagors and will have to look primarily to
the value of the Mortgaged Properties for recovery of the outstanding principal
and unpaid interest on the defaulted Mortgage Loans.
RISK OF LOSSES ASSOCIATED WITH CERTAIN NON-CONFORMING AND NON-TRADITIONAL
LOANS. The Sponsor's underwriting standards consider, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the value of the property. However, the Sponsor's Mortgage Loan
program generally provides for the origination of Mortgage Loans relating to
non-conforming credits which are likely to experience higher rates of
delinquency, foreclosure and bankruptcy than have historically been experienced
by loans conforming to FNMA or FHLMC guidelines. In addition, certain of the
Mortgage Loans may provide for escalating or variable payments by the borrower
under the Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is
generally qualified on the basis of the initial interest rate plus 1%. In some
instances the Mortgagors' income may not be sufficient to enable them to
continue to make their loan payments as such payments increase and thus the
likelihood of default will increase. For a more detailed discussion, see
"Mortgage Loan Program."
RISK OF LOSSES ASSOCIATED WITH BALLOON LOANS. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a
stated maturity of less than the period of time of the corresponding
amortization schedule. Consequently, upon the maturity of a Balloon Loan, the
Mortgagor will be required to make a "balloon" payment that will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the Mortgage Loan. The ability
of a Mortgagor to refinance such a Mortgage Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the value
of the related Mortgaged Property, the Mortgagor's equity in the related
Mortgaged Property, the financial condition of the Mortgagor, the tax laws and
general economic conditions at the time.
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Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Sponsor,
the Originators, the Master Servicer, the Servicer, any Sub-Servicer or the
Trustee will be obligated to provide funds to refinance any Mortgage Loan,
including Balloon Loans.
RISK OF LOSSES ASSOCIATED WITH BANKRUPTCY OF MORTGAGORS. General economic
conditions have an impact on the ability of borrowers to repay Mortgage Loans.
Loss of earnings, illness and other similar factors also may lead to an increase
in delinquencies and bankruptcy filings by borrowers. In the event of personal
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
RISK OF LOSSES ASSOCIATED WITH FORECLOSURE OF MORTGAGED PROPERTIES. Even
assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Securityholders could occur. An action to foreclose
on a Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) sufficient to repay all amounts due on the related Mortgage
Loan. The Servicer will be entitled to deduct from Liquidation Proceeds all
expenses reasonably incurred in attempting to recover amounts due on the related
liquidated Mortgage Loan ("Liquidated Mortgage Loan") and not yet repaid,
including payments to prior lienholders, accrued servicing fees, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans and insufficient funds are available
from any applicable credit enhancement, Securityholders could experience a loss
on their investment.
Many liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party who takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property and who, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up the
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain
Legal Aspects of Mortgage Loans and Related Matters--Environmental Legislation."
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
LITIGATION. Any material litigation relating to the Sponsor or the
Servicer will be specified in the related Prospectus Supplement.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and,
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consequently, will experience higher rates of loss and delinquency on mortgage
loans generally. The Mortgage Loans underlying certain series of Securities may
be concentrated in such regions, and such concentrations may present risk
considerations in addition to those generally present for similar mortgage loan
asset backed securities without such concentrations. Information with respect
to geographic concentration of Mortgaged Properties will be specified in the
related Prospectus Supplement.
LEGAL CONSIDERATIONS. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators, the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans. See
"Certain Legal Aspects of Mortgage Loans and Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may entitle the borrower to rescind the loan or to a refund
of amounts previously paid and, in addition, could subject the Servicer to
damages and administrative sanctions. If the Servicer is unable to collect all
or part of the principal or interest on the Mortgage Loans because of a
violation of the aforementioned laws, public policies or general principles of
equity then the Trust may be delayed or unable to repay all amounts owed to
Securityholders. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer or an Originator, such violations may materially
impact the financial ability of the Servicer to continue to act as Servicer or
the ability of an Originator to repurchase or replace Mortgage Loans if such
violations breach a representation or warranty contained in a Pooling and
Servicing Agreement.
YIELD AND PREPAYMENT CONSIDERATIONS. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ("ARM Loans") to fixed-rate loans
or due to breaches of representations and warranties) on the Mortgage Loans and
the price paid by Securityholders. Such yield may be adversely affected by a
higher or lower than anticipated rate of prepayments on the related Mortgage
Loans. The yield to maturity on Strip Securities or Securities purchased at
premiums to or discounts from par will be extremely sensitive to the rate of
prepayments on the related Mortgage Loans. In addition, the yield to maturity
on certain other types of classes of Securities, including Accrual Securities or
certain other classes in a series including more than one class of Securities,
may be relatively more sensitive to the rate of prepayment on the related
Mortgage Loans than other classes of Securities.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
Mortgage Loan or Loans), sales of Mortgaged Properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain "due-on-sale" provisions, and the
Servicer will be required to enforce such provisions unless (i) such enforcement
would materially increase the risk of default or delinquency on, or materially
decrease the security for, such Mortgage Loan or (ii) such enforcement is not
permitted by
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applicable law, in which case the Servicer is authorized to permit the purchaser
of the related Mortgaged Property to assume the Mortgage Loan. See "The Pooling
and Servicing Agreement" in the related Prospectus Supplement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
BOOK-ENTRY REGISTRATION. Issuance of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
definitive physical securities representing such Securityholders' interests,
except in certain circumstances described in the related Prospectus Supplement.
Since transactions in Securities will be able to be effected only through
DTC, direct or indirect participants in DTC's book-entry system ("Direct or
Indirect Participants") and certain banks, the ability of a Securityholder to
pledge a Security to persons or entities that do not participate in the DTC
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical security representing the Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such a case, DTC will be
required to credit such distributions to the accounts of its Participants which
thereafter will be required to credit them to the accounts of the applicable
class of Securityholders either directly or indirectly through Indirect
Participants. See "Description of the Securities--Form of Securities."
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF BANKRUPTCY OF THE SPONSOR
OR AN ORIGINATOR. In the event of the bankruptcy of the Sponsor or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Sponsor, an Originator or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such
action could have an effect, for an indeterminate period of time, on the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
SECURITY RATING. The rating of Securities credit enhanced through external
credit enhancement such as a letter of credit, financial guaranty insurance
policy or mortgage pool insurance will depend primarily on the creditworthiness
of the issuer of such external credit enhancement device (a "Credit Enhancer").
Any reduction in the rating assigned to the claims-paying ability of the related
Credit Enhancer below the rating initially given to the related Securities would
likely result in a reduction in the rating of the Securities. See "Rating" in
the Prospectus Supplement.
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THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Co-operative Loans, (iii) Home Improvement Loans or
(iv) other loans (each hereinafter defined) or (B) certificates of interest or
participation in the items described in clause (A) or in pools of such items, in
each case, as specified in the related Prospectus Supplement, together with
payments in respect of such primary Mortgage Assets and certain other accounts,
obligations or agreements, in each case as specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to be
included in the related Trusts. If specific information respecting the primary
Mortgage Assets is not known at the time the related series of Securities
initially is offered, information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Securities (the "Detailed Description"). A copy of the
Pooling and Servicing Agreement with respect to each Series of Securities will
be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series (the
"Mortgage Asset Schedule") will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
THE MORTGAGE LOANS--GENERAL
The real properties which secure repayment of the Mortgage Loans (the
"Mortgaged Properties") may be located in any one of the fifty states, the
District of Columbia, Puerto Rico or any other Territories of the United States.
If specified in the related Prospectus Supplement, Mortgage Loans with certain
Loan-to-Value Ratios and/or certain principal balances may be covered wholly or
partially by primary mortgage insurance policies. Unless otherwise specified in
the related Prospectus Supplement, all of the Mortgage Loans will be covered by
standard hazard insurance policies (which may be in the form of a blanket or
forced placed hazard insurance policy). The existence, extent and duration of
any such coverage will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
("monthly pay") or bi-weekly. The payment terms of the Mortgage Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for period of time and under certain circumstances is
followed by an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an adjustable rate to a fixed
rate). The specified rate of interest on a Mortgage Loan is its "Mortgage
Rate." Changes to an Adjustable Rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal
of a Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. If provided for in the
Prospectus Supplement, certain Mortgage Loans may be subject to temporary
buydown plans ("Buydown Mortgage Loans") pursuant to which the monthly
payments made by the Mortgagor during the early years of the Mortgage Loan
(the "Buydown Period") will be less than the scheduled monthly payments on
the Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon, being
hereinafter referred to as "Buydown Funds") funded by the originator of the
Mortgage Loan or another source (including the
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Servicer or the related Originator and the builder of the Mortgaged
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity. Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Mortgage Loans
having graduated payment provisions may provide for deferred payment of a
portion of the interest due monthly during a specified period, and recoup
the deferred interest through negative amortization during such period
whereby the difference between the interest paid during such period and the
interest accrued during such period is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as "growing
equity" mortgage loans may provide for periodic scheduled payment increases
for a specified period with the full amount of such increases being applied
to principal.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection therewith. Other Mortgage Loans
may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers of
the related Mortgaged Property.
(e) Certain Mortgage Loans may be home equity revolving lines of
credit which may have principal amortization schedules which reset when
additional amounts are drawn down thereunder.
Other Mortgage Loans may be assumable by persons meeting either the
Underwriting Guidelines of the Sponsor, in some cases at the time of
origination of the Mortgage Loan, and in other cases, the Sponsor's then-
applicable Underwriting Guidelines.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool; such
information, insofar as it may relate to statistical information relating to
such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") which may also be the related cut-off date (the "Cut-Off
Date"). Such information will include to the extent applicable to the
particular Mortgage Pool (in all cases as of the Statistic Calculation Date) (i)
the aggregate outstanding principal balance and the average outstanding
principal balance of the Mortgage Loans, (ii) the largest principal balance and
the smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one-to-four-family houses,
vacation and second homes or other real property), (iv) the original terms to
stated maturity of the Mortgage Loans, (v) the weighted average remaining term
to maturity of the Mortgage Loans and the range of the remaining terms to
maturity; (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the weighted average Combined Loan-to-Value Ratio and
the range of Combined Loan-to-Value Ratios of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (the "APR")
and ranges of Mortgage Rates or APRs borne by the Mortgage Loans, (ix) in the
case of Mortgage Loans having adjustable rates, the weighted average of the
adjustable rates and indexes, if any; (x) the aggregate outstanding principal
balance, if any, of Buy-Down Loans and Mortgage Loans having graduated payment
provisions; (xi) the amount of any mortgage pool insurance policy, special
hazard insurance policy or bankruptcy bond to be maintained with respect to such
Mortgage Pool; (xii) the amount of any standard hazard insurance required to be
maintained with respect to each Mortgage Loan; (xiii) the amount, if any, and
terms of any credit enhancement to be provided with respect to all or any
Mortgage Loans or the Mortgage Pool; and (xiv) the geographical distribution of
the Mortgage Loans on a state-by-state basis. In addition, preliminary
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or more general information of the nature described above may be provided in the
Prospectus Supplement, and specific or final information may be set forth in a
Current Report on Form 8-K, together with the related Pooling and Servicing
Agreement, which will be filed with the Securities and Exchange Commission and
will be made available to holders of the related series of Securities within
fifteen days after the initial issuance of such Securities.
The "Combined Loan-to-Value Ratio" or "CLTV" of a Mortgage Loan at any
given time is, with respect to any first lien Mortgage Loans, the percentage
equal to the original balance of the related Mortgage Loan divided by the
appraised value of the related property. With respect to any Junior Lien Loans,
the Combined-Loan-to-Value Ratio is the percentage determined by dividing (x)
the sum of the original principal balance of such Mortgage Loan (less the
amount, if any, of the premium for any credit life insurance) plus the then
current principal balance of all mortgage loans secured by liens on the related
Mortgaged Property having priorities senior to that of the lien which secures
such Mortgage Loan, if any, by (y) the value of the related Mortgaged Property,
based upon the appraisal or valuation made at the time of origination of the
Mortgage Loan. In the case where there is no senior lien to the Mortgage Loan
and such Mortgage Loan represents a purchase money instrument, the lesser of (a)
the appraisal or valuation, or (b) the purchase price. If the Mortgagor will
use the proceeds of the Mortgage Loan to refinance an existing Mortgage Loan
which is being serviced directly or indirectly by the Servicer, the requirement
of an appraisal or other valuation at the time the new Mortgage Loan is made may
be waived.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
on the same Mortgaged Properties) in a particular Mortgage Pool become equal to
or greater than the value of such Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the nonconforming credit mortgage lending industry. An overall
decline in the market value of residential real estate, the general condition of
a Mortgaged Property, or other factors, could adversely affect the values of the
Mortgaged Properties such that the outstanding balances of the Mortgage Loans,
together with any additional liens on the Mortgaged Properties, including Junior
Lien Loans held by the Trust, equal or exceed the value of the Mortgaged
Properties. Under such circumstances, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the nonconforming credit mortgage lending industry.
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that losses
on the Mortgage Loans are not covered by credit enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Servicer
will service the Mortgage Loans, either directly or through Sub-Servicers,
pursuant to the Pooling and Servicing Agreement and will receive a fee for such
services. If applicable, and unless otherwise specified in the related
Prospectus Supplement, a Master Servicer's primary function will be to review
the Servicer's monthly servicing reports for any material inconsistencies, and
secondarily, the Master Servicer will assume the Servicer's obligations in the
event of a default by the Servicer. Unless otherwise specified in the
Prospectus Supplement, the Servicer will be liable for fees and expenses of the
Master Servicer. See "Mortgage Loan Program" and "The Pooling and Servicing
Agreement." With respect to Mortgage Loans serviced through a Sub-Servicer, the
Servicer will remain liable for its servicing obligations under the related
Pooling and Servicing Agreement as if the Servicer alone were servicing such
Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Sponsor, the Servicer and the Originators with respect to a
series of Securities will be related to servicing and/or providing (or, where
the Sponsor or an Originator acquired a Mortgage Loan from another originator,
obtaining from such originator) certain representations and warranties
concerning the Mortgage Loans and to assign to the Trustee for such series of
Securities the Sponsor's or Originator's rights with respect to such
representations and warranties. See "The Pooling and Servicing Agreement." The
obligations of the Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Pooling
and
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Servicing Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Originators as more fully described herein under "Mortgage Loan
Program--Qualifications of Originators" and "The Pooling and Servicing
Agreement") and its obligation to make certain cash advances in the event of
delinquencies in payments on, or with respect to, the Mortgage Loans. The
obligations of a Servicer to make advances may be subject to limitations, to the
extent provided herein and in the related Prospectus Supplement. The Master
Servicer's contractual obligations for servicing the Mortgage Loans and making
advances will consist primarily of acting as a back-up Servicer in the event of
the removal of the Servicer in accordance with the terms of the Pooling and
Servicing Agreement.
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust, home improvement loans or
participation or other beneficial interests therein, secured by first or junior
liens on one- to four-family residential properties. The Mortgaged Properties
relating to Single Family Loans will consist of detached or semi-detached
one-family dwelling units, two-to four-family dwelling units, townhouses,
rowhouses, manufactured housing permanently affixed to real estate under
applicable state law, individual condominium units in condominium developments,
individual units in planned unit developments, certain mixed use and other
dwelling units, and rural properties (generally defined as Mortgaged Properties
containing more than five acres of land). Such Mortgage Properties may include
owner-occupied (which includes vacation and second homes) and non-owner occupied
investment properties.
If so specified, the Single Family Loans may include Condominium Loans,
loans or participations therein secured by mortgages or deeds of trust on
condominium units in low-or high-rise condominium developments together with
such condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans
will be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
Unless otherwise specified in the Prospectus Supplement, loans to make home
improvements may be secured by first or junior liens on conventional one-
to-four-family residential properties and multi-family residential properties
("Home Improvement Loans"). Home Improvement Loans may be conventional, or may
be partially insured by the Federal Housing Administration ("FHA") or another
federal or state agency, as specified in the related Prospectus Supplement. The
loan proceeds from such Home Improvement Loans are typically disbursed to an
escrow agent which, according to guidelines established by the Originators,
releases such proceeds to the contractor upon completion of the improvements or
in draws as the work on the improvements progresses. Costs incurred by the
Mortgagor for loan origination including origination points and appraisal, legal
and title fees, are often included in the amount financed.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any portion of the payments due under the related Mortgage Note that may have
been retained by any Originator ("Originator's Retained Yield"), or any other
interest retained by the Sponsor or any affiliate of the Sponsor, evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages or deeds of trust
or other similar security instruments creating a lien on single-family (i.e.,
one- to four-family) residential properties, or (ii) certificates of interest or
participations in such Mortgage Notes.
As used herein, the term "certificates of interest or participation" means
either individual loans, or pools of loans, which are partly owned by the
related Trust and partly owned by some other person or entity, which will
generally be the Originator of such loans or some other entity at a preceding
point in the chain of title of such loans. In general, the use of certificates
of interest or participation will be limited to facilitating arrangements
involving Unaffiliated Originators and/or Sub-Servicers; such arrangements will
not have a material affect on Securityholders' rights. By way of illustration,
the Sponsor may purchase a pool of mortgage loans from an Unaffiliated
Originator in a transaction in which such Unaffiliated Originator, rather than
being paid a premium on such sale, instead retains a portion of the interest
payments actually received on such mortgage loans. As another illustration, an
Unaffiliated Originator may subordinate a portion of the principal amount of
mortgage loans sold by such Unaffiliated Originator to provide a level of first
loss protection in the event of delinquencies and/or defaults on such mortgage
loans. In each illustration the portion of the mortgage loans retained is the
"Originator's Retained Yield", and the related Trust will own a participation
interest (which may, for convenience, be certificated to assist in the cash-flow
structuring of the related Securities, and thus take the form of a "certificate
of interest or participation") rather than a direct ownership interest in the
entire loan. Alternatively, to assist in a sub-servicing arrangement, a
specified sub-pool of mortgage loans which are owned in their entirety by the
related Trust may be designated and, again for convenience, certificated, thus
resulting in a 100% participation interest in such mortgage loans being owned by
such Trust.
The Mortgaged Properties will consist primarily of owner-occupied attached
or detached one-family dwelling units, two- to four-family dwelling units,
condominiums, townhouses, row houses, manufactured housing, individual units in
planned-unit developments and certain other dwelling units, and the fee,
leasehold or other interests in the underlying real property. For a Trust which
elects to be treated as a REMIC, any Mortgage Properties which constitute
manufactured housing shall be limited to "manufactured housing" as defined in
the Code provisions applicable to REMICs at the time of issuance. The Mortgaged
Properties may include vacation, second and non-owner occupied homes. If
specified in the related Prospectus Supplement relating to a series of
Securities, a Mortgage Pool may contain Cooperative Loans evidenced by
promissory notes ("Cooperative Notes") secured by security interests in shares
issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used herein, unless the context indicates otherwise,
"Mortgage Loans" include Cooperative Loans, "Mortgaged Properties" include
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, "Mortgage Notes" include
Cooperative Notes and "Mortgages" include security agreements with respect to
Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by the Originators, all as
described below under "Mortgage Loan Program." The characteristics of the
Mortgage Loans will be described in the related Prospectus Supplement. Other
mortgage loans available for acquisition by a Trust may have characteristics
that would make them eligible for inclusion in a Mortgage Pool but may not be
selected by the Sponsor for inclusion in such Mortgage Pool.
Each series of Securities will evidence interests in one or more Mortgage
Pool(s) containing Mortgage Loans having an aggregate principal balance of not
less than approximately $5,000,000 as of, unless otherwise specified in the
applicable Prospectus Supplement, the related Cut-Off Date. Each Security will
evidence an interest in only the related Mortgage Pool and corresponding Trust
Estate, and not in any other Mortgage Pool or any other Trust Estate (except in
those limited situations whereby certain collections on any Mortgage Loans in a
related Mortgage Pool in excess of amounts needed to pay the related Securities
may be deposited in a master reserve account or otherwise applied in a manner
that provides credit enhancement for more than one series of Securities).
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THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have payments that are due
monthly or bi-weekly, (ii) be secured by Mortgaged Properties located in any of
the fifty states, the District of Columbia, Puerto Rico or any other Territories
of the United States and (iii) consist of one or more of the following types of
mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of generally not more than 30
years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that adjusts
periodically, at the intervals described in the related Prospectus
Supplement (which may have adjustments in the amount of monthly payments at
periodic intervals) over the term of the mortgage loan to equal the sum of
a fixed percentage set forth in the related Mortgage Note (the "Note
Margin") and an index (the "Index") to be specified in the related
Prospectus Supplement, such as, by way of example: (i) U.S. Treasury
securities of a specified constant maturity, (ii) weekly auction average
investment yield of U.S. Treasury bills of specified maturities, (iii) the
daily Bank Prime Loan rate made available by the Federal Reserve Board or
as quoted by one or more specified lending institutions, (iv) the cost of
funds of member institutions for the Federal Home Loan Bank of San
Francisco, or (v) the interbank offered rates for U.S. dollar deposits in
the London Markets, each calculated as of a date prior to each scheduled
interest rate adjustment date that will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will set forth
the relevant Index and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the related
Mortgage Pool. If specified in the related Prospectus Supplement, an ARM
Loan may include a provision that allows the Mortgagor to convert the
adjustable Mortgage Rate to a fixed rate at some point during the term of
such ARM Loan subsequent to the initial payment date;
(3) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of generally not more than 30 years with monthly
payments during the first year calculated on the basis of an assumed
interest rate that will be lower than the Mortgage Rate applicable to such
mortgage loan in subsequent years. Deferred Interest, if any, will be
added to the principal balance of such mortgage loans;
(4) Balloon mortgage loans ("Balloon Loans"), which are fixed-rate
mortgage loans having original or modified terms to maturity of generally 5
to 15 years as described in the related Prospectus Supplement and that may
have level monthly payments of principal and interest based generally on a
not more than 30-year amortization schedule. The amount of the monthly
payment may remain constant until the maturity date, upon which date the
full outstanding principal balance on such Balloon Loan will be due and
payable (such amount, the "Balloon Amount");
(5) Modified mortgage loans ("Modified Loans"), which are fixed or
adjustable-rate mortgage loans providing for terms at the time of
modification of generally not more than 30 years. Modified Loans may be
mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate
mortgage loans to fixed rate mortgage loans, or construction loans which
have been converted to permanent mortgage loans; or
(6) Certain of the Mortgage Loans may be what are commonly referred
to as "home equity revolving lines of credit" ("Home Equity Lines") Home
Equity Lines are generally evidenced by a loan agreement ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from
time to time by the borrower writing a check against the account (the
amount of such draw down, an "Additional Balance"). A Home Equity Line
will establish a maximum credit limit with respect to the related borrower,
and will permit the borrower to draw down Additional Balances, and repay
the aggregate balance outstanding in each case from time to time in such a
manner so that the aggregate balance outstanding does not exceed the
maximum credit limit. A Home Equity Line will be secured by either a
senior or a junior lien Mortgage, and will bear interest at either fixed or
an adjustable rate.
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In certain states the borrower must, on the opening of an account,
draw an initial advance of not less than a specified amount. Each Home
Equity Line is assigned an amortization basis when the account is opened.
The "amortization basis" is the length of time in which the initial advance
plus interest will be repaid in full. The amortization bases of the Home
Equity Lines generally range from 60 months (5 years) to 180 months (15
years) depending on the credit limit assigned. Generally, the amortization
basis will be longer the higher the credit limit. The minimum monthly
payment on a Home Equity Line will generally be equal to the sum of the
following: (i) an amount necessary to completely repay the then-
outstanding balance and the applicable finance charge in equal installments
over the assigned amortization basis ("Basic Monthly Amount"); (ii) any
monthly escrow charges; (iii) any delinquency or other similar charges; and
(iv) any past due amounts, including past due finance charges. The Basic
Monthly Amount will be recomputed each time the related Coupon Rate adjusts
and whenever an Additional Balance is advanced; such recomputation in the
case of an Additional Advance may also reset the amortization schedule.
The effect of each such advance on the related Home Equity Line is to reset
the commencement date of the original maturity term to the date of the
later advance. For example, a Home Equity Line made originally with a 15-
year maturity from date of origination changes at the time of the next
adjustment or advance to a Home Equity Line with a maturity of 15 years
from the date of such advance. For certain Home Equity Lines, the same
type of recomputation exists for adjustments of the related Coupon Rate.
Prior to the expiration of a specified period, the reduction of the
account to a zero balance and the closing of a Home Equity Line account may
result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a Home Equity Line account is closed by the
Servicer due to a default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right to
require the borrower to pay the entire balance plus all other accrued but
unpaid charges immediately, and to cancel the borrower's credit privileges
under the Loan Agreement if, among other things, the borrower fails to make
any minimum payment when due under the Loan Agreement, if there is a
material change in the borrower's ability to repay the Home Equity Line, or
if the borrower sells any interest in the property securing the Loan
Agreement, thereby causing the "due-on-sale" clause in the trust deed or
mortgage to become effective.
(7) Another type of mortgage loan described in the related Prospectus
Supplement.
As described in the related Prospectus Supplement, a Mortgage Pool may
contain (i) ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans, or (ii) fixed rate Mortgage Loans which allow the Mortgagors to
convert the fixed rates on such Mortgage Loans to an adjustable rate at some
point during the life of such Mortgage Loan (each such Mortgage Loan, a
"Convertible Mortgage Loan"). If specified in the related Prospectus
Supplement, upon any conversion, the Sponsor will repurchase or the Servicer,
the applicable Sub-Servicer, Originator, or a third party will purchase the
converted Mortgage Loan as and to the extent set forth in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Sponsor or the Servicer (or another party specified therein) may agree to
act as remarketing agent with respect to such converted Mortgage Loans and, in
such capacity, to use its best efforts to arrange for the sale of converted
Mortgage Loans under specific conditions. Upon the failure of any party so
obligated to purchase any such converted Mortgage Loan, the inability of any
remarketing agent to so arrange for the sale of the converted Mortgage Loan and
the unwillingness of the remarketing agent to exercise any election to purchase
the converted Mortgage Loan for its own account, the related Mortgage Pool will
thereafter include both fixed rate and adjustable rate Mortgage Loans. In
addition, certain Mortgage Loans, which may be ARM Loans or Fixed Rate Mortgage
Loans, may provide that the interest rate thereon may decrease by a specified,
maximum amount for so long as the related Mortgagor has not become delinquent or
has maintain a record of current payments for a minimum amount of time.
As described in the related Prospectus Supplement, certain of the Mortgage
Loans may be Buydown Mortgage Loans pursuant to which the monthly payments made
by the Mortgagor during the Buydown Period will be less than the scheduled
monthly payments on the Mortgage Loan, the resulting difference to be made up
from (i) Buydown Funds funded by the Originator of the Mortgaged Property or
another source (including the Servicer or the related Originator) and placed in
the Buydown Account and (ii) if the Buydown Funds are contributed on a present
value basis, investment earnings on such Buydown Funds. See "Description of the
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Securities--Payments on Mortgage Loans; Deposits to Distribution Account." The
terms of the Buydown Mortgage Loans, if such loans are included in a Trust, will
be as set forth in the related Prospectus Supplement.
The Sponsor and/or certain Originators may make certain representations and
warranties regarding the Mortgage Loans, but the Sponsor's assignment of the
Mortgage Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Mortgage Loans." The Servicer's obligations with
respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under "Mortgage
Loan Program--Representations by Originators," "--Sub-Servicing by Originators"
and "Description of the Securities--Assignment of Mortgage Loans," and its
obligation to make certain cash advances of interest in the event of
delinquencies in payments on or with respect to the Mortgage Loans and interest
shortfalls due to prepayment of Mortgage Loans, in amounts described herein
under "Description of the Securities--Advances"). The obligation of the
Servicer to make delinquency advances will be limited to amounts which the
Servicer believes ultimately will be recoverable reimbursable out of the
proceeds of liquidation of the Mortgage Loans. The Master Servicer's
obligations consist primarily of acting as a back-up Servicer in the event of
the removal of the Servicer in accordance with the terms and conditions of the
Pooling and Servicing Agreement. See "Mortgage Loan Program--Master Servicer."
In the event that the Master Servicer assumes the role of Servicer, the Master
Servicer will assume all of the obligations of the Servicer except for
obligations to repurchase or substitute for Mortgage Loans which breach
representations and warranties under the Pooling and Servicing Agreement. See
"Description of the Securities--Advances."
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MORTGAGE LOAN PROGRAM
UNDERWRITING GUIDELINES
As more fully described below and as may also be described in greater
detail in the related Prospectus Supplement, there are various types of
Originators that may participate in the Sponsor's Mortgage Loan Program. Under
the Sponsor's Mortgage Loan Program, the Sponsor purchases and originates
Mortgage Loans pursuant to three types of underwriting guidelines: (1) standard
underwriting guidelines according to the Sponsor's Originator Guide, as modified
from time to time, used by Affiliated Originators and Unaffiliated Originators
("Sponsor's Guidelines"), (2) underwriting guidelines utilized by Unaffiliated
Originators and approved by the Sponsor ("Approved Guidelines"), and (3)
underwriting guidelines used by Unaffiliated Originators of a portfolio of
Mortgage Loans subsequently purchased in whole or part by the Sponsor as a bulk
acquisition ("Bulk Acquisition"). The respective underwriting guidelines are
described below.
SPONSOR'S GUIDELINES
The Sponsor's Guidelines intended to assess both the prospective borrower's
ability to repay the loan and the adequacy of the real property security as
collateral for the loan granted. The pricing and required Loan-to-Value Ratios
for a loan are established based on the borrower's financial history; the loan
type and the property type.
To manage credit risk on its loans, the Sponsor's Guidelines conducts a
thorough underwriting of a loan. In general, the Sponsor analyzes the equity in
the collateral, the property type, the sales history of the property and the
payment history, debt-to-income ratio and the employment history of the
applicant. Mortgage loan packages prepared by correspondents generally include
employment history, documentation of income and assets, credit history of
mortgage or rent. Limited income verification may be used if compensating
factors are present.
Loans acquired by the Sponsor fully amortize over a period not to exceed
360 months. The loan amount generally ranges from $5,000 to $350,000 unless a
higher amount is specifically approved by the Underwriting Manager of the
Servicer, on behalf of the Sponsor and is within the underwriting guidelines.
The homes used for collateral to secure the loans may be owner occupied,
non-owner occupied rental properties or combination owner occupied/rental
properties, all of which are one- to four-family residences (detached and semi-
detached residences, row houses, townhouses, condominium units or units in a
planned unit development). In addition, loans may be secured by manufactured
homes with land if the manufactured homes are permanently affixed and defined as
real estate under applicable state law. With respect to rural properties, the
Sponsor's underwriting guidelines generally require that no more than 20 acres
of land be taken into account determining the value of the property.
The value of each property proposed as security for a loan generally is
determined by a recent appraisal from an independent appraiser who meets the
following standards: the appraiser must remain free of any outside influence in
the valuation process and must provide a complete and accurate report; the final
estimate of market value of the property must represent the appraiser's
professional conclusion, based on market data, logical analysis and judgment; an
adequately supported estimate of value should be based, as applicable, on the
cost, sales comparison and income approaches to value, with additional
information provided when appropriate; and the appraisal must be analyzed by the
underwriters to determine the acceptability of the property as security for the
loan requested.
The total amount of a loan generally includes origination fees, credit life
insurance premium, if any, prepaid interest and other closing costs. "Loan-to-
Value Ratio" or "LTV" is the percentage equal to the note amount divided by the
lesser of appraised value or the purchase price of the real estate. The maximum
Loan-to-Value Ratio for Sponsor loans is generally 85%. The maximum Loan-to-
Value Ratio for non-owner occupied homes is generally 80%.
The Sponsor's Guidelines verification of personal financial information for
most applicants. The applicant's total monthly obligations (including principal
and interest on each mortgage, tax assessments, other
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loans, charge accounts and all scheduled indebtedness) generally should not
exceed 50% of a borrower's gross monthly income. The debt ratio calculation for
adjustable rate loans is based upon the principal and interest payment amount
utilizing the initial rate plus one percent. Two years of employment with the
borrower's current employer or two years of like experiences is preferred.
The Sponsor requires a credit report by an independent, nationally
recognized credit reporting agency reflecting the applicant's credit history.
The credit report must reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required of the first mortgage balance, its status and
whether local taxes, interest, insurance and assessments are included in the
applicant's monthly payment. All taxes and assessments not included in the
payment are required to be verified as current. Credit analysis is subjective
and subject to interpretation in the underwriting process.
Certain laws protect loan applicants by permitting them to cancel the loan
after loan documents are signed but before the loan is funded, the so-called
"rescission period". The rescission period must have expired prior to the
funding of the loan.
The Sponsor's Guidelines require title insurance coverage or an attorney's
title opinion on each home equity loan it originates. The Servicer or the
related Originator is generally named as the insured on the title insurance
policies and the addressee of the title opinion. In addition, the Sponsor's
Guidelines generally require a survey of the property on purchase money loans.
The borrower must obtain hazard insurance in an amount equal to the lesser
of (i) the loan amount, (ii) the replacement cost of the improvements or (iii)
the insurable value of the property. The Servicer requires that its name and
address are properly added to the "mortgage clause" of the insurance policy. In
the event the Servicer's name is added to a "loss payee clause" and the policy
does not provide for written notice of policy changes or cancellation, an
endorsement adding such provision is required. The borrower must obtain flood
insurance in the same amount if the improvements are located in an area
identified as a special flood hazard area.
After a loan is underwritten, approved and funded, the Servicer's closing
department personnel review the mortgage loan packages. A random sample of the
mortgage loan packages are subsequently subjected to a quality control audit.
APPROVED GUIDELINES. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines. Certain of the Mortgage Loans will be acquired in
negotiated transactions, and such negotiated transactions may be governed by
agreements ("Master Commitments") relating to ongoing acquisitions of Mortgage
Loans by the Sponsor from Originators who will represent that the Mortgage Loans
have been originated in accordance with underwriting guidelines agreed to by the
Sponsor; the Sponsor will generally review or cause to be reviewed only a
limited portion of the Mortgage Loans in any delivery of Mortgage Loans from the
related Originator for conformity with the Approved Guidelines.
The underwriting standards utilized in negotiated transactions and Master
Commitments may vary substantially from the Sponsor's Guidelines. The Approved
Guidelines are designed to provide an underwriter with information to evaluate
either the security for the related Mortgage Loan, which security consists
primarily of the borrower's repayment ability, or the adequacy of the Mortgaged
Property as collateral, or a combination of both. Due to the variety of
Approved Guidelines and review procedures that may be applicable to the Mortgage
Loans included in any Mortgage Pool, the related Prospectus Supplement will not
distinguish among the various Approved Guidelines applicable to the Mortgage
Loans nor describe any review for compliance with applicable Approved Guidelines
performed by the Sponsor. Moreover, there can be no assurance that every
Mortgage Loan was originated in conformity with the applicable Approved
Guidelines in all material respects, or that the quality or performance of
Mortgage Loans underwritten pursuant to varying guidelines as described above
will be equivalent under all circumstances.
BULK GUIDELINES. Bulk portfolios of Mortgage Loans may be originated by a
variety of Originators under several different underwriting guidelines. Because
bulk portfolios are generally seasoned for a period of time, the Sponsor's
underwriting review of bulk portfolios of Mortgage Loans focuses primarily on
payment histories and estimated current values based on estimated property
appreciation or depreciation and loan
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amortization. As a result, Mortgage Loans acquired in Bulk Acquisitions may not
conform to the requirements of the Sponsor's Guidelines, or any Approved
Guidelines. For example, the Sponsor may purchase Mortgage Loans in bulk
acquisitions with Loan-to-Value Ratios in excess of 80%, without title
insurance, or with nonconforming appraisal methods such as tax assessments.
Bulk Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Originator must meet certain minimum requirements, as
modified from time to time, by the Sponsor. The Sponsor generally will cause
the Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten for the
purpose of determining whether such Mortgage Loans were originated in accordance
with the guidelines represented to have been used by the related Originators in
originating such Mortgage Loans. Such underwriting may consist of a review of
all such Mortgage Loans or may be performed on a sample basis. In addition,
such reunderwriting may be performed by the Sponsor or by a third party acting
at the direction of the Sponsor.
QUALITY CONTROL. The Servicer maintains a quality control program and a
quality control department experienced in origination and servicing of mortgage
loans. In 1993 the Servicer's servicing operation received favorable audits
from FNMA, FHLMC, GNMA and all major private investors.
QUALIFICATIONS OF ORIGINATORS
Except in the case of Mortgage Loans acquired from an Originator in
connection with a Bulk Acquisition, each Originator from which a Mortgage Loan
is acquired will have been accepted by the Sponsor for participation in the
Sponsor's mortgage loan program. The Sponsor acquires loans nationwide through
a series of correspondents, either directly or through the Servicer. The
Sponsor's procedural manuals and guidelines for processing, underwriting and
closing loans are intended to produce quality loans and consistent procedures.
Any Originator, including any who is an Unaffiliated Originator, is subject to
an approval process to determine financial strength, experience and compliance
with state licensing requirements. Upon approval, all Unaffiliated Originators
are required to execute an agreement containing certain representations and
warranties regarding such Unaffiliated Originator and the related loans with the
Sponsor or the Servicer prior to any loan closing. Appraisers and closing
agents are also subjected to an approval process, including verification of
certification and licensing, financial responsibility and quality of work
product. Mortgage loans (other than Mortgage Loans acquired in Bulk
Acquisitions) will be closed using the Servicer's loan closing documents or on
the Originator's loan documents which have been approved by the Sponsor's legal
counsel. All Mortgage Loans (other than Mortgage Loans acquired on Bulk
Acquisitions) will be underwritten on behalf of the Sponsor by the Servicer's
personnel prior to approval and/or purchase. All Unaffiliated Originators are
required to originate mortgage loans in accordance with the applicable
underwriting standards. However, with respect to any Originator, some of the
generally applicable underwriting standards described herein and in the
Sponsor's Guidelines may be modified or waived with respect to certain Mortgage
Loans originated by such Originators.
The Resolution Trust Corporation (the "RTC") or the Federal Deposit
Insurance Corporation (the "FDIC") (either in their respective corporate
capacities or as receiver or conservator for a depository institution) may also
be an Originator of the Mortgage Loans. The RTC and the FDIC are together
referred to as the "Federal Corporations." The RTC was established pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which was enacted in response to the financial crisis of the thrift
industry and the Federal Savings and Loan Insurance Corporation. The purpose of
FIRREA is to restore the public's confidence in the savings and loan industry in
order to ensure a viable system of affordable housing finance as well as to
improve the supervision of savings associations and promote the independence of
the FDIC. The FDIC is an independent executive agency originally established by
the Banking Act of 1933 to insure the deposits of all banks entitled to federal
deposit insurance under the Federal Reserve Act and Federal Deposit Insurance
Act. The FDIC administers the system of nationwide deposit insurance (mutual
guaranty of deposits) for United States Banks and together with the United
States Comptroller of the Currency regulates in areas related to the maintenance
of reserves for certain types of deposits, the maintenance of certain financial
ratios, transactions with affiliates and a broad range of other banking
practices.
The Sponsor will monitor the Originators and the Sub-Servicers under the
control of a Federal Corporation, as well as those Originators and Sub-Servicers
that are insolvent or in receivership or conservatorship or otherwise
financially distressed. Such Originators may not be able or permitted to
repurchase Mortgage Loans for which there has been a breach of representation
and warranty. Moreover, any such Originator may make no representations and
warranties with respect to Mortgage Loans sold by it. The Federal
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Corporations (either in their respective corporate capacities or as receiver for
a depository institution) may also originate Mortgage Loans, in which event
neither the related Federal Corporation nor the depository institution for which
such Federal Corporation is acting as receiver may make representations and
warranties with respect to the Mortgage Loans that such Federal Corporation
sells, or such Federal Corporation may make only limited representations and
warranties (for example, that the related legal documents are enforceable). A
Federal Corporation may have no obligation to repurchase any Mortgage Loan for a
breach of a representation and warranty. If, as a result of a breach of
representation and warranty, an Originator is required to repurchase a Mortgage
Loan but is not permitted or otherwise fails to do so or if representations and
warranties are not made by an Originator, to the extent that neither the Sponsor
nor any other entity has assumed the representations and warranties or made
representations and warranties, neither the Sponsor nor that entity will be
required to repurchase such Mortgage Loan and, consequently such Mortgage Loan
will remain in the related Mortgage Pool and any related losses will be borne by
the Securityholders or by the related credit enhancement, if any. In addition,
loans which are purchased either directly or indirectly from a Federal
Corporation may be subject to a contract right of such Federal Corporation to
repurchase such loans under certain limited circumstances.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a
qualified mortgage under the REMIC provisions of the Code and is a Mortgage;
(iii) each Mortgaged Property is improved by a residential dwelling, which may
include condominiums, townhouses and manufactured housing permanently affixed to
real estate under applicable state law; (iv) each Mortgage Loan had, at the time
of origination, either an attorney's title opinion or a title search or title
policy; (v) as of the related Cut-Off Date each Mortgage Loan conveyed is
secured by a valid and subsisting lien of record on the Mortgaged Property
having the priority indicated on the related Schedule of Mortgage Loans subject
in all cases to exceptions to title set forth in the title insurance policy, if
any, with respect to the related Mortgage Loan; (vi) each Originator held good
and indefeasible title to, and was the sole owner of, each Mortgage Loan
conveyed by such Originator; and (vii) each Mortgage Loan was originated in
accordance in all material respects with applicable law and is the valid, legal
and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement all of the
representations and warranties of an Originator conveying a Mortgage Loan
directly to the Sponsor will be made as of the date on which such Originator
sells or assigns the Mortgage Loan to the Sponsor; the date as of which such
representations and warranties are made thus may be a date prior to the date of
the issuance of the related series of Securities. A substantial period of time
may elapse between the date as of which the representations and warranties are
made and the later date of issuance of the related series of Securities.
Accordingly, any remedies against the Originator will not arise if, during the
period commencing on the date of sale of a Mortgage Loan by the Originator to
the Sponsor, an event occurs that would give rise to such remedy if the event
had occurred prior to sale of the affected Mortgage Loan.
Unless otherwise described in the related Prospectus Supplement, the
Sponsor cannot guarantee compliance with, any representations and warranties
made by any Unaffiliated Originator with respect to the Mortgage Loans
originated or purchased by it and acquired by a Trust.
The Sponsor will assign to the Trustee for the benefit of the holders of
the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach
of any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the "Loan
Purchase Price") set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a
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percentage per annum, payable in respect of master servicing compensation or
sub-servicing compensation, as applicable, and the Originator's Retained Yield,
if any, and certain miscellaneous administrative amounts, together with, without
duplication, the aggregate amount of all delinquent interest, if any.
In addition to the repurchase obligation, the related Originator and/or the
Sponsor may remove a defective Mortgage Loan (a "Deleted Mortgage Loan") from
the related Trust and substitute in its place another Mortgage Loan of like kind
(a "Qualified Replacement Mortgage" as such term is defined in the related
Pooling and Servicing Agreement); however, such substitution must be effected
within 90 days of the date of the initial issuance of the Securities with
respect to a Trust for which no REMIC election is to be made. With respect to a
Trust for which a REMIC election is to be made, except as otherwise provided in
the Prospectus Supplement relating to a series of Securities, such substitution
of a defective Mortgage Loan must be effected within two years of the date of
the initial issuance of the Securities, and may not be made if such substitution
would cause the Trust to not qualify as a REMIC or result in a prohibited
transaction tax under the Code. Except as otherwise provided in the related
Prospectus Supplement, any Qualified Replacement Mortgage generally will, on the
date of substitution, (i) have an outstanding principal balance, after deduction
of all scheduled payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Mortgage Loan (the amount of any
shortfall to be paid to the related Trust in the month of substitution for
distribution to the Securityholders), (ii) have a Mortgage Rate neither more
than one percentage point less than nor one percentage point more than the
Mortgage Rate of the Deleted Mortgage Loan as of the date of substitution, (iii)
have a remaining term to maturity neither more than one year less than nor one
year more than that of the Deleted Mortgage Loan, and (iv) comply with all of
the representations and warranties set forth in the related Pooling and
Servicing Agreement as of the date of substitution. The related Pooling and
Servicing Agreement may include additional requirements relating to ARM Loans or
other specific types of Mortgage Loans or additional provisions relating to
meeting the foregoing requirements on an aggregate basis where a number of
substitutions occur contemporaneously. Unless otherwise specified in the
related Prospectus Supplement or Pooling and Servicing Agreement, an Originator
will also have the option to substitute a replacement Mortgage Loan for a
Mortgage Loan that it is obligated to repurchase in connection with a breach of
a representation and warranty.
The Servicer will be required under the applicable Pooling and Servicing
Agreement to enforce such purchase or substitution obligations for the benefit
of the Trustee and the Securityholders, following the practices it would employ
in its good faith business judgment if it were the owner of such Mortgage Loan;
provided, however, that this purchase or substitution obligation will in no
event become an obligation of the Servicer in the event the Originator fails to
honor such obligation (unless, with respect to a particular Mortgage Loan the
Servicer is the Originator). If the Originator fails to repurchase or
substitute a loan and no breach of the Sponsor's representations has occurred,
the Originator's purchase or substitution obligation will in no event become an
obligation of the Sponsor. In the case of a Designated Originator transaction
where the Originator fails to repurchase or substitute a Mortgage Loan and
neither the Sponsor, nor any other entity has assumed the representations and
warranties, such repurchase or substitute obligation of the Originator will in
no event become an obligation of the Sponsor. Unless otherwise specified in the
related Prospectus Supplement, the foregoing will constitute the sole remedy
available to Securityholders or the Trustee for a breach of representation by an
Originator in its capacity as a seller of Mortgage Loans to the Sponsor.
Notwithstanding the foregoing with respect to any Originator that requests
the Servicer's consent to the transfer of sub-servicing rights relating to any
Mortgage Loans to a successor servicer, the Servicer may release such Originator
from liability, under its representations and warranties described above, upon
the assumption by such successor servicer of the Originator's liability for such
representations and warranties as of the date they were made. In that event,
the Servicer's rights under the instrument by which such successor servicer
assumes the Originator's liability will be assigned to the Trustee, and such
successor servicer shall be deemed to be the "Originator" for purposes of the
foregoing provisions.
SUB-SERVICING
An Originator (other than the Servicer) of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. The Servicer may employ Sub-Servicers
that neither originate mortgage loans nor originated the Mortgage Loans with
respect to all or a portion of the servicing duties with respect to a particular
Mortgage Pool, or with respect to particular Mortgage Loans; such Sub-Servicers
shall be referred to as "Contract Sub-Servicers."
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Each Unaffiliated Originator is expected to release servicing of the
related Mortgage Loans to the Servicer, however in certain cases, Unaffiliated
Originators may act as Sub-Servicers for the related Mortgage Loans pursuant to
an agreement between the related Unaffiliated Originator and the Servicer (a
"Sub-Servicing Agreement"). An Unaffiliated Originator acting as a Sub-Servicer
for the Mortgage Loans will be required to meet certain standards specified in
the Prospectus Supplement with respect to its conventional Mortgage Loan
servicing portfolio, GAAP tangible net worth, cash/warehouse line availability,
mortgage servicing licensing status and other specified qualifications.
Contract Sub-Servicers shall be required to satisfy standards similar to those
for Unaffiliated Originators; however, the Servicer will be directly responsible
to the Trusts for Servicing Mortgage Loans in compliance with the standards set
forth in the Pooling and Servicing Agreement. Unless otherwise specified in the
related Prospectus Supplement, the Servicer will be responsible for the
compensation of any Contract Sub-Servicer and such compensation shall be
inclusive in the Servicer's fees.
While such a Sub-Servicing Agreement will be a contract solely between the
Servicer and the Sub-Servicer, the Pooling and Servicing Agreement pursuant to
which a series of Securities is issued will provide that, the Trustee, the
Servicer or any Master Servicer must recognize the Sub-Servicer's rights and
obligations under such Sub-Servicing Agreement. If a Pooling and Servicing
Agreement of a related series of Securities provides for the use of one or more
Sub-Servicers, such terms of the Pooling and Servicing Agreement and the related
Sub-Servicing Agreement will be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, with the
approval of the Servicer, a Sub-Servicer may delegate its servicing obligations
to third-party servicers, but such Sub-Servicer will remain obligated under the
related Sub-Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer, including collection of payments from
Mortgagors and remittance of such collections to the Servicer; maintenance of
hazard insurance and filing and settlement of claims thereunder, subject in
certain cases to the right of the Servicer to approve in advance any such
settlement; maintenance of escrow or impound accounts of Mortgagors for payment
of taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the Mortgage Loan; processing of assumptions or substitutions;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing of Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Mortgage Loans. A Sub-Servicer also may be
obligated to make advances to the Servicer in respect of delinquent installments
of principal and/or interest (net of any sub-servicing or other compensation) on
Mortgage Loans, as described more fully under "Description of the Securities--
Advances," and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors. A Sub-Servicer may also be obligated to pay to the
Servicer any Compensating Interest with respect to the related Mortgage Loans.
No assurance can be given that the Sub-Servicers will carry out their advance or
payment obligations, if any, with respect to the Mortgage Loans. Unless
otherwise specified in the related Prospectus Supplement, a Sub-Servicer may
transfer its servicing obligations to another entity that has been approved for
participation in the Sponsor's loan purchase programs, but only with the
approval of the Servicer.
As compensation for its servicing duties, the Sub-Servicer may be entitled
to a monthly servicing fee in a minimum amount set forth in the related
Prospectus Supplement. The Sub-Servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties provided in the Mortgage Note or related instruments. The
Sub-Servicer will be reimbursed by the Servicer for certain expenditures that it
makes, generally to the same extent that the Servicer would be reimbursed under
the applicable Pooling and Servicing Agreement from the loan proceeds. Unless
specified in the related Prospectus Supplement and Pooling and Servicing
Agreement, compensation for the services of the Sub-Servicer shall be paid by
the Servicer as a general corporate obligation of the Servicer. See "The
Pooling and Servicing Agreement--Servicing and Other Compensation and Payment of
Expenses; Originator's Retained Yield."
Each Sub-Servicer will be required to agree to indemnify the Servicer for
any liability or obligation sustained by the Servicer in connection with any act
or failure to act by the Sub-Servicer in its servicing capacity. Each
Sub-Servicer will be required to maintain a fidelity bond and an errors and
omission policy with respect to its officers, employees and other persons acting
on its behalf or on behalf of the Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such Mortgage
Loan, unless the Sub-Servicing Agreement is terminated earlier by the Servicer
or the Sub-Servicer or unless servicing is released to the Servicer. The
Servicer generally may terminate a Sub-Servicing Agreement immediately upon the
giving of notice upon certain stated events, including the violation of such
Sub-Servicing Agreement by the Sub-Servicer, or upon thirty days'
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notice to the Sub-Servicer without cause upon payment of an amount equal to a
specified termination fee calculated as a specified percentage of the aggregate
outstanding principal balance of all mortgage loans, including the Mortgage
Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing Agreement and
certain transfer fees.
The Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may act
as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Servicer acts as servicer, it will not assume
liability for the representations and warranties of the Sub-Servicer that it
replaces. If the Servicer enters into a new Sub-Servicing Agreement, each new
Sub-Servicer either must be an Originator, meet the standards for becoming an
Originator or have such servicing experience that is otherwise satisfactory to
the Servicer. The Servicer may make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur and, in any event, if the new Sub-Servicer is an affiliate of the
Servicer, the liability for such representations and warranties will not be
assumed by such new Sub-Servicer. In the event of such an assumption, the
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and warranties.
Any amendments to a Sub-Servicing Agreement or to a new Sub-Servicing Agreement
may contain provisions different from those described above that are in effect
in the original Sub-Servicing Agreements. However, the Pooling and Servicing
Agreement for each Trust Estate will provide that any such amendment or new
agreement may not be inconsistent with such Pooling and Servicing Agreement to
the extent that it would materially and adversely affect the interests of the
Securityholders.
MASTER SERVICER
A Master Servicer may be specified in the related Prospectus Supplement for
the related series of Securities. Customary servicing functions with respect to
Mortgage Loans constituting the Mortgage Pool in the Trust Estate will be
provided by the Servicer directly or through one or more Sub-Servicers subject
to supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Pooling and Servicing Agreement with the Master Servicer, (ii)
maintain a current data base with the payment histories of each Mortgagor, (iii)
review monthly servicing reports and data relating to the Mortgage Pool for
discrepancies and errors, and (iv) act as back-up Servicer during the term of
the transaction unless the Servicer is terminated or resigns in such case the
Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing Agreement
for any Series for which Mortgage Loans comprise the Trust Estate. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be required to be a FNMA- or FHLMC-approved seller/servicer and, in the
case of FHA Loans, approved by HUD as an FHA mortgagee. The Master Servicer
will be compensated for the performance of its services and duties under each
Pooling and Servicing Agreement as specified in the related Prospectus
Supplement.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under "The Pooling and Servicing Agreement" below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling and Servicing Agreement for the related Trust and
to the related Prospectus Supplement.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as Debt Instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ("Strip
Securities") entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance in
the case of Accrual Securities which are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities
may include one or more classes of Fixed-Income Securities (collectively, the
"Senior Securities") that are senior to one or more classes of Fixed-Income
Securities (collectively, the "Subordinate Securities") in respect of certain
distributions of principal and interest and allocations of losses on Mortgage
Loans. In addition, certain classes of Senior (or Subordinate) Securities may
be senior to other classes of Senior (or Subordinate) Securities in respect of
such distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus
or any Prospectus Supplement related hereto. Equity Securities may be offered
on a private placement basis or pursuant to a separate Registration Statement to
be filed by the Sponsor. In addition, the Sponsor and its affiliates may
initially or permanently hold any Equity Securities issued by any Trust.
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GENERAL PAYMENT TERMS OF SECURITIES
As provided in the related Pooling and Servicing Agreement and as described
in the related Prospectus Supplement, Securityholders will be entitled to
receive payments on their Securities on specified dates ("Payment Dates").
Payment Dates with respect to Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record Date")
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. Unless otherwise described in the related
Prospectus Supplement, the Payment Date will be the twenty-fifth day of each
month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and in the case of semi-annually-pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
The related Prospectus Supplement and Pooling and Servicing Agreement will
describe the periods (each, a "Remittance Period" or "Due Period") antecedent to
each Payment Date (for example, in the case of monthly-pay Securities, the
calendar month preceding the month in which a Payment Date occurs or such other
specified period). Unless otherwise provided in the related Prospectus
Supplement, collections received on or with respect to the related Mortgage
Loans during a Remittance Period will be required to be remitted by the Servicer
to the related Trustee prior to the related Payment Date, and will be used to
distribute payments to Securityholders on such Payment Date. As may be
described in the related Prospectus Supplement, the related Pooling and
Servicing Agreement may provide that all or a portion of the principal collected
on or with respect to the related Mortgage Loans may be applied by the related
Trustee to the acquisition of additional Mortgage Loans during a specified
period (rather than used to distribute payments of principal to Securityholders
during such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the related
Prospectus Supplement, terminate prior to the end of the specified period and
result in the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality or the Sponsor, the Servicer, any
Sub-Servicer, any Master Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to a
series, Securities of each series covered by a particular Pooling and Servicing
Agreement will evidence specified beneficial ownership interest in a separate
Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust
Estate will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) a pool of Mortgage Loans (and the related mortgage documents) or
certificates of interest or participations therein underlying a particular
series of Securities as from time to time are subject to the Pooling and
Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation, all
payments due on the Mortgage Loans after the related Cut-Off Date, as from time
to time are identified as deposited in respect thereof in the Principal and
Interest Account and in the related Distribution Account; (iii) property
acquired by foreclosure of the Mortgage Loans or deed in lieu of foreclosure;
(iv) hazard insurance policies and primary insurance policies, if any, and
certain proceeds thereof;
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and (v) any combination, as specified in the related Prospectus Supplement, of a
letter of credit, financial guaranty insurance policy, purchase obligation,
mortgage pool insurance policy, special hazard insurance policy, bankruptcy
bond, reserve fund or other type of credit enhancement as described under
"Description of Credit Enhancement." To the extent that any Trust Estate
includes certificates of interest or participations in Mortgage Loans, the
related Prospectus Supplement will describe the material terms and conditions of
such certificates or participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ("Physical
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar of the Securities (the "Security
Registrar") named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related Prospectus Supplement, specified classes of
a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to their Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Securityholders. Accordingly, although Securityholders will not possess
Securities, the rules provide a mechanism by which Securityholders will receive
distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
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Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Securities"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will cause
the Mortgage Loans being included in the related Trust Estate to be assigned to
the Trustee together with, unless otherwise specified in the related Prospectus
Supplement, all principal and interest due on or after the Cut-Off Date with
respect to such Mortgage Loan, other than principal and interest due before the
Cut-Off Date. If specified in the related Prospectus Supplement, the Sponsor or
any of its affiliates may retain the Originator's Retained Yield, if any, for
itself or transfer the same to others. The Trustee will, concurrently with such
assignment, deliver a series of Securities to the Sponsor in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing
as an exhibit to the related Pooling and Servicing Agreement. Such schedule
will include, among other things, information as to the principal balance of
each Mortgage Loan as of the Cut-Off Date, as well as information regarding the
Mortgage Rate, the currently scheduled monthly payment of principal and interest
and the maturity of the Mortgage Note.
In connection with the issuance of a series of Securities, the Originators
will be required to deliver to the Sponsor, who in turn will deliver to the
Trustee or other permitted document custodian, which may include the Servicer, a
file consisting of (i) the original Notes or certified copies thereof, endorsed
by the Originator thereof in blank or to the order of the holder, (ii) originals
(or certified copies) of all intervening assignments, showing a complete chain
of title from origination to the applicable Originators, if any, including
warehousing assignments, with evidence of recording or certification of filing
for recordation thereon, (iii) originals of all assumption and modification
agreements, if any, and (iv) either: (a) the original Mortgage, with evidence of
recording thereon, (b) a true and accurate copy of the Mortgage where the
original has been transmitted for recording, until such time as the original is
returned by the public recording office or (c) a copy of the Mortgage certified
by the public recording office in those instances where the original recorded
Mortgage has been lost. The Trustee will agree, for the benefit of the
Securityholders, to review each such file delivered to it within the time period
specified in the related Pooling and Servicing Agreement to ascertain that all
required documents (or certified copies of documents) have been executed and
received. The related Pooling and Servicing Agreement may provide for multiple
document custodians.
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The Originators are additionally required to cause to be prepared and
recorded, within the time period specified in the related Pooling and Servicing
Agreement (or, if original recording information is unavailable, within such
later period as is permitted by the Pooling and Servicing Agreement) assignments
of the Mortgages from the Originators to the Trustee, in the appropriate
jurisdictions in which such recordation is necessary to perfect the lien thereof
as against creditors of or purchasers from the Originators, to the Trustee;
PROVIDED, HOWEVER, that if the Originators furnish to the Trustee an opinion of
counsel to the effect that no such recording is necessary to perfect the
Trustee's interests in the Mortgages with respect to one or more jurisdictions,
then such recording will not be required with respect to such jurisdictions.
If the Sub-Servicer or Originator does not cure an omission or defect in a
required document within the time period specified in the related Pooling and
Servicing Agreement (or such other minimum notice period under applicable state
law) after notice is given to the Servicer and such omission or defect
materially and adversely affects the rights of the Securityholders or the Trust,
the Sub-Servicer or Originator, as the case may be, will be obligated to
purchase the related Mortgage Loan from the Trustee at its Loan Purchase Price
(or, if specified in the related Prospectus Supplement, will be permitted to
substitute for such Mortgage Loan under the conditions specified in the related
Prospectus Supplement). The Servicer will be obligated to enforce this
obligation of the Sub-Servicer or Originator, as the case may be, to the extent
described above under "Mortgage Loan Program--Representations by Originators."
Unless otherwise specified in the related Prospectus Supplement, neither the
Servicer, the Master Servicer nor the Sponsor will, however, be obligated to
purchase or substitute for such Mortgage Loan if the Sub-Servicer or Originator,
as the case may be, defaults on its obligation to do so, and there can be no
assurance that a Sub-Servicer or Originator, as the case may be, will carry out
any such obligation. Unless otherwise specified in the related Prospectus
Supplement, such purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized at any time to appoint a custodian pursuant
to a custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Mortgage Loans as the agent of the Trustee. The
identity of any such custodian to be appointed on the date of initial issuance
of the Securities will be set forth in the related Prospectus Supplement.
Pursuant to each Pooling and Servicing Agreement, the Servicer, either
directly or through Sub-Servicers, will service and administer the Mortgage
Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a "Forward Purchase Agreement")
with the Sponsor whereby the Sponsor will agree to transfer additional Mortgage
Loans to such Trust following the date on which such Trust is established and
the related Securities are issued. The Trust may enter into Forward Purchase
Agreements to permit the acquisition of additional Mortgage Loans that could not
be delivered by the Sponsor or have not formally completed the origination
process, in each case prior to the date on which the Securities are delivered to
the Securityholders (the "Closing Date"). Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to a Trust conform to the
requirements specified in such Forward Purchase Agreement. If a Forward
Purchase Agreement is to be utilized, and unless otherwise specified in the
related Prospectus Supplement, the related Trustee will be required to deposit
in a segregated account (each, a "Pre-Funding Account") all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Securities of the related series; the additional Mortgage Loans will
be transferred to the related Trust in exchange for money released to the
Sponsor from the related Pre-Funding Account. Each Forward Purchase Agreement
will set a specified period during which any such transfers must occur. The
Forward Purchase Agreement or the related Pooling and Servicing Agreement will
require that, if all moneys originally deposited to such Pre-Funding Account are
not so used by the end of such specified period, then any remaining moneys will
be applied as a mandatory prepayment of the related class or classes of
Securities as specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, the specified period for the
acquisition by a Trust of additional Mortgage Loans will not exceed three months
from the date such Trust is established.
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PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
The Servicer will deposit or will cause to be deposited into the Principal
and Interest Account certain payments and collections received by it subsequent
to the related Cut-Off Date (other than payments due on or before the Cut-Off
Date), as specifically set forth in the related Pooling and Servicing Agreement,
which generally will include the following except as otherwise provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the "Due Date") ("Principal Prepayments"), on the Mortgage Loans
comprising a Trust Estate;
(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment thereof
retained by the Servicer and the Sub-Servicer, if any, as their servicing
fee or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed advances made, by the Servicer
or the related Sub-Servicer) received and retained, if any, in connection
with the liquidation of any defaulted Mortgage Loan, by foreclosure, deed
in lieu of foreclosure or otherwise ("Liquidation Proceeds"), including all
proceeds of any title, hazard or other insurance policy covering any
Mortgage Loan in such Mortgage Pool ("Insurance Proceeds") or proceeds from
any alternative arrangements established in lieu of any such insurance and
described in the applicable Prospectus Supplement, other than proceeds to
be applied to the restoration of the related property or released to the
Mortgagor in accordance with the Servicer's normal servicing procedures
(such amounts, net of related unreimbursed expenses and advances of the
Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Estate purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Servicer, the Sponsor, the Master Servicer,
any Sub-Servicer or Originator or any other person pursuant to the terms of
the Pooling and Servicing Agreement. See "Mortgage Loan Program--
Representations by Originators," "--Assignment of Mortgage Loans" above;
and
(vi) any amounts required to be transferred from the Distribution
Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Servicer shall cause
to be established and the Trustee will maintain, at the corporate trust office
of the Trustee, in the name of the Trust for the benefit of the holders of each
series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the "Distribution
Account"). Both the Principal and Interest Account and the Distribution Account
must be (x) maintained with a depository institution whose debt obligations at
the time of any deposit therein meet certain rating criteria, and (y) (i) an
account or accounts the deposits in which are fully insured to the limits
established by the FDIC, (ii) an account maintained at a federal savings and
loan or state banking institution, (iii) an account maintained at a principal
subsidiary of a bank holding company, (iv) an account maintained at a national
banking association, or (v) such other account or accounts acceptable to the
Rating Agency or Agencies that rated one or more classes of Securities of such
series (an "Eligible Account"). The collateral that is eligible to secure
amounts in an Eligible Account is limited to certain permitted investments,
which are generally limited to United States government securities and other
high-quality investments ("Permitted Investments"). A Distribution Account may
be maintained as an interest-bearing or a non-interest-bearing account, or funds
therein may be invested in Permitted Investments as described below. The
Principal and Interest Account may contain funds relating to more than one
series of Securities as well as payments received on other mortgage loans
serviced or master serviced by the Servicer that have been deposited into the
Principal and Interest Account. The Servicer will be entitled to any interest
or other income or gain realized with respect to the funds on deposit in the
Principal and Interest Accounts.
Unless otherwise specified in the related Prospectus Supplement and Pooling
and Servicing Agreement, not later than a specified day preceding each Payment
Date (the "Remittance Date"), the Servicer will withdraw
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from the Principal and Interest Account and remit to the Trustee for deposit
into the applicable Distribution Account, in immediately available funds, the
amount to be distributed therefrom to Securityholders on such Payment Date. The
Servicer will remit to the Trustee for deposit into the Distribution Account the
amount of any advances made by the Servicer as described herein under
"Advances," any amounts required to be paid by the Servicer out of its own funds
due to the operation of a deductible clause in any blanket policy maintained by
the Servicer to cover hazard losses on the Mortgage Loans as described under
"Hazard Insurance; Claims Thereunder" below and any other amounts as
specifically set forth in the related Pooling and Servicing Agreement. The
Trustee will cause all payments under any credit enhancement such as a financial
guaranty insurance policy or a letter of credit to be deposited in the
Distribution Account prior to the close of business on the business day next
preceding each Payment Date.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Servicer. Funds on deposit in the related Distribution
Account may be invested in Permitted Investments maturing, in general, no later
than the Payment Date.
If applicable, each Sub-Servicer servicing a Mortgage Loan pursuant to a
Sub-Servicing Agreement will establish and maintain an account (the
"Sub-Servicing Account") which generally meets the requirements set forth in the
Sponsor's Guidelines from time to time, and is otherwise acceptable to the
Servicer.
Any Sub-Servicer will be required to deposit into its Sub-Servicing Account
all amounts described above under "Mortgage Loan Program--Sub-Servicing by
Originators" that are received by it in respect of the Mortgage Loans, less its
servicing fee or other compensation.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will deposit
the related Buydown Funds provided to it in a Buydown Account that will comply
with the requirements set forth herein with respect to a Sub-Servicing Account.
Unless otherwise specified in the related Prospectus Supplement, the terms of
all Buydown Mortgage Loans provide for the contribution of Buydown Funds in an
amount equal to or exceeding either (i) the total payments to be made from such
funds pursuant to the related buydown plan or (ii) if such Buydown Funds are to
be deposited on a discounted basis, that amount of Buydown Funds which, together
with investment earnings thereon at a rate as set forth in the Sponsor's
Guidelines from time to time, will support the scheduled level of payments due
under the Buydown Mortgage Loan. Neither the Servicer nor the Sponsor will be
obligated to add to any such discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any such insufficiency is not recoverable from the
Mortgagor or, in an appropriate case, from the related Originator or the related
Sub-Servicer, distributions to Securityholders may be affected. With respect to
each Buydown Mortgage Loan, the Sub-Servicer will withdraw from the Buydown
Account and remit to the Servicer on or before the date specified in the
Sub-Servicing Agreement described above the amount, if any, of the Buydown Funds
(and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan
that, when added to the amount due from the Mortgagor on such Buydown Mortgage
Loan, equals the full monthly payment which would be due on the Buydown Mortgage
Loan if it were not subject to the buydown plan.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buydown Period, the Sub-Servicer will withdraw from the
Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown Mortgage
Loan, the Sub-Servicer will generally be required to withdraw from the Buydown
Account and remit to the Servicer the Buydown Funds and investment earnings
thereon, if any, which together with such prepayment will result in a prepayment
in full; provided that Buydown Funds may not be available to cover a prepayment
under certain Mortgage Loan programs. Any Buydown Funds so remitted to the
Servicer in connection with a prepayment described in the preceding sentence
will be deemed to reduce the amount that would be required to be paid by the
Mortgagor to repay fully the related Mortgage Loan if the Mortgage Loan were not
subject to the buydown plan. Any investment earnings remaining in the Buydown
Account after prepayment or after termination of the Buydown Period will be
remitted to the related Mortgagor or such other designated party pursuant to the
agreement relating to each Buydown Mortgage Loan (the "Buydown Agreement"). If
the Mortgagor defaults during the Buydown Period with respect to a Buydown
Mortgage Loan and the property securing such Buydown Mortgage Loan is sold in
liquidation (either
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by the Servicer, the Primary Insurer, the insurer under the mortgage pool
insurance policy (the "Pool Insurer") or any other insurer), the Sub-Servicer
will be required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and remit the same to the Servicer or, if
instructed by the Servicer, pay the same to the Primary Insurer or the Pool
Insurer, as the case may be, if the Mortgaged Property is transferred to such
insurer and such insurer pays all of the loss incurred in respect of such
default.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Servicer may, from time to time, make withdrawals from the Principal
and Interest Account for certain purposes, as specifically set forth in the
related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Pooling and Servicing Agreement and described in "--Payments on Mortgage
Loans; Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency Advances
or Servicing Advances as to any Mortgaged Property, out of late payments or
collections on the related Mortgage Loan with respect to which such
Delinquency Advances or Servicing Advances were made or from subsequent
collections on the Mortgage Loans deposited to the Principal Interest
Account;
(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to pay the Sponsor or its assignee all amounts allocable to the
Originator's Retained Yield out of collections or payments which represent
interest on each Mortgage Loan (including any Mortgage Loan as to which
title to the underlying Mortgaged Property was acquired);
(v) to withdraw amounts that have been deposited in the Principal and
Interest Account in error; and
(vi) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the Pooling
and Servicing Agreement, as described in "The Pooling and Servicing
Agreement--Termination, Retirement of Securities."
DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in the
case of quarterly-pay Securities, the third month following such month and each
third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as the Securityholders of such Securities at the close of
business as of the last day of the preceding month (the "Record Date") in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided
percentage interest (the "Percentage Interest") represented by a Security of a
particular class will be equal to the percentage obtained by dividing the
initial principal balance or notional amount of such Security by the aggregate
initial amount or notional balance of all the Securities of such class.
Distributions will be made in immediately available funds (by wire transfer or
otherwise) to the account of a Securityholder at a bank or other entity having
appropriate facilities therefor, if such Securityholder has so notified the
Trustee or the Paying Agent, as the case may be, and the applicable Pooling and
Servicing Agreement provides for such form of payment, or by check mailed to the
address of the person entitled thereto as it appears on the Security Register;
provided, however, that the final distribution in retirement of the Securities
(other than any Book-Entry Securities) will be made only upon presentation and
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surrender of the Securities at the office or agency of the Trustee specified in
the notice to Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related Prospectus
Supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different interest rate (the "Pass-Through
Rate"), which may be a fixed or adjustable Pass-Through Rate. The related
Prospectus Supplement will specify the Pass-Through Rate for each class, or in
the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and
the method for determining the Pass-Through Rate. Unless otherwise specified in
the related Prospectus Supplement, interest on the Securities will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
Principal Distribution Amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date, allocable to Securityholders
which are not covered by advances or the applicable credit enhancement, in each
case in such amount that is allocated to such class on the basis set forth in
the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such
interest-only or revolving period may, upon the occurrence of certain events to
be described in the related Prospectus Supplement, terminate prior to the end of
the specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes of
Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the 15th day (or if such day is not a business day,
the next succeeding business day or such other date specified in the Pooling and
Servicing Agreement) of the month of distribution (the "Determination Date"),
the Servicer will provide the Trustee, (and the Master Servicer and Credit
Enhancer, if any) with a monthly servicing report. Except as otherwise provided
in the related Pooling and Servicing Agreement, on or prior to one business day
after the related Remittance Date (or such earlier or later day as shall be
agreed by a Financial Guaranty Insurer, if applicable, and Trustee) of the month
of distribution, the Trustee will use the monthly servicing report to determine
the amounts of principal and interest which will be passed through to
Securityholders on the immediately succeeding Payment Date. If the amount in
the Principal and Interest Account is insufficient to
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cover the amount to be passed through to Securityholders, the Trustee will,
prior to the related Payment Date, notify a Financial Guaranty Insurer or any
other person required to be notified pursuant to the related Pooling and
Servicing Agreement.
ADVANCES
As to be described in the related Prospectus Supplement, the Servicer may
be required, not later than each Remittance Date, to deposit into the Principal
and Interest Account an amount equal to the sum of the scheduled interest and
principal payments or such other minimum monthly remittance amount, if any, as
provided in the related Pooling and Servicing Agreement (net of the Servicing
Fees and certain administrative amounts) due, but not collected, with respect to
delinquent Mortgage Loans during the prior Remittance Period, but only if, in
its good faith business judgment, the Servicer believes that such amount will
ultimately be recovered from the related Mortgage Loan. Such amounts are
"Delinquency Advances." The Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto.
A Mortgage Loan is "delinquent" if any payment due thereon is not made by
the close of business on the day such payment is scheduled to be due.
The Servicer will be required to pay all "out of pocket" costs and expenses
incurred in the performance of its servicing obligations, but only to the extent
that the Servicer reasonably believes that such amounts are recoverable and will
be reimbursable out of the proceeds of liquidation of the related Mortgage Loan
and will increase Net Liquidation Proceeds on the related Mortgage Loan. Each
such amount so paid will constitute a "Servicing Advance." The Servicer may
recover Servicing Advances to the extent permitted by the Mortgage Loans or, if
not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from liquidation proceeds realized upon the liquidation of the
related Mortgage Loan. In no case may the Servicer recover Servicing Advances
from the principal and interest payments on any specific Mortgage Loan.
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described under "The Pooling
and Servicing Agreement--Termination; Retirement of Securities" below, the
Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Servicer's
obligation to make advances may be supported by credit enhancement as described
in the related Pooling and Servicing Agreement. In the event that the provider
of such support is downgraded by a Rating Agency rating the related Securities
or if the collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Securities may also be downgraded.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the Trustee
will forward or cause to be forwarded to each holder of record of such class of
Securities a statement or statements with respect to the related Trust setting
forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage Loans
after giving effect to the distribution of principal on such Payment Date;
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(v) with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class after giving
effect to the distribution of principal on such Payment Date;
(vi) the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of credit enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any credit enhancement substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan Purchase
Price amounts included in such distribution; and (ix) a number with
respect to each class (the "Pool Factor") computed by dividing the
principal balance of all certificates in such class (after giving effect to
any distribution of principal to be made on such Payment Date) by the
original principal balance of certificates of such class on the Closing
Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year following any
year during which Securities are outstanding, the Trustee shall furnish a report
to each Securityholder of record at any time during each calendar year as to the
aggregate amounts reported pursuant to (i), (ii) and (iii) with respect to the
Securities for such calendar year. If a class of Securities are in book-entry
form, DTC will supply such reports to the Securityholders in accordance with its
procedures.
In addition, on each Payment Date the Trustee will forward or cause to be
forwarded additional information, as of the close of business on the last day of
the prior calendar month, as more specifically described in the related Pooling
and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate principal
balances thereof, together with the number, percentage and aggregate
principal balances of Mortgage Loans (a) 30-59 days delinquent, (b) 60-89
days delinquent and (c) 90 or more days delinquent;
(ii) the number, percentage, aggregate Mortgage Loan balances and
status of all Mortgage Loans in foreclosure proceedings (and whether any
such Mortgage Loans are also included in any of the statistics described in
the foregoing clause (i));
(iii) the number, percentage and aggregate Mortgage Loan balances of
all Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and
whether any such Mortgage Loans are also included in any of the statistics
described in the foregoing clause (i));
(iv) the number, percentage and aggregate Mortgage Loan balances of
all Mortgage Loans relating to the status of any Mortgaged Properties as to
which title has been taken in the name of, or on behalf of the Trustee (and
whether any such Mortgage Loans are also included in any of the statistics
described in the foregoing clause (i)); and
(v) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure.
Each Pooling and Servicing Agreement shall provide that the Securityholders
will have the right to request a Securityholder list. Any Securityholder in a
Trust may apply in writing to the related Trustee, and such application shall
state that the Securityholder desires to communicate with other Securityholders
with respect to their rights under the related Pooling and Servicing Agreement.
Such written request shall be accompanied by a copy of the communication which
such Securityholder proposes to transmit to other Securityholders. The Trustee
shall furnish such Securityholder list to such requesting Securityholder within
ten business days after receipt of the application.
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COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Servicer, is required to service
and administer the Mortgage Loans in accordance with the Pooling and Servicing
Agreement and with reasonable care, and using that degree of skill and attention
that the Servicer exercises with respect to comparable mortgage loans that it
services for itself or others.
The duties of the Servicer include collecting and posting of all payments,
responding to inquiries of Mortgagors or by federal, state or local government
authorities with respect to the Mortgage Loans, investigating delinquencies,
reporting tax information to Mortgagors in accordance with its customary
practices and accounting for collections and furnishing monthly and annual
statements to the Trustee with respect to distributions and making Delinquency
Advances and Servicing Advances. The Servicer is required to follow its
customary standards, policies and procedures in performing its duties as
Servicer.
The Servicer (i) is authorized and empowered to execute and deliver, on
behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the related Mortgaged Properties; (ii) may consent to
any modification of the terms of any Note not expressly prohibited by the
Pooling and Servicing Agreement if the effect of any such modification (x) will
not materially and adversely affect the security afforded by the related
Mortgaged Property (other than as permitted by the related Pooling and Servicing
Agreement) or the timing of receipt of any payments required thereunder; and (y)
will not cause a Trust which is a REMIC to fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Servicer to
follow such collection procedures as it follows from time to time with respect
to mortgage loans in its servicing portfolio that are comparable to the Mortgage
Loans. The Servicer may in its discretion (i) waive any assumption fees, late
payment charges, charges for checks returned for insufficient funds, prepayment
fees, if any, or the fees which may be collected in the ordinary course of
servicing the Mortgage Loans, (ii) if a Mortgagor is in default or about to be
in default because of a Mortgagor's financial condition, arrange with the
Mortgagor a schedule for the payment of delinquent payments due on the related
Mortgage Loan; PROVIDED, HOWEVER, the Servicer shall not reschedule the payment
of delinquent payments more than one time in any twelve consecutive months with
respect to any Mortgagor or (iii) modify payments of monthly principal and
interest on any Mortgage Loan becoming subject to the terms of the Relief Act in
accordance with the Servicer's general policies for comparable mortgage loans
subject to the Relief Act.
The Servicer will be required to foreclose upon or otherwise comparably
effect the ownership on behalf of the Trust of Mortgaged Properties relating to
defaulted Mortgage Loans as to which no satisfactory arrangements can be made
for collection of delinquent payments. The related Pooling and Servicing
Agreement will require the Servicer to take into account the existence of any
hazardous substances, hazardous wastes or solid wastes, as such terms are
defined in the Comprehensive Environmental Response Compensation and Liability
Act, the Response Conservation and Recovery Act of 1976, or other federal, state
or local environmental legislation, in determining whether to foreclose upon a
Mortgaged Property, or otherwise comparably effect the ownership of such
Mortgaged Property on behalf of the Trust.
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be required, to the extent it has knowledge of such
conveyance or prospective conveyance, to exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Note; PROVIDED, HOWEVER, that the Servicer will not
be required to exercise any such right if (i) the "due-on-sale" clause, in the
reasonable belief of the Servicer, is not enforceable under applicable law or
(ii) the Servicer reasonably believes that to permit an assumption of the
Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the Financial Guaranty Insurer, if any, or jeopardize
coverage under any primary insurance policy or applicable credit enhancement
arrangements. In such event, the Servicer will be required to enter into an
assumption and modification agreement with the person to whom such Mortgaged
Property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note and, unless prohibited by applicable law
or the related documents, the Mortgagor remains liable thereon. If the
foregoing is not permitted under applicable law, the Servicer will be authorized
to enter into a substitution of liability agreement with such person, pursuant
to which the original Mortgagor is released from liability and such person is
substituted as Mortgagor and becomes liable under the Mortgage Note. The
assumed loan must conform in all respects to the requirements, representations
and warranties of the Pooling
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and Servicing Agreement. See "Certain Legal Aspects of Mortgage Loans and
Related Matters--Enforceability of Certain Provisions" herein.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer shall foreclose upon or otherwise comparably effect the
ownership on behalf of the Trust of Mortgaged Properties relating to defaulted
Mortgage Loans as to which no satisfactory arrangements can be made for
collection of delinquent payments and which the Servicer has not purchased
pursuant to the related Pooling and Servicing Agreement (such Mortgage Loans,
"REO Property"). In connection with such foreclosure or other conversion, the
Servicer shall exercise such of the rights and powers vested in it under the
related Pooling and Servicing Agreement, and use the same degree of care and
skill in their exercise or use, as prudent mortgage lenders would exercise or
use under the circumstances in the conduct of their own affairs, including, but
not limited to, advancing funds for the payment of taxes, amounts due with
respect to Senior Liens and insurance premiums. Any amounts so advanced shall
constitute "Servicing Advances." Unless otherwise provided in the related
Prospectus Supplement, the Servicer shall sell any REO Property within 23 months
of its acquisition by the Trust, unless the Servicer obtains for the Trustee an
opinion of counsel experienced in federal income tax matters, addressed to the
Trustee, a Financial Guaranty Insurer, if applicable, and the Servicer, to the
effect that the holding by the Trust of such REO Property for any greater period
will not result in the imposition of taxes on "Prohibited Transactions" of the
Trust as defined in Section 860F of the Code or, if a REMIC election has been
made, cause the Trust to fail to qualify as a REMIC under the REMIC Provisions
at any time that any Securities are outstanding, in which case the Servicer
shall sell any REO Property by the end of any extended period specified in any
such opinion.
Notwithstanding the generality of the foregoing provisions, the Servicer
shall manage, conserve, protect and operate each REO Property for the
Securityholders solely for the purpose of its prompt disposition and sale in a
manner which does not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code or result in the
receipt by the Trust of any "income from non-permitted assets" within the
meaning of Section 860F(a)(2)(B) of the Code or any "net income from foreclosure
property" which is subject to taxation under the REMIC Provisions. Pursuant to
its efforts to sell such REO Property, the Servicer shall either itself or
through an agent selected by the Servicer protect and conserve such REO Property
in the same manner and to such extent as is customary in the locality where such
REO Property is located and may, incident to its conservation and protection of
the interests of the Securityholders, rent the same, or any part thereof, as the
Servicer deems to be in the best interest of the Securityholders for the period
prior to the sale of such REO Property. The Servicer shall take into account
the existence of any hazardous substances, hazardous wastes or solid wastes, as
such terms are defined in the Comprehensive Environmental Response Compensation
and Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property. The Servicer shall determine, with
respect to each defaulted Mortgage Loan, when it has recovered, whether through
trustee's sale, foreclosure sale or otherwise, all amounts it expects to recover
from or on account of such defaulted Mortgage Loan, whereupon such Mortgage Loan
shall become a Liquidated Mortgage Loan.
If a defaulted Mortgage Loan or REO Property is not so removed from the
Trust Estate, then, upon the final liquidation thereof, if a loss is realized
that is not covered by any applicable form of credit enhancement or other
insurance, the Securityholders will bear such loss. However, if a gain results
from the final liquidation of an REO Property that is not required by law to be
remitted to the related Mortgagor, the Servicer will be entitled to retain such
gain as additional servicing compensation unless the related Prospectus
Supplement provides otherwise. For a description of the Servicer's obligations
to maintain and make claims under applicable forms of credit enhancement and
insurance relating to the Mortgage Loans, see "Description of Credit
Enhancement" and "Hazard Insurance; Claims Thereunder--Hazard Insurance
Policies."
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more classes of
Senior Securities and one or more classes of Subordinate Securities, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby.
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Subordination of the Subordinate Securities of any Senior/Subordinate Series of
Securities will be effected by the following method, unless an alternative
method is specified in the related Prospectus Supplement. In addition, certain
classes of Senior (or Subordinate) Securities may be senior to other classes of
Senior (or Subordinate) Securities, as specified in the related Prospectus
Supplement. The following discussion (together with the summaries under
"Description of Credit Enhancement" below) describes all material terms and
provisions related to a Senior/Subordinate Series of Securities. The following
discussion is subject to, and is qualified in its entirety by reference to, the
related Prospectus Supplement with respect to the particular priorities and
other rights as among the various classes of Senior Securities or Subordinate
Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for distribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage Loans
not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that
becomes a Liquidated Mortgage Loan, the amount of loss realized, if any (as more
fully described in the related Pooling and Servicing Agreement, a "Realized
Loss"), will equal the portion of the stated principal balance remaining, after
application of all amounts recovered (net of amounts reimbursable to the
Servicer for related advances and expenses) towards interest and principal owing
on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a PRO-RATA basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties that are generally of the same type as are covered under a
special hazard insurance policy, the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
"Special Hazard Amount") specified in the related Prospectus Supplement. See
"Description of Credit Enhancement--Special Hazard Insurance Policies." If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a PRO-RATA basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a PRO-RATA basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to a
Security in a Senior/Subordinate Series will be made by reducing the Principal
Balance thereof as of the Payment Date following the calendar month in which
such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a
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specified schedule or such other method of reduction as such Prospectus
Supplement may specify. If so specified in the related Prospectus Supplement,
additional credit support for this form of subordination may be provided by the
establishment of a reserve fund for the benefit of the holders of the Senior
Securities (which may, if such Prospectus Supplement so provides, initially be
funded by a cash deposit by the Sponsor or the related Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each Series of Securities shall have credit support
comprised of one or more of the following components. Each component will have
a monetary limit and will provide coverage with respect to Realized Losses that
are (i) attributable to the Mortgagor's failure to make any payment of principal
or interest as required under the Mortgage Note, but not including Special
Hazard Losses, Extraordinary Losses or other losses resulting from damage to a
Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such loss, a
"Defaulted Mortgage Loss"); (ii) of a type generally covered by a special hazard
insurance policy (as defined below) (any such loss, a "Special Hazard Loss");
(iii) attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a bankruptcy court
of the principal balance of or the Mortgage Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss"). Losses
occasioned by war, civil insurrection, certain governmental actions, nuclear
reaction and certain other risks ("Extraordinary Losses") will not be covered
unless specified herein. To the extent that the credit enhancement for any
series of Securities is exhausted, the Securityholders will bear all further
risks of loss not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, credit
enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of credit enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur that exceed the amount covered by credit enhancement
or are not covered by the credit enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of credit
enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to other classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by credit enhancement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in
the applicable Prospectus Supplement and the Pooling and Servicing Agreement,
the credit enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Reduction or Substitution of Credit
Enhancement." If specified in the applicable Prospectus Supplement, credit
enhancement for a series of Securities may cover one or more other series of
Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus describe all material terms and provisions relating to such insurance
policies or bonds. The related Prospectus Supplement will set forth the
particular terms and provisions of any such insurance policies or bonds by
reference to the actual forms of such policies or bonds, copies of which are
available upon request.
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LETTER OF CREDIT
If any component of credit enhancement as to any series of Securities is to
be provided by a letter of credit (the "Letter of Credit"), a bank (the "Letter
of Credit Bank") will deliver to the Trustee an irrevocable Letter of Credit.
The Letter of Credit may provide direct coverage with respect to the related
Securities or, if specified in the related Prospectus Supplement, support the
Sponsor's or any other person's obligation pursuant to a Purchase Obligation to
make certain payments to the Trustee with respect to one or more components of
credit enhancement. The Letter of Credit Bank, as well as the amount available
under the Letter of Credit with respect to each component of credit enhancement,
will be specified in the applicable Prospectus Supplement and in the related
Form 8-K. The Letter of Credit will expire on the expiration date set forth in
the related Prospectus Supplement, unless earlier terminated or extended in
accordance with its terms. On or before each Payment Date, either the Letter of
Credit Bank or the Sponsor (or other obligor under a Purchase Obligation) will
be required to make the payments specified in the related Prospectus Supplement
after notification from the Trustee, to be deposited in the related Distribution
Account, if and to the extent covered, under the applicable Letter of Credit.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy ("Mortgage Pool Insurance Policy")
obtained by the Sponsor for each related Trust Estate will be issued by the Pool
Insurer named in the related Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to limitations specified in the related
Prospectus Supplement described below, cover Defaulted Mortgage Losses in an
amount equal to a percentage specified in the related Prospectus Supplement (or
in a Current Report on Form 8-K) of the aggregate principal balance of the
Mortgage Loans on the Cut-Off Date. As set forth under "Maintenance of Credit
Enhancement," the Servicer will use reasonable efforts to maintain the Mortgage
Pool Insurance Policy and to present claims thereunder to the Pool Insurer on
behalf of itself, the Trustee and the Securityholders. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss (typically,
such policies do not cover Special Hazard Losses, Fraud Losses and Bankruptcy
Losses), since claims thereunder may only be made respecting particular
defaulted Mortgage Loans and only upon satisfaction of certain conditions
precedent described below due to a failure to pay irrespective of the reason
therefor.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Sponsor for a Trust will be issued by the
insurer named in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described in the related
Prospectus Supplement, protect holders of the related series of Securities from
(i) losses due to direct physical damage to a Mortgaged Property other than any
loss of a type covered by a hazard insurance policy or a flood insurance policy,
if applicable, and (ii) losses from partial damage caused by reason of the
application of the co-insurance clauses contained in hazard insurance policies.
See "Hazard Insurance; Claims Thereunder." A Special Hazard Insurance Policy
will not cover Extraordinary Losses. Aggregate claims under a Special Hazard
Insurance Policy will be limited to a maximum amount of coverage, as set forth
in the related Prospectus Supplement or in a Current Report on Form 8-K. A
Special Hazard Insurance Policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the Mortgaged Property securing
the Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Servicer.
Subject to the foregoing limitations, in general a Special Hazard Insurance
Policy will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Servicer or the
Sub-Servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the Mortgage Rate to the date of claim settlement and
certain expenses incurred by the Servicer or the Sub-Servicer with respect to
such property. If the property is transferred to a third party in a sale
approved by the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer"), the amount that the Special Hazard Insurer will pay will be
the amount under (ii) above reduced by the net proceeds of the sale of the
property.
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BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible that
the bankruptcy court may establish the value of the Mortgaged Property of such
Mortgagor at an amount less than the then outstanding, principal balance of the
Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation"). The
amount of the secured debt then could be reduced to such value, and, thus, the
holder of such Mortgage Loan would become an unsecured creditor to the extent
the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including a reduction in the amount of the monthly
payment on the related Mortgage Loan or a reduction in the mortgage interest
rate. See "Certain Legal Aspects of Mortgage Loans and Related Matters--
Anti-Deficiency Legislation and Other Limitations on Lenders." Any bankruptcy
bond ("Bankruptcy Bond") to provide coverage for Bankruptcy Losses for
proceedings under the federal Bankruptcy Code obtained by the Sponsor for a
Trust Estate will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement or in a Current Report on Form 8-K.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Sponsor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, amounts otherwise distributable to
Subordinate Securityholders or the owners of any Originator's Retained Yield, or
any other instrument satisfactory to the Rating Agency or Agencies, which will
be applied and maintained in the manner and under the conditions specified in
such Prospectus Supplement. In the alternate or in addition to such deposit to
the extent described in the related Prospectus Supplement, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
credit enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Estate.
FINANCIAL GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy or surety bond ("Financial Guaranty Insurance Policy") may be
obtained and maintained for each class or series of Securities. The issuer of
any Financial Guaranty Insurance Policy (a "Financial Guaranty Insurer") will be
described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders of one or more
classes are entitled under the related Pooling and Servicing Agreement plus any
other amounts specified therein or in the related Prospectus Supplement (the
"Insured Payment").
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies generally will not guarantee any specified rate of prepayments or
provide funds to redeem Securities on any specified date.
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Subject to the terms of the related Pooling and Servicing Agreement, the
Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto third party
guarantees, and other arrangements for maintaining timely payments or providing
additional protection against losses on the assets included in such Trust,
paying administrative expenses, or accomplishing such other purpose as may be
described in the Prospectus Supplement. The Trust may include a guaranteed
investment contract or reinvestment agreement pursuant to which funds held in
one or more accounts will be invested at a specified rate. If any class of
Securities has a floating interest rate, or if any of the Mortgage Assets has a
floating interest rate, the Trust may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS-COLLATERALIZATION
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced by separate
classes of the related series of Securities. In such case, credit support may
be provided by a cross-support feature which requires that distributions with
respect to one class of security be made with excess amounts available from
asset groups within the same Trust which support other classes of Securities.
The Prospectus Supplement for a series that includes a cross-support feature
will describe the manner and conditions for applying such cross-support feature.
In addition, as may be described in the related Prospectus Supplement, a
Trust Estate may include the right to receive moneys from a common pool of
credit enhancement which may be available for more than one series of
Securities, such as a master reserve account or a master insurance policy.
Notwithstanding the foregoing, unless specifically described otherwise in the
related Prospectus Supplement, no collections on any Mortgage Loans held by any
Trust may be applied to the payment of Securities issued by any other Trust
(except to the limited extent that certain collections in excess of amounts
needed to pay the related Securities may be deposited in a common, master
reserve account that provides credit enhancement for more than one series of
Securities).
OVERCOLLATERALIZATION
If specified in the Prospectus Supplement, subordination provisions of a
Trust may be used to accelerate to a limited extent the amortization of one or
more classes of Securities relative to the amortization of the related Mortgage
Loans. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, with respect to the Mortgage
Loans or groups thereof, overcollateralization which results from the excess of
the aggregate principal balance of the related Mortgage Loans, or a group
thereof, over the principal balance of the related class of Securities. Such
acceleration may continue for the life of the related security or may be
limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related Prospectus Supplement, such limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not expressly
provide for credit enhancement arrangements in lieu of some or all of the
arrangements mentioned below, the following paragraphs shall apply.
If a form of credit enhancement has been obtained for a series of
Securities, the Sponsor or the Servicer will be obligated to exercise its best
reasonable efforts to keep or cause to be kept such form of credit support in
full force and effect throughout the term of the applicable Pooling and
Servicing Agreement, unless coverage
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thereunder has been exhausted through payment of claims or otherwise, or
substitution therefor is made as described below under "Reduction or
Substitution of Credit Enhancement."
In lieu of the Sponsor's or the Servicer's obligation to maintain a
particular form of credit enhancement, the Sponsor or the Servicer may obtain a
substitute or alternate form of credit enhancement. If the Servicer obtains
such a substitute form of credit enhancement, it will maintain and keep such
form of credit enhancement in full force and effect as provided herein. Prior
to its obtaining any substitute or alternate form of credit enhancement, the
Sponsor or the Servicer, as the case may be, will obtain written confirmation
from the Rating Agency or Agencies that rated the related series of Securities
that the substitution or alternate form of credit enhancement for the existing
credit enhancement will not adversely affect the then current ratings assigned
to such Securities by such Rating Agency or Agencies.
The Servicer, on behalf of itself, the Trustee and Securityholders, will
provide the Trustee information required for the Trustee to draw under a Letter
of Credit or Financial Guaranty Insurance Policy, will present claims to each
Pool Insurer, to the issuer of each Special Hazard Insurance Policy or other
special hazard instrument, to the issuer of each Bankruptcy Bond and will take
such reasonable steps as are necessary to permit recovery under such Letter of
Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance
policies or comparable coverage respecting defaulted Mortgage Loans or Mortgage
Loans which are the subject of a bankruptcy proceeding. Additionally, the
Servicer will present such claims and take such steps as are reasonably
necessary to provide for the performance by another party of its Purchase
Obligation. As set forth above, all collections by the Servicer under any
Purchase Obligation, any Mortgage Pool Insurance Policy, or any Bankruptcy Bond
and, where the related property has not been restored, any Special Hazard
Insurance Policy, are to be deposited initially in the Principal and Interest
Account and ultimately in the Distribution Account, subject to withdrawal as
described above. All draws under any Letter of Credit or Financial Guaranty
Insurance Policy will be deposited directly in the Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Servicer is not required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to one or more classes of Securityholders on liquidation of the
Mortgage Loan after reimbursement of the Servicer for its expenses and (ii) that
such expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds. If recovery under any applicable form of credit enhancement
is not available because the Servicer has been unable to make the above
determinations, has made such determinations incorrectly or recovery is not
available for any other reason, the Servicer is nevertheless obligated to follow
such normal practices and procedures (subject to the preceding sentence) as it
deems necessary or advisable to realize upon the defaulted Mortgage Loan and in
the event such determination has been incorrectly made, is entitled to
reimbursement of its expenses in connection with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the related Prospectus Supplement, the amount
of credit support provided pursuant to any of the credit enhancements
(including, without limitation, a Mortgage Pool Insurance Policy, Financial
Guaranty Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond,
Letter of Credit or any alterative form of credit enhancement) may be reduced
under certain specified circumstances. In addition, if provided in the related
Prospectus Supplement, any formula used in calculating the amount or degree of
credit enhancement may be changed without the consent of the Securityholders
upon written confirmation from each Rating Agency then rating the Securities
that such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
credit enhancement will be subject to periodic reduction in accordance with a
schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Mortgage Loans declines. Additionally, in certain cases, such
credit support (and any replacements therefor) may be replaced, reduced or
terminated upon the written assurance from each applicable Rating Agency that
the then current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable credit enhancement is downgraded, the credit rating
of the related Securities may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, neither the
Sponsor nor the Servicer thereafter will be obligated to obtain replacement
credit support in order to restore the rating of the Securities, and also will
be permitted to replace
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such credit support with other credit enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current rating of the related series of Securities is maintained. Where
the credit support is in the form of a Reserve Fund, a permitted reduction in
the amount of credit enhancement will result in a release of all or a portion of
the assets in the Reserve Fund to the Sponsor, one or more Originators, the
Servicer or such other person that is entitled thereto. Any assets so released
will not be available to fund distribution obligations in future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Servicer upon request.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for the Mortgage Loan. Additionally, the Pooling and Servicing
Agreement will require the Servicer to cause to be maintained with respect to
each Mortgage Loan a hazard insurance policy with a generally acceptable carrier
that provides for fire and extended coverage relating to such Mortgage Loan in
an amount not less than the least of (i) the outstanding principal balance of
the Mortgage Loan, (ii) the minimum amount required to compensate for damage or
loss to the improvements on a replacement cost basis or (iii) the full insurable
value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property with improvements in an area identified in the Federal Register by the
Federal Emergency Management Agency as having special flood hazards, the
Servicer will be required to maintain with respect thereto a flood insurance
policy in a form meeting the requirements of the then-current guidelines of the
Federal Insurance Administration with a generally acceptable carrier in an
amount representing coverage, and which provides for recovery by the Servicer on
behalf of the Trust of insurance proceeds relating to such Mortgage Loan of not
less than the least of (i) the outstanding principal balance of the Mortgage
Loan, (ii) the minimum amount required to compensate for damage to or loss of
the improvements on a replacement cost basis, (iii) the maximum amount of
insurance that is available under the Flood Disaster Protection Act of 1973.
Pursuant to the related Pooling and Servicing Agreement, the Servicer will be
required to indemnify the Trust out of the Servicer's own funds for any loss to
the Trust resulting from the Servicer's failure to maintain such flood
insurance.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire with extended coverage and against flood hazards on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as loss
payee and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance, and otherwise complies with
the requirements of the Pooling and Servicing Agreement, the Servicer shall be
deemed conclusively to have satisfied its obligations with respect to fire and
hazard insurance coverage under the Pooling and Servicing Agreement. Such
blanket policy may contain a deductible clause, in which case the Servicer will
be required, in the event that there shall not have been maintained on the
related Mortgaged Property a policy complying with the Pooling and Servicing
Agreement, and there shall have been a loss that would have been covered by such
policy, to deposit in the Principal and Interest Account from the Servicer's own
funds the difference, if any, between the amount that would have been payable
under a policy complying with the Pooling and Servicing Agreement and the amount
paid under such blanket policy.
While the Servicer does not actively monitor the maintenance of hazard or
flood insurance by borrowers, it responds to the notices of cancellation or
expiration as joint-loss payee by requiring verification of replacement
coverage.
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THE SPONSOR
The Sponsor, EquiVantage Acceptance Corp., was incorporated in the State of
Delaware on June 6, 1990. It is an affiliate of Transworld Mortgage
Corporation. The Sponsor was organized for the purpose of the purchase and
securitization of first and junior mortgage loans.
The Sponsor maintains its principal office at 13111 Northwest Freeway,
Suite 300, Houston, Texas 77040. Its telephone number is (713) 895-1900.
THE SERVICER
Unless otherwise specified in the related Prospectus Supplement, Transworld
Mortgage Corporation will act as the Servicer for a series of Securities.
Transworld Mortgage Corporation is an approved seller/servicer for FNMA, FHLMC,
GNMA, FHA and VA, and has been servicing mortgage loans since 1991 when it
acquired an existing servicing operation from Commonwealth Mortgage Company of
America, L.P.
Transworld Mortgage Corporation, a Texas corporation established on
November 14, 1990, is a nationwide servicer of first and junior lien mortgage
loans. Transworld Mortgage Corporation maintains its principal office at 13111
Northwest Freeway, Suite 600, Houston, Texas 77040. It's telephone number is
(713) 895-6700.
THE MASTER SERVICER
A Master Servicer may be appointed pursuant to a Pooling and Servicing
Agreement and named in the related Prospectus Supplement or Current Report on
Form 8-K.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe
certain additional provisions common to each Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
The principal servicing compensation to be paid to the Servicer in respect
of its servicing activities for each series of Securities will be equal to the
percentage per annum specified in the related Prospectus Supplement or Current
Report on Form 8-K of the outstanding principal balance of the Mortgage Loans,
and such compensation will be retained by it from collections of interest on the
Mortgage Loans in the related Trust Estate (after provision has been made for
the payment of interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be, to Securityholders and for the payment of any
Originator's Retained Yield) at the time such collections are deposited into the
applicable Principal and Interest Account. As compensation for its servicing
duties, the Servicer and/or a Sub-Servicer and any Master Servicer will be
entitled to a monthly servicing fee as set forth in the related Prospectus
Supplement. Certain Sub-Servicers may also receive additional compensation in
the amount of all or a portion of the interest due and payable on the applicable
Mortgage Loan which is over and above the interest rate specified at the time
the Sponsor committed to purchase the Mortgage Loan. See "Mortgage Loan
Program--Sub-Servicing by Originators." In addition, the Servicer or a
Sub-Servicer may retain assumption fees, modification fees and late payment
charges, to the extent collected from Mortgagors, and any benefit which may
accrue as a result of the investment of funds in the Principal and Interest
Account or the applicable Distribution Account (unless otherwise specified in
the related Prospectus Supplement) or in a Sub-Servicing Account, as the case
may be.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay or cause to be paid certain ongoing expenses associated with
each Trust Estate and incurred by it in connection with its responsibilities
under the Pooling and Servicing Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any alternative credit
enhancement arrangements, payment of the fees and disbursements of the Master
Servicer, the Trustee, any custodian appointed by the Trustee, the Security
Registrar
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and any Paying Agent, and payment of expenses incurred in enforcing the
obligations of Sub-Servicers and Originators. The Servicer may be entitled to
reimbursement of expenses incurred in enforcing the obligations of Sub-Servicers
and Originators under certain limited circumstances. In addition, as indicated
in the preceding section, the Servicer will be entitled to reimbursements for
certain expenses incurred by it in connection with Liquidated Mortgage Loans and
in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if there
will be any Originator's Retained Yield retained. Any such Originator's
Retained Yield will be a specified portion of the interest payable on each
Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be
established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of
a Mortgage Loan will represent a specified portion of the interest payable
thereon and will not be part of the related Trust Estate. Any partial recovery
of interest in respect of a Mortgage Loan will be allocated between the owners
of any Originator's Retained Yield and the holders of classes of Securities
entitled to payments of interest as provided in the Prospectus Supplement and
the applicable Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
The Servicer will be required to deliver to the Trustee, the Master
Servicer (if applicable), the Rating Agencies and any Credit Enhancer on or
before a specified date of each year, beginning the first such date that is at
least a specified number of months after the Cut-Off Date, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Servicer during such preceding calendar year and of
performance under the related Pooling and Servicing Agreement has been made
under such officers' supervision, and (ii) to the best of such officers'
knowledge, based on such review, the Servicer has fulfilled all its obligations
under the related Pooling and Servicing Agreement for such year, or, if there
has been a default in the fulfillment of any such obligations, specifying each
such default known to such officers and the nature and status thereof including
the steps being taken by the Servicer to remedy such defaults.
On or before the last day of a specified month of each year, beginning the
first such date that is at least a specified number of months after the Cut-Off
Date, the Servicer will be required to cause to be delivered to the Trustee, the
Master Servicer (if applicable), the Rating Agencies and any Credit Enhancer, if
applicable, a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Credit Enhancer, if
applicable, stating that such firm has, with respect to the Servicer's overall
servicing operations (i) performed applicable tests in accordance with the
compliance testing procedures as set forth in Appendix 3 of the AUDIT GUIDE FOR
AUDITS OF HUD APPROVED NONSUPERVISED MORTGAGEES or (ii) examined such operations
in accordance with the requirements of the Uniform Single Audit Program for
Mortgage Bankers, and in either case stating such firm's conclusions relating
thereto.
REMOVAL AND RESIGNATION OF THE SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or subject to the consent of the Master Servicer or Financial Guaranty
Insurer and the Trustee. No such resignation will become effective until the
Trustee, the Master Servicer, if applicable, or a successor Servicer has assumed
the Servicer's obligations and duties under the Pooling and Servicing Agreement.
The Trustee, the Master Servicer, if applicable, the Financial Guaranty Insurer
or the Securityholders will have the right subject to certain rights to cure by
the Servicer, pursuant to the related Pooling and Servicing Agreement, to remove
the Servicer upon the occurrence of any of (a) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations; (b) the failure
of the Servicer to perform any one or more of its material obligations under the
Pooling and Servicing Agreement as to which the Servicer shall continue in
default with respect thereto for a period of time specified
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in the related Pooling and Servicing Agreement after notice by the Trustee, the
Master Servicer, if applicable, or any Financial Guaranty Insurer of said
failure; (c) the failure of the Servicer to cure any breach of any of its
representations and warranties set forth in the Pooling and Servicing Agreement
which materially and adversely affects the interests of the Securityholders or
any Financial Guaranty Insurer, if applicable, for a period of time specified in
the related Pooling and Servicing Agreement after the Servicer's discovery or
receipt of notice thereof; or (d) the failure to deliver to Trustee any proceeds
or required payments which failure shall continue for a period of time specified
in the related Pooling and Servicing Agreement after notice.
The Pooling and Servicing Agreement may also provide that a Financial
Guaranty Insurer may remove the Servicer, or the Master Servicer, if applicable,
pursuant to clause (iii) below, upon the occurrence of any of certain events
including:
(i) with respect to any Payment Date, if the total available funds
with respect to the Mortgage Loans Group will be less than the related
distribution amount on the class of insured securities in respect of such
Payment Date; provided, however, that the Financial Guaranty Insurer will
have no right to remove the Servicer pursuant to the provision described in
this clause (i) if the Servicer can demonstrate to the reasonable
satisfaction of the Financial Guaranty Insurer that such event was due to
circumstances beyond the control of the Servicer;
(ii) the failure by the Servicer to make any required Servicing
Advance;
(iii) the failure of the Servicer (or the Master Servicer, if
applicable) to perform one or more of its material obligations under the
Pooling and Servicing Agreement and such failure shall continue for a
period of time specified in the related Pooling and Servicing Agreement; or
(iv) the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest.
RESIGNATION OF THE MASTER SERVICER
If applicable, and unless otherwise specified in the related Prospectus
Supplement, each Pooling and Servicing Agreement will provide that the Master
Servicer may not resign from its obligations and duties thereunder, unless such
duties and obligations are no longer permissible under applicable law or the
Trustee resigns. No such resignation will be acceptable until a successor
Master Servicer assumes such duties and obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, the Trustee, the Master
Servicer or the Financial Guaranty Insurer (as provided in the related Pooling
and Servicing Agreement) may, by written notification to the Servicer, terminate
all of the rights and obligations of the Servicer under the Pooling and
Servicing Agreement (other than any rights of the Servicer as Securityholder)
covering such Trust Estate and in and to the Mortgage Loans and the proceeds
thereof, whereupon the Master Servicer, if designated in the related Pooling and
Servicing Agreement, the Trustee or, with the Financial Guaranty Insurer's
consent, its designee will succeed to all responsibilities, duties and
liabilities of the Servicer under such Pooling and Servicing Agreement (other
than the obligation to purchase Mortgage Loans under certain circumstances) and
will be entitled to similar compensation arrangements. In the event that the
Master Servicer and Trustee would be obligated to succeed the Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, another qualifying mortgage servicing
institution to act as successor to the Servicer under the Pooling and Servicing
Agreement (unless otherwise set forth in the Pooling and Servicing Agreement).
Pending such appointment, the Master Servicer is obligated to act in such
capacity.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Sponsor, the
Servicer, the Master Servicer, if applicable, and the Trustee, with the prior
approval of a Financial Guaranty Insurer, if required,
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but without giving notice or the consent of any of the holders of Securities
covered by such Pooling and Servicing Agreement, (i) to cure an ambiguity, (ii)
to correct or supplement any provision therein which may be inconsistent with
any other provision therein, (iii) upon receipt of the opinion of counsel
experienced in federal income tax matters to the effect that no entity-level tax
will be imposed on the Trust; provided that such change would not adversely
affect in any material respect the interests of any Securityholder, as evidenced
by an opinion of counsel.
The Pooling and Servicing Agreement may also be amended by the Sponsor, the
Servicer, the Master Servicer, if applicable, and the Trustee with the prior
consent of the Financial Guaranty Insurer and with the consent of the holders of
Securities of each class affected thereby evidencing, in each case, not less
than a majority of the aggregate Percentage Interests constituting such class
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Pooling and Servicing Agreement or of
modifying in any manner the rights of the holders of Securities covered by such
Pooling and Servicing Agreement, except that no such amendment may (i) change in
any manner the amount of, or change the timing of, payments which are required
to be distributed to any Securityholder without the consent of such
Securityholder or (ii) reduce the aforesaid percentages of Percentage Interests
which are required to consent to any such amendment, without the consent of all
of the Securityholders covered by such Pooling and Servicing Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Estate, the Trustee will not be entitled to consent
to and the Financial Guaranty Insurer will not be entitled to approve any
amendment to a Pooling and Servicing Agreement without having first received an
opinion from counsel nationally recognized in federal tax matters to the effect
that such amendment or the exercise of any power granted to the Servicer, the
Sponsor or the Trustee in accordance with such amendment will not result in the
imposition of a tax on the related Trust Estate or cause such Trust Estate to
fail to qualify as a REMIC.
TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, a
Financial Guaranty Insurance Policy of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate (b) the disposition of all property acquired in respect of
any Mortgage Loan remaining in the Trust Estate, (ii) any time when a Qualified
Liquidation (as defined in the Code) of the Trust Estate is effected (iii)
termination of the Trust upon the option of the Servicer after the outstanding
aggregate loan balances of the Mortgage Loans in the Trust Estate is less than
or equal to ten percent of the sum of the aggregate loan balances of all
Mortgage Loans in the Trust Estate as of the original creation date of the
Mortgage Pool and the original amount deposited in the Pre-Funded Account, or
such percentage as is designated in the related Pooling and Servicing Agreement
or (iv) termination of the Trust upon loss of REMIC status. In no event,
however, will the trust created by the related Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in such Pooling and Servicing Agreement. Written notice
of termination of the Pooling and Servicing Agreement will be given to each
Securityholder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency appointed by the Trustee
that will be specified in the notice of termination. If the Trust Estate is
liquidated under the applicable Pooling and Servicing Agreement, a penalty may
be imposed upon the Securityholders based upon the fee that would be foregone by
the Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of Mortgage
Loans evidenced by a series of Securities shall be made at the option of the
Servicer, the Sponsor or, if applicable, the holder of the REMIC Residual
Securities at the price specified in the related Prospectus Supplement. The
exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Servicer, the Sponsor or, if
applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series.
The Prospectus Supplement or Form 8-K for each series of Securities will set
forth the amounts that the holders of such Securities will be entitled to
receive upon such earlier than expected retirement. If a REMIC election has
been
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made, the termination of the related Trust Estate will be effected in a manner
consistent with applicable federal income tax regulations and its status as a
REMIC.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Sponsor and/or its
affiliates.
The Trustee may resign at any time so long as the Trustee provides written
notice to the Sponsor, the Servicer, the Credit Enhancer and the
Securityholders, and complies with the other conditions specified in the
applicable Pooling and Servicing Agreement, in which event the Sponsor will be
obligated to appoint a successor Trustee. The Sponsor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Sponsor will be obligated to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders
of Securities evidencing a majority of the aggregate undivided interests (or, if
so specified in the related Prospectus Supplement, voting rights) in the related
Trust Estate or if the related Pooling and Servicing Agreement so provides by
the related Financial Guaranty Insurer or Credit Enhancer, if any. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee and payment by the Trustee of all costs associated with the assumption
by the Successor Trustee of the Trustee's obligations under the related Pooling
and Servicing Agreement.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
holder for such Security, the Pass-Through Rate on any such Security entitled to
payments of interest (which Pass-Through Rate may vary if so specified in the
related Prospectus Supplement) and the rate of payment of principal on such
Security (or the rate at which the notional amount thereof is reduced if such
Security is not entitled to payments of principal) and other factors.
Each month the interest payable on an actuarial type of Mortgage Loan will
be calculated as one-twelfth of the applicable Mortgage Rate multiplied by the
principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
payment of such interest to the Securityholders will be made on the twenty-fifth
day (or, if such day is not a business day, the next succeeding business day) of
the month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month, or, in the case of semi-annually-pay Securities, the
twenty-fifth day of every sixth month) following the month of accrual.
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A class of Securities may be entitled to payments of interest at a fixed
Pass-Through Rate specified in the related Prospectus Supplement, a variable
Pass-Through Rate or adjustable Pass-Through Rate calculated based on the
weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the aggregate
payments of interest on a class of Securities, and the yield to maturity
thereon, will be effected by the rate of payment of principal on the Securities
(or the rate of reduction in the notional balance of Securities entitled only to
payments of interest) and, in the case of Securities evidencing interests in ARM
Loans, by changes in the Net Mortgage Rates on the ARM Loans. See "Maturity and
Prepayment Considerations" below. The yield on the Securities also will be
effected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans required by the Pooling and Servicing Agreement in
the event of breaches of representations made in respect of such Mortgage Loans
by the Sponsor, the Originators, the Servicer and others, or repurchases due to
conversions of ARM Loans to a fixed interest rate. See "Mortgage Loan Program--
Representations by Originators" and "Descriptions of the Securities--Assignment
of Mortgage Loans" above. In general, if a class of Securities is purchased at
initial issuance at a premium and payments of principal on the related Mortgage
Loans occur at a rate faster than anticipated at the time of purchase, the
purchaser's actual yield to maturity will be lower than that assumed at the time
of purchase. In addition, if a class of Securities is purchased at initial
issuance at a discount and payments of principal on the related Mortgage Loans
occur at a rate slower than that assumed at the time of purchase, the
purchaser's actual yield to maturity will be lower than that originally
anticipated. The effect of principal prepayments, liquidations and purchases on
yield will be particularly significant in the case of a series of Securities
having a class entitled to payments of interest only or to payments of interest
that are disproportionately high relative to the principal payments to which
such class is entitled. Such a class will likely be sold at a substantial
premium to its principal balance, if any, and any faster than anticipated rate
of prepayments will adversely affect the yield to holders thereof. In certain
circumstances, rapid prepayments may result in the failure of such holders to
recoup their original investment. In addition, the yield to maturity on certain
other types of classes of Securities, including Accrual Securities or certain
other classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or repurchases
of the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As
a result, the effect on an investor's yield of principal payments and
repurchases occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of a series of
Securities would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid for the number
of days in the month actually elapsed up to the date of the prepayment, at a
daily rate determined by dividing the Mortgage Rate by 365. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the next succeeding month
to holders of Securities entitled to payments of interest because interest on
the principal amount of any Mortgage Loan so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan as of the first day of the month in which such partial
prepayment is received. As a result, unless otherwise specified in the related
Prospectus Supplement, the effect of a partial prepayment on a Mortgage Loan
will be to reduce the amount of interest passed through to holders of Securities
on the Payment Date following the receipt of such partial prepayment by an
amount equal to one month's interest at the applicable Pass-Through Rate or Net
Mortgage Rate, as the case may be, on the prepaid amount. With respect to
amounts due the Servicer from Sub-Servicers in respect of partial principal
prepayments, see "Description of the Securities--Payment on Mortgage Loans;
Deposits to Distribution Account." Neither full nor partial principal
prepayments are passed through until the month following receipt. See "Maturity
and Prepayment Considerations."
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The Mortgage Rates on certain ARM Loans subject to negative amortization
adjust monthly and their amortization schedules adjust less frequently. During
a period of rising interest rates as well as immediately after origination
(initial Mortgage Rates are generally lower than the sum of the indices
applicable at origination and the related Note Margins) the amount of interest
accruing on the principal balance of such Mortgage Loans may exceed the amount
of the minimum scheduled monthly payment thereon. As a result, a portion of the
accrued interest on negatively amortizing Mortgage Loans may become Deferred
Interest that will be added to the principal balance thereof and will bear
interest at the applicable Mortgage Rate. The addition of any such Deferred
Interest to the principal balance will lengthen the weighted average life of the
Securities evidencing interests in such Mortgage Loans and may adversely affect
yield to holders thereof depending upon the price at which such Securities were
purchased. In addition, with respect to certain ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on such a Mortgage Loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce such principal balance,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof depending upon the price at which such
Securities were purchased.
For each Mortgage Pool, if all necessary advances are made, if there is no
unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer is
not in default under its obligations or other credit enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six month's interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Mortgage Loan "Description of the Securities--Principal and Interest on
the Securities."
With respect to certain of the ARM Loans, the Mortgage Rate at origination
may be below the rate that would result if the index and margin relating thereto
were applied at origination. Under the Sponsor's underwriting standards, the
Mortgagor under each Mortgage Loan will be qualified on the basis of the
Mortgage Rate in effect at origination. The repayment of any such Mortgage Loan
may thus be dependent on the ability of the Mortgagor to make larger level
monthly payments following the adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the maturity, average life and yield of the related series of
Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Servicer, nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, generally all Mortgage Loans
will contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the Mortgage Loan upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Servicer will generally enforce any due-on-sale clause
to the extent it has
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knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect the interests of the
Securityholders or adversely affect or jeopardize coverage under any applicable
insurance policy. The extent to which the Mortgage Loans are assumed by
purchasers of the Mortgaged Properties rather than prepaid by the related
Mortgagors in connection with the sales of the Mortgaged Properties will affect
the weighted average life of the related series of Securities. See "Description
of the Securities--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of the Mortgage Loans and Related Matters--Enforceability of Certain
Provisions" for a description of certain provisions of the Pooling and Servicing
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate mortgage loans. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on ARM Loans that the rate of
prepayment may increase as a result of refinancings. There can be no certainty
as to the rate of prepayments on the Mortgage Loans during any period or over
the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such
interest-only or revolving period may, upon the occurrence of certain events to
be described in the related Prospectus Supplement, terminate prior to the end of
the specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Servicer, the Sponsor or, if specified in
the related Prospectus Supplement, the holders of the REMIC Residual Securities
or the Credit Enhancer may have the option to purchase the Mortgage Loans in a
Trust Estate. See "The Pooling and Servicing Agreement--Termination; Retirement
of Securities."
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries which describe all material
terms and provisions of the material legal aspects of the mortgage loans.
Because such legal aspects are governed in part by applicable state laws (which
laws may differ substantially), the summaries do not purport to be complete nor
to reflect the laws of any particular state nor to encompass the laws of all
states in which the Mortgaged Properties may be situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Mortgage Loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Priority between mortgages depends on their terms in some cases or on the terms
of separate subordination or intercreditor agreements, and generally on the
order of recordation of the mortgage in the appropriate recording office. There
are two parties to a mortgage, the mortgagor, who is the borrower and homeowner,
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 is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties; the borrower-homeowner
called the trustor (similar to a mortgagor), a lender (similar to a mortgagee)
called the beneficiary, and a third-party grantee called the trustee. Under a
deed of trust, the borrower grants 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 trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage, and, in some cases, the directions
of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and,
in most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and
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occupancy agreements or (ii) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the cooperative to refinance a mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the cooperative to extend its term or, in the alterative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either
event, a foreclosure by the holder of a blanket mortgage or the termination of
the underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure on Shares of
Cooperatives" below.
FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale (private sale) under a specific provision in the deed of trust
and state laws which authorize the trustee to sell the property upon any default
by the borrower under the terms of the note or deed of trust. Beside the
non-judicial remedy, a deed of trust may be judicially foreclosed. In addition
to any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and within a certain period of time send
a copy to the borrower trustor and to any person who has recorded a request for
a copy of notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within a specified period, 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 local newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale unless
there is a great deal of economic incentive for new purchaser to purchase the
subject
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property at the sale. Rather, it is common for the lender to purchase the
property from the trustee or referee for a credit bid less than or equal to the
unpaid principal amount of the mortgage or deed of trust, accrued and unpaid
interest and the expense of foreclosure. Generally, state law controls the
amount of foreclosure costs and expenses, including attorneys' fees, which may
be recovered by a lender. Thereafter, subject to the right of the borrower in
some states to remain in possession during the redemption period, the lender
will assume the burdens of ownership, including obtaining hazard insurance and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale
of the property may not equal the lender's investment in the property and, in
some states, the lender may be entitled to a deficiency judgment. Any loss may
be reduced by the receipt of any mortgage insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement owned
by the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by
the tenant-stockholder under the proprietary lease or occupancy agreement
usually will constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the
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right of the cooperative corporation to receive sums due under the proprietary
lease or occupancy agreement. If there are proceeds remaining, the lender must
account to the tenant-stockholder for the surplus. Conversely, if a portion of
the indebtedness remains unpaid, the tenant-stockholder is generally responsible
for the deficiency. See "Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors or other parties are given
a statutory period in which to redeem the property from 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 rights of
redemption would defeat the title of any purchaser subsequent to foreclosure or
sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a Trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the amount due to the lender and the net amount
realized upon the public sale of the real property. In the case of a Mortgage
Loan secured by a property owned by a trust where the Mortgage Note is executed
on behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
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 on 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, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and, on certain types of loans such as
those secured by second liens and investor-owned
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properties, reducing the lender's security interest to the value of the
residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
Certain state courts have imposed general equitable principles upon
judicial foreclosure. These equitable principles are generally designed to
relieve the borrower from the legal effect of the borrower's default under the
related 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 required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disabilities. In other cases, such courts have limited the right of the lender
to foreclose if the default under the loan is not monetary, such as the borrower
failing to adequately maintain the property or the borrower executing a second
deed of trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, 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 the State Licensing Laws
and fair debt collection practices acts. These laws and regulations impose
specific statutory liabilities upon lenders who originate mortgage loans and who
fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In certain states, however, such a lien will
not have priority over prior recorded liens of a deed of trust. In addition,
under federal environmental legislation and under state law in a number of
states, a secured party which takes a deed in lieu of foreclosure or acquires a
mortgaged property at a foreclosure sale or assumes active control over the
operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a lender (such as a Trust Estate) secured by
residential real property. In the event that title to a Mortgaged Property
securing a Mortgage Loan in a Trust Estate was acquired by the Trust and cleanup
costs were incurred in respect of the Mortgaged Property, the holders of the
related series of Securities might realize a loss if such costs were required to
be paid by the Trust. The Servicer shall take into account the existence of any
hazardous substances, hazardous wastes or solid wastes, as such terms are
defined in the Comprehensive Environmental Response Compensation and Liability
Act, the Resource Conservation and Recovery Act of 1976, or other federal, state
or local environmental legislation, on a Mortgaged Property in determining
whether to foreclose upon or otherwise comparably convert the ownership of such
Mortgaged Property.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of the
Mortgage Loans contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states including California, and in some cases
the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
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The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles generally are 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 suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("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. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
As indicated above under "Mortgage Loan Program, Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early ownership
mortgage loans, originated by non-federally chartered lenders have historically
been subjected to a variety of restrictions. Such restrictions differed from
state to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender was in
compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St.
Germain Act ("Title VIII"). Title VIII provides that: notwithstanding any state
law to the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
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National Credit Union Administration with respect to origination of alternative
mortgage instruments by federal credit unions; and all other non-federally
chartered housing creditors, including state-chartered savings and loan
associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alterative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations.
Title VIII provides that any state may reject applicability of the provisions of
Title VIII by adopting, prior to October 15, 1985, a law or constitutional
provision expressly rejecting the applicability of such provisions. Certain
states have taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies
to Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
Mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be effected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, 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 or similar legislation or
regulations, which would not be recoverable from the related Mortgage Loans,
would result in a reduction of the amounts distributable to the holders of the
related Securities, and would not be covered by advances, any Letter of Credit
or any other form of credit enhancement (other than a Certificate Insurance
Policy) provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that the Relief
Act or similar legislation or regulations applies to any Mortgage Loan which
goes into default, there may be delays in payment and losses on the related
Securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the Mortgage Loans resulting from similar legislation
or regulations may result in delays in payments or losses to Securityholders of
the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities.
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust Estate
(a "Grantor Trust Estate") which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit ("REMIC"); (ii) securities
("REMIC Securities") representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment
of partnership interests. Such a discussion will be set forth in the applicable
Prospectus Supplement for any Trust issuing Securities characterized as
partnership interests. The Prospectus Supplement for each series of Securities
will indicate whether a REMIC election (or elections) will be made for the
related Trust Estate and, if a REMIC election is to be made, will identify all
"regular interests" and "residual interests"
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in the REMIC. For purposes of this discussion, references to a "Securityholder"
or a "Holder" are to the beneficial owner of a Security.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the applicable Prospectus Supplement) the related
Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each
Holder of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage Loans included in the Grantor Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
SPECIAL TAX ATTRIBUTES
Unless otherwise disclosed in an applicable Prospectus Supplement, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "qualifying real property loans" within the meaning of section
593(d) of the Code; (ii) "loans . . . secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii)
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in real
property" within the meaning of section 860G(a)(3)(A) of the Code; and (b)
interest on Grantor Trust Fractional Interest Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B) of the Code. In
addition, the Grantor Trust Strip Securities will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) . . .
principally secured by an interest in real property" within the meaning of
section 860G(a)(3)(A) of the Code.
TAXATION OF HOLDERS OF GRANTOR TRUST SECURITIES
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding
a Grantor Trust Fractional Interest Security directly or through certain pass-
through entities will be allowed a deduction for such reasonable servicing fees
and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds two percent of such Holder's adjusted
gross income. Further, Holders (other than corporations) subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "Discount and Premium," below.
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Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between the outstanding principal balance on the Security
and the amount paid for such Security is less than 0.25% of such principal
balance times the weighted average remaining maturity of the Security.
SALES OF GRANTOR TRUST SECURITIES
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
GRANTOR TRUST REPORTING
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Servicer, the Trustee will furnish to each Holder during such
year such customary factual information as the Servicer deems necessary or
desirable to enable Holders of Grantor Trust Securities to prepare their tax
returns and will furnish comparable information to the Internal Revenue Service
(the "IRS") as and when required to do so by law.
REMIC SECURITIES
If provided in an applicable Prospectus Supplement, an election will be
made to treat a Trust Estate as a REMIC under the Code. Qualification as a
REMIC requires ongoing compliance with certain conditions. With respect to each
series of Securities for which such an election is made, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the applicable Prospectus Supplement), assuming
compliance with the Pooling and Servicing Agreement, the Trust Estate will be
treated as a REMIC for federal income tax purposes. A Trust Estate for which a
REMIC election is made will be referred to herein as a "REMIC Trust." The
Securities of each class will be designated as "regular interests" in the REMIC
Trust except that a separate class will be designated as the "residual interest"
in the REMIC Trust. The Prospectus Supplement for each Series of Securities
will state whether Securities of each class will constitute a regular interest
(a "Regular Security") or a residual interest (a "Residual Security").
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See "Taxes on a REMIC Trust". Generally, the total income from the
Mortgage Loans in a REMIC Trust will be taxable to the Holders of the Securities
of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992
(the "REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
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SPECIAL TAX ATTRIBUTES
Regular and Residual Securities will be "regular or residual interests in a
REMIC" within the meaning of section 7701(a)(19)(C)(xi) of the Code, "qualifying
real property loans" within the meaning of section 593(d) of the Code and "real
estate assets" within the meaning of section 856(c)(5)(A) of the Code. If at
any time during a calendar year less than 95 percent of the assets of a REMIC
Trust consist of "qualified mortgages" (within the meaning of section 860G(a)(3)
of the Code) then the portion of the Regular and Residual Securities that are
qualifying assets under those sections during such calendar year may be limited
to the portion of the assets of such REMIC Trust that are qualified mortgages.
Similarly, income on the Regular and Residual Securities will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of section 856(c)(3)(B) of the Code, subject to the same limitation as
set forth in the preceding sentence. For purposes of applying this limitation,
a REMIC Trust should be treated as owning the assets represented by the
qualified mortgages. The assets of the Trust Estate will include, in addition
to the Mortgage Loans, payments on the Mortgage Loans held pending distribution
on the Regular and Residual Securities and any reinvestment income thereon.
Regular and Residual Securities held by a financial institution to which section
585, 586 or 593 of the Code applies will be treated as evidences of indebtedness
for purposes of section 582(c)(1) of the Code. Regular Securities will also be
qualified mortgages with respect to other REMICs.
TAXATION OF HOLDERS OF REGULAR SECURITIES
Except as indicated below in this federal income tax discussion, the
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. Holders of Regular Securities that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Securities under an accrual method. For additional tax
consequences relating to Regular Securities purchased at a discount or with
premium, see "Discount and Premium," below.
TAXATION OF HOLDERS OF RESIDUAL SECURITIES
DAILY PORTIONS. Except as indicated below, a Holder of a Residual Security
for a REMIC Trust generally will be required to report its daily portion of the
taxable income or net loss of the REMIC Trust for each day during a calendar
quarter that the Holder owned such Residual Security. For this purpose, the
daily portion shall be determined by allocating to each day in the calendar
quarter its ratable portion of the taxable income or net loss of the REMIC Trust
for such quarter and by allocating the amount so allocated among the Residual
Holders (on such day) in accordance with their percentage interests on such day.
Any amount included in the gross income or allowed as a loss of any Residual
Holder by virtue of this paragraph will be treated as ordinary income or loss.
The requirement that each Holder of a Residual Security report its daily
portion of the taxable income or net loss of the REMIC Trust will continue until
there are no Securities of any class outstanding, even though the Holder of the
Residual Security may have received full payment of the stated interest and
principal on its Residual Security.
The Trustee will provide to Holders of Residual Securities of each series
of Securities (i) such information as is necessary to enable them to prepare
their federal income tax returns and (ii) any reports regarding the Securities
of such series that may be required under the Code.
TAXABLE INCOME OR NET LOSS OF A REMIC TRUST. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications.
The first modification is that a deduction will be allowed for accruals of
interest (including any original issue discount, but without regard to the
investment interest limitation in section 163(d) of the Code) on the Regular
Securities (but not the Residual Securities), even though Regular Securities are
for non-tax purposes evidences of beneficial ownership rather than indebtedness
of a REMIC Trust. Second, market discount or premium equal to the difference
between the total stated principal balances of the qualified mortgages and the
basis to the REMIC Trust therein generally will be included in income (in
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the case of discount) or deductible (in the case of premium) by the REMIC Trust
as it accrues under a constant yield method, taking into account the Prepayment
Assumption (as defined in the applicable Prospectus Supplement, See "Discount
and Premium--ORIGINAL ISSUE DISCOUNT" below). The basis to a REMIC Trust in the
qualified mortgages is the aggregate of the issue prices of all the Regular and
Residual Securities in the REMIC Trust on the Settlement Date. If, however, a
substantial amount of a class of Regular or Residual Securities has not been
sold to the public, then the fair market value of all the Regular or Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "Taxes on a REMIC Trust--PROHIBITED TRANSACTIONS" below) will
be taken into account. Fourth, a REMIC Trust generally may not deduct any item
that would not be allowed in calculating the taxable income of a partnership by
virtue of section 703(a)(2) of the Code. Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "PASS-THROUGH OF SERVICING AND GUARANTY FEES TO
INDIVIDUALS" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the Regular and Residual Securities are not treated as expenses of the REMIC
Trust for which a deduction is allowed. If the deductions allowed to a REMIC
Trust exceed its gross income for a calendar quarter, such excess will be a net
loss for the REMIC Trust for that calendar quarter. The REMIC Regulations also
provide that any gain or loss to a REMIC Trust from the disposition of any
asset, including a qualified mortgage or "permitted investment" (as defined in
section 86OG(a)(5) of the Code) will be treated as ordinary gain or loss.
A Holder of a Residual Security may be required to recognize taxable income
without being entitled to receive a corresponding amount of cash. This could
occur, for example, if the qualified mortgages are considered to be purchased by
the REMIC Trust at a discount, some or all of the Regular Securities are issued
at a discount, and the discount included as a result of a prepayment on a
Mortgage Loan that is used to pay principal on the Regular Securities exceeds
the REMIC Trust's deduction for unaccrued original issue discount relating to
such Regular Securities. Taxable income may also be greater in earlier years
because interest expense deductions, expressed as a percentage of the
outstanding principal amount of the Regular Securities, may increase over time
as the earlier classes of Regular Securities are paid, whereas interest income
with respect to any given Mortgage Loan expressed as a percentage of the
outstanding principal amount of that Mortgage Loan, will remain constant over
time.
BASIS RULES AND DISTRIBUTIONS. A Holder of a Residual Security has an
initial basis in its Security equal to the amount paid for such Residual
Security. Such basis is increased by amounts included in the income of the
Holder and decreased by distributions and by any net loss taken into account
with respect to such Residual Security. A distribution on a Residual Security
to a Holder is not included in gross income to the extent it does not exceed
such Holder's basis in the Residual Security (adjusted as described above) and,
to the extent it exceeds the adjusted basis of the Residual Security, shall be
treated as gain from the sale of the Residual Security.
A Holder of a Residual Security is not allowed to take into account any net
loss for any calendar quarter to the extent such net loss exceeds such Holder's
adjusted basis in its Residual Security as of the close of such calendar quarter
(determined without regard to such net loss). Any loss disallowed by reason of
this limitation may be carried forward indefinitely to future calendar quarters
and, subject to the same limitation, may be used only to offset income from the
Residual Security.
EXCESS INCLUSIONS. Any excess inclusions with respect to a Residual
Security are subject to certain special tax rules. With respect to a Holder of
a Residual Security, the excess inclusion for any calendar quarter is defined as
the excess (if any) of the daily portions of taxable income over the sum of the
"daily accruals" for each day during such quarter that such Residual Security
was held by such Holder. The daily accruals are determined by allocating to
each day during a calendar quarter its ratable portion of the product of the
"adjusted issue price" of the Residual Security at the beginning of the calendar
quarter and 120 percent of the "federal long-term rate" in effect on the
Settlement Date, based on quarterly compounding, and properly adjusted for the
length of such quarter. For this purpose, the adjusted issue price of a
Residual Security as of the beginning of any calendar quarter is equal to the
issue price of the Residual Security, increased by the amount of daily accruals
for all prior quarters and decreased by any distributions made with respect to
such Residual Security before the beginning of such quarter. The issue price of
a Residual Security is the initial offering price to the
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public (excluding bond houses and brokers) at which a substantial amount of the
Residual Securities was sold. The federal long-term rate is a blend of current
yields on Treasury securities having a maturity of more than nine years,
computed and published monthly by the IRS.
For Holders of Residual Securities that are thrift institutions described
in section 593 of the Code, income from a Residual Security generally may be
offset by losses from other activities. Under the REMIC Regulations, such an
organization is treated as having applied its allowable deductions for the year
first to offset income that is not an excess inclusion and then to offset that
portion of its income that is an excess inclusion. For other Holders of
Residual Securities, any excess inclusions cannot be offset by losses from other
activities. For Holders that are subject to tax only on unrelated business
taxable income (as defined in section 511 of the Code), an excess inclusion of
such Holder is treated as unrelated business taxable income. With respect to
variable contracts (within the meaning of section 817 of the Code), a life
insurance company cannot adjust its reserve to the extent of any excess
inclusion, except as provided in regulations. The REMIC Regulations indicate
that if a Holder of a Residual Security is a member of an affiliated group
filing a consolidated income tax return, the taxable income of the affiliated
group cannot be less than the sum of the excess inclusions attributable to all
residual interests in REMICs held by members of the affiliated group. For a
discussion of the effect of excess inclusions on certain foreign investors that
own Residual Securities, see "Foreign Investors" below.
The REMIC Regulations provide that an organization to which section 593 of
the Code applies and which is the Holder of a Residual Security may not use its
allowable deductions to offset any excess inclusions with respect to such
Security if such Security does not have "significant value." For this purpose, a
Residual Security has significant value under the REMIC Regulations if (i) its
issue price is at least 2% of the aggregate of the issue prices of all the
Regular and Residual Securities in that REMIC Trust and (ii) its "anticipated
weighted average life" is at least 20% of the "anticipated weighted average
life" of such REMIC Trust.
In determining whether a Residual Security has significant value, the
anticipated weighted average life of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless of their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions should be calculated as
discussed above.
In the case of any Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such Residual
Securities reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain) will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
Residual Security as if held directly by such shareholder. Similar rules will
apply in the case of regulated investment companies, common trust funds and
certain cooperatives that hold a Residual Security.
PASS-THROUGH OF SERVICING AND GUARANTY FEES TO INDIVIDUALS. A Holder of a
Residual Security who is an individual will be required to include in income a
share of any servicing and guaranty fees. A deduction for such fees will be
allowed to such Holder only to the extent that such fees, along with certain of
such Holder's other miscellaneous itemized deductions exceed 2 percent of such
Holder's adjusted gross income. In addition, a Holder of a Residual Security
may not be able to deduct any portion of such fees in computing such Holder's
alternative minimum tax liability. A Holder's share of such fees will generally
be determined by (i) allocating the amount of such expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter, and (ii)
allocating the daily amount among the Holders in proportion to their respective
holdings on such day.
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TAXES ON A REMIC TRUST
PROHIBITED TRANSACTIONS. The Code imposes a tax on a REMIC equal to 100
percent 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 investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
CONTRIBUTIONS TO A REMIC AFTER THE STARTUP DAY. The Code imposes a tax on
a REMIC equal to 100 percent of the value of any property contributed to the
REMIC after the "startup day" (generally the same as the Settlement Date).
Exceptions are provided for cash contributions to a REMIC (i) during the three
month period beginning on the startup day, (ii) made to a qualified reserve fund
by a Holder of a residual interest, (iii) in the nature of a guarantee, (iv)
made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by Treasury regulations.
NET INCOME FROM FORECLOSURE PROPERTY. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
SALES OF REMIC SECURITIES
GENERAL. Except as provided below, if a Regular or Residual Security is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Security. The
adjusted basis of a Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security.
See "Discount and Premium." The adjusted basis of a Residual Security is
determined as described above under "Taxation of Holders of Residual Securities-
- -BASIS RULES AND DISTRIBUTIONS." Except as provided in the following paragraph
or under section 582(c) of the Code, any such gain or loss will be capital gain
or loss, provided such Security is held as a "capital asset" (generally,
property held for investment) within the meaning of section 1221 of the Code.
Gain from the sale of a Regular Security that might otherwise be capital
gain will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the income of the Holder of a Regular Security had income accrued at a rate
equal to 110 percent of the "applicable federal rate" (generally, an average of
current yields on Treasury securities) as of the date of purchase over (ii) the
amount actually includible in such Holder's income. In addition, gain
recognized on such a sale by a Holder of a Regular Security who purchased a such
Security at a market discount would also be taxable as ordinary income in an
amount not exceeding the portion of such discount that accrued during the period
such Security was held by such Holder, reduced by any market discount includible
in income under the rules described below under "Discount and Premium."
If a Holder of a Residual Security sells its Residual Security at a loss,
the loss will not be recognized if, within six months before or after the sale
of the Residual Security, such Holder purchases another residual interest in any
REMIC or any interest in a taxable mortgage pool (as defined in section 7701(i)
of the Code) comparable to a residual interest in a REMIC. Such disallowed loss
would be allowed upon the sale of the other residual interest (or comparable
interest) if the rule referred to in the preceding sentence does not apply to
that sale. While this rule may be modified by Treasury regulations, no such
regulations have yet been published.
TRANSFERS OF RESIDUAL SECURITIES. Section 860E(e) of the Code imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a Residual Security to a disqualified organization
and upon a pass-through
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entity (including regulated investment companies, real estate investment trusts,
common trust funds, partnerships, trusts, estates, certain cooperatives, and
nominees) that owns a Residual Security if such pass-through entity has a
disqualified organization as a record-holder. For purposes of the preceding
sentence, a transfer includes any transfer of record or beneficial ownership,
whether pursuant to a purchase, a default under a secured lending agreement or
otherwise.
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a Residual Security and certain other provisions
that are intended to meet this requirement are described in the Pooling and
Servicing Agreement, and will be discussed more fully in the applicable
Prospectus Supplement relating to the offering of any Residual Security. In
addition, a pass-through entity (including a nominee) that holds a Residual
Security may be subject to additional taxes if a disqualified organization is a
record-holder therein. A transferor of a Residual Security (or an agent of a
transferee of a Residual Security, as the case may be) will be relieved of such
tax liability if (i) the transferee furnishes to the transferor (or the
transferee's agent) an affidavit that the transferee is not a disqualified
organization, and (ii) the transferor (or the transferee's agent) does not have
actual knowledge that the affidavit is false at the time of the transfer.
Similarly, no such tax will be imposed on a pass-through entity for a period
with respect to an interest therein owned by a disqualified organization if (i)
the record-holder of such interest furnishes to the pass-through entity an
affidavit that it is not a disqualified organization, and (ii) during such
period, the pass-through entity has no actual knowledge that the affidavit is
false.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "Foreign Investors -- Grantor
Trust Securities and Regular Securities") will be disregarded for all federal
tax purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A Residual Security would be treated as
constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a Residual Security, determined as of the date such
Security is transferred and based on events that have occurred as of that date
and on the Prepayment Assumption. See "Discount and Premium" and "Taxation of
Holders of Residual Securities--EXCESS INCLUSIONS."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a Residual Security has "improper knowledge" (i.e., either knew,
or should have known, that the transferee would be unwilling or unable to pay
taxes due on its share of the taxable income of the REMIC Trust). A transferor
is presumed not to have improper knowledge if (i) the transferor conducts, at
the time of a transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor finds that
the transferee has historically paid its debts as they come due and finds no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee makes certain
representations to the transferor in the affidavit relating to disqualified
organizations discussed above. Transferors of a Residual Security should
consult with their own tax advisors for further information regarding such
transfers.
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REPORTING AND OTHER ADMINISTRATIVE MATTERS
For purposes of the administrative provisions of the Code, each REMIC Trust
will be treated as a partnership and the Holders of Residual Securities will be
treated as partners. The Trustee will prepare, sign and file federal income tax
returns for each REMIC Trust, which returns are subject to audit by the IRS.
Moreover, within a reasonable time after the end of each calendar year, the
Trustee will furnish to each Holder that received a distribution during such
year a statement setting forth the portions of any such distributions that
constitute interest distributions, original issue discount, and such other
information as is required by Treasury regulations and, with respect to Holders
of Residual Securities in a REMIC Trust, information necessary to compute the
daily portions of the taxable income (or net loss) of such REMIC Trust for each
day during such year. The Trustee will also act as the tax matters partner for
each REMIC Trust, either in its capacity as a Holder of a Residual Security or
in a fiduciary capacity. Each Holder of a Residual Security, by the acceptance
of its Residual Security, agrees that the Trustee will act as its fiduciary in
the performance of any duties required of it in the event that it is the tax
matters partner.
Each Holder of a Residual Security is required to treat items on its return
consistently with the treatment on the return of the REMIC Trust, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the
applicable Prospectus Supplement, the Trustee does not intend to register any
REMIC Trust as a tax shelter pursuant to section 6111 of the Code.
TERMINATION
In general, no special tax consequences will apply to a Holder of a Regular
Security upon the termination of a REMIC Trust by virtue of the final payment or
liquidation of the last Mortgage Loan remaining in the Trust Estate. If a
Holder of a Residual Security's adjusted basis in its Residual Security at the
time such termination occurs exceeds the amount of cash distributed to such
Holder in liquidation of its interest, although the matter is not entirely free
from doubt, it would appear that the Holder of the Residual Security is entitled
to a loss equal to the amount of such excess.
DEBT SECURITIES
GENERAL
With respect to each Series of Debt Securities, Dewey Ballantine, special
tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the applicable Prospectus Supplement) the Securities will
be classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "Discount and Premium,"
below.
SPECIAL TAX ATTRIBUTES
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will
not possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
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SALE OR EXCHANGE
If a Holder of a Debt Security sells or exchanges such Security, the Holder
will recognize gain or loss equal to the difference, in any, between the amount
received and the Holder's adjusted basis in the Security. The adjusted basis in
the Security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "Discount and Premium -- Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and
certain Grantor Trust Fractional Interest Securities will be treated as having
original issue discount by virtue of the coupon stripping rules in section 1286
of the Code. In very general terms, (i) original issue discount is treated as a
form of interest and must be included in a Holder's income as it accrues
(regardless of the Holder's regular method of accounting) using a constant yield
method; (ii) market discount is treated as ordinary income and must be included
in a Holder's income as principal payments are made on the Security (or upon a
sale of a Security); and (iii) if a Holder so elects, premium may be amortized
over the life of the Security and offset against inclusions of interest income.
These tax consequences are discussed in greater detail below.
ORIGINAL ISSUE DISCOUNT
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the Securities was sold. The issue price also includes
any accrued interest attributable to the period between the beginning of the
first Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price
at maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will
be treated as zero if such discount is less than 0.25 percent of the stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a Security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Settlement Date until the date
on which each such distribution is expected to be made under the assumption that
the Mortgage Loans prepay at the rate specified in the applicable Prospectus
Supplement (the Prepayment Assumption) by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
Security's stated redemption price at maturity. If original issue discount is
treated as zero under this rule, the actual amount of original issue discount
must be allocated to the principal distributions on the Security and, when each
such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Strip
Securities should be aware that there can be no assurance that the rules
described below will be applied to such Securities. Under these rules
(described in greater detail below), (i) the amount and rate of accrual of
original issue discount on each series of Securities will be based on (x) the
Prepayment Assumption, and (y) in
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the case of a Security calling for a variable rate of interest, an assumption
that the value of the index upon which such variable rate is based remains equal
to the value of that rate on the Settlement Date, and (ii) adjustments will be
made in the amount of discount accruing in each taxable year in which the actual
prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The
Sponsor makes no representation, however, that the Mortgage Loans for a given
series will prepay at the rate reflected in the Prepayment Assumption for that
series or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of
an original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
applicable Prospectus Supplement, the Trustee will report original issue
discount based on accrual periods of one month, each beginning on a payment date
(or, in the case of the first such period, the Settlement Date) and ending on
the day before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the EXCESS, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and
(B) the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, OVER (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated based on (i) the yield to maturity of the Security,
calculated as of the Settlement Date, giving effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, (iii) the Prepayment Assumption, and (iv) in
the case of a Security calling for a variable rate of interest, an assumption
that the value of the index upon which such variable rate is based remains the
same as its value on the Settlement Date over the entire life of such Security.
The adjusted issue price of a Security at any time will equal the issue price of
such Security, increased by the aggregate amount of previously accrued original
issue discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time 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.
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion 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 Security for all days on or after the day of purchase).
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MARKET DISCOUNT
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With
respect to Securities that have unaccrued original issue discount, such market
discount must be included in income in addition to any original issue discount.
A Holder that incurs or continues indebtedness to acquire a Security at a market
discount may also be required to defer the deduction of all or a portion of the
interest on such indebtedness until the corresponding amount of market discount
is included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25 percent of the
remaining stated redemption price at maturity of such Security multiplied by its
weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
SECURITIES PURCHASED AT A PREMIUM
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a "Premium Security") at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under "Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
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SPECIAL ELECTION
For any Security acquired on or after April 4, 1994, a Holder may elect to
include in gross income all "interest" that accrues on the Security by using a
constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, DE
MINIMIS original issue discount, market discount, DE MINIMIS market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31 percent if recipients of
such distributions fail to furnish to the payor certain information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from such tax. Any amounts deducted and withheld from a distribution
to 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 of distributions that is required to supply information but that does
not do so in the proper manner.
FOREIGN INVESTORS
GRANTOR TRUST SECURITIES AND REGULAR SECURITIES
Distributions made on a Grantor Trust Security or a Regular Security to, or
on behalf of, a Holder that is not a U.S. Person generally will be exempt from
U.S. federal income and withholding taxes. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income. This exemption is
applicable provided (a) the Holder is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the Security, (b) the
Holder signs a statement under penalties of perjury that certifies that such
Holder is not a 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. Holders should be
aware that the IRS might take the position that this exemption does not apply to
a Holder that also owns 10 percent or more of the Residual Securities of any
REMIC trust, or to a Holder that is a "controlled foreign corporation" described
in section 881(c)(3)(C) of the Code.
REMIC RESIDUAL SECURITIES
Amounts distributed to a Holder of a Residual Security that is a not a U.S.
Person generally will be treated as interest for purposes of applying the 30
percent (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and Regular Securities,
as described above, but only to the extent that the obligations directly
underlying the REMIC Trust that issued the Residual Security (E.G., Mortgage
Loans or regular interests in another REMIC) were issued after July 18, 1984.
In no case will any portion of REMIC income that constitutes an excess inclusion
be entitled to any exemption from the withholding tax or a reduced treaty rate
for withholding. See "Taxation of Holders of Residual Securities--EXCESS
INCLUSIONS."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA
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("ERISA Plans"). Section 4975 of the Code imposes essentially the same
prohibited transaction restrictions on tax-qualified retirement plans described
in Section 401(a) of the Code ("Qualified Retirement Plans") and on Individual
Retirement Accounts ("IRAs") described in Section 408 of the Code (collectively,
"Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any such plan that is a Qualified Retirement
Plan and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the Mortgage Loans included in
a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
"DOL") has promulgated regulations (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Estate and cause the Sponsor, the
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Sponsor, the Servicer, any Sub-Servicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of Plan assets; or
(ii) has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
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PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of "mortgage pools" (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 is not
available for mortgage pools that include Cooperative Loans and does not provide
an exemption for Subordinate Securities.
PTCE 83-1 defines the term "mortgage pool" as "an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one-to four-family, residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash." The Sponsor expects that each pool of Mortgage Loans (other
than pools including Cooperative Loans) will be a "mortgage pool" within the
meaning of PTCE 83-1.
PTCE 83-1 defines the term "mortgage pool pass-through certificate" as a
"certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." The Sponsor has been advised by Dewey Ballantine
that, for purposes of applying PTCE 83-1, the term "mortgage pool pass-through
certificate" would include (i) Securities representing interests in a Trust
Estate consisting of Mortgage Loans issued in a series consisting of only a
single class of Securities; and (ii) Senior Securities representing interests in
a Trust Estate consisting of Mortgage Loans issued in a series in which there is
only one class of Senior Securities; provided that the Securities described in
clauses (i) and (ii) evidence the beneficial ownership of a specified portion of
both future interest payments and future principal payments with respect to the
Mortgage Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of
one percent of the aggregate principal balance of all covered pooled mortgages,
or the principal balance of the largest covered mortgage, must be maintained;
and (3) the amount of the payment retained by the pool sponsor together with
other funds inuring to its benefit must be limited to not more than adequate
consideration for forming the mortgage pools plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also
imposes additional specific conditions for certain types of transactions
involving an investing Plan and for situations in which the Parties in Interest
or Disqualified Persons are fiduciaries.
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The Prospectus Supplement for a series will set forth whether the Trustee
in respect of that series is affiliated with the Sponsor. If the credit
enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of one percent of the aggregate principal
balance of the Mortgage Loans or the principal balance of the largest Mortgage
Loan, then the Sponsor has been advised that the second general condition
referred to above will be satisfied. The Sponsor will not receive total
compensation for forming and providing services to the Mortgage Pools which will
be more than adequate consideration. Each Plan fiduciary responsible for making
the investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute "mortgage pool
pass-through certificates" for purposes of applying PTCE 83-1, (ii) the second
and third general conditions will be satisfied, and (iii) the specific
conditions, not discussed herein, of PTCE 83-1 have been satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor, the
DOL did not have under its consideration interests in pools of the exact nature
described herein. There are other class and individual prohibited transaction
exemptions issued by the DOL that could apply to a Plan's acquisition or holding
of Securities. There can be no assurance that any of those exemptions will apply
with respect to any particular Plan that acquires or holds Securities or, even
if all of the conditions specified therein were satisfied, that the exemption
would apply to all transactions involving the Trust Estate. The applicable
Prospectus Supplement under "ERISA Considerations" may contain additional
information regarding the application of PTCE 83-1, or other prohibited
transaction exemptions that may be available, with respect to the series offered
thereby.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Security held by a Tax Exempt Investor will be considered UBTI and thus
will be subject to federal income tax. See "Certain Federal Income Tax
Consequences -- Taxation of Owners of REMIC Residual Securities Excess
Inclusions."
CONSULTATION WITH COUNSEL
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related Prospectus
Supplement will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are
rated in at least the second highest rating category by any Rating Agency, and
as such may be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any State
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of 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 "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
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SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Securities or to purchase any class of Securities
representing more than a specified percentage of the investors assets. The
Sponsor will make no representations as to the proper characterization of any
class of Securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of Securities. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Securities of any class constitute legal investments under SMMEA or are
subject to investment, capital or other restrictions, and whether SMMEA has been
overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Securities or will be used by the Sponsor for general corporate
purposes. The Sponsor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Sponsor, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
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1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters (which may include affiliates of the Sponsor);
2. By placements by the Sponsor with institutional investors through
dealers; and
3. By direct placements by the Sponsor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Securities may be offered in whole or in part in exchange for the Mortgage Loans
(and other assets, if applicable) that would comprise the Mortgage Pool in
respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Sponsor whose identities and relationships to
the Sponsor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Sponsor will indemnify the several underwriters and the
underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Sponsor and purchasers of
Securities of such series.
The Sponsor anticipates that the Securities offered hereby will be sold
primarily to institutional investors or be placed with individuals by the
Sponsor or an affiliate of the Sponsor. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities.
Securityholders should consult with their legal advisors in this regard prior to
any such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor and the Servicer
by Karen Crawford, Esq., in-house Counsel to the Sponsor and the Servicer.
Certain legal matters regarding the issuance and the federal income tax
treatment of the Securities will be passed upon by Dewey Ballantine, New York,
New York.
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FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not material
to the offering made hereby. However, any prospective purchaser who desires to
review financial information concerning the Sponsor will be provided by the
Sponsor upon request with a copy of the most recent financial statements of the
Sponsor.
A Prospectus Supplement and the related Form 8-K (which shall be
incorporated by reference to this Registration Statement) may contain the
financial statements of the related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series of
Securities, contains a summary of the material terms of the applicable exhibits
to the Registration Statement and the documents referred to herein and therein.
Copies of such exhibits are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and may be inspected, without
charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
PAGE
----
<S> <C>
Accrual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,33
Additional Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Affiliated Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Approved Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 26
APR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARM Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Balloon Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Balloon Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Bankruptcy Bond. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Bankruptcy Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Bankruptcy Loss Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Basic Monthly Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Book-Entry Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Bulk Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Bulk Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Buydown Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Buydown Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Buydown Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Buydown Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Buydown Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
CLTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Condominium Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contract Sub-Servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Convertible Mortgage Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Cooperative Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cooperative Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Credit Enhancer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Debt Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 67
Defaulted Mortgage Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Deferred Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Deficient Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Deleted Mortgage Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Delinquency Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Detailed Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Direct or Indirect Participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Disqualified Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
DOL Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7, 34
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 33
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 79
ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<TABLE>
PAGE
----
<S> <C>
Extraordinary Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Federal Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Guaranty Insurance Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Financial Guaranty Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
FIRREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Fixed-Income Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 33
Forward Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 37
Fraud Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Fraud Loss Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Garn-St. Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Grantor Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Grantor Trust Fractional Interest Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Grantor Trust Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 67
Grantor Trust Strip Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Home Equity Lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Home Improvement Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Indirect Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Insurance Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Insured Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 33
Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Junior Lien Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Letter of Credit Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Loan Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Loan-to-Value Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Lockout periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Master Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Modified Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Mortgage Asset Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Mortgage Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Mortgage Pool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Mortgage Pool Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Mortgage Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 18
Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgagor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Net Mortgage Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Note Margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Originator's Retained Yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
87
<PAGE>
<TABLE>
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<S> <C>
Originators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Partnership Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Pass-Through Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Payment Dates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7, 34
Percentage Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Permitted Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Physical Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Physical Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Pool Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Pooling and Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Pre-Funding Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 37
Premium Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Principal Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PTCE 83-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Purchase Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Qualified Replacement Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Qualified Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Rating Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Realized Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7, 34, 40
Regular Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17, 67
REMIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2, 67
REMIC Regular Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
REMIC Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
REMIC Residual Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
REMIC Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
REMIC Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Remittance Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Remittance Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7, 34
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Residual Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
RTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Security Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Securityholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 33
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Servicing Advance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Servicing Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Settlement Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SMMEA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 82
Special Hazard Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Special Hazard Insurance Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Special Hazard Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Special Hazard Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Sponsor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sponsor's Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 26
</TABLE>
88
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<TABLE>
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<S> <C>
Statistic Calculation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Strip Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 33
Sub-Servicer(s). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sub-Servicing Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Sub-Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Subordinate Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Subordinate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 33
Tax Exempt Investor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Tax-Favored Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Title V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Title VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Trust Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 5
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U.S. Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Unaffiliated Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
</TABLE>
89
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SPONSOR
OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE SPONSOR, THE SERVICER OR THE CERTIFICATE INSURER SINCE SUCH
DATE.
------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................................................. S-3
Reports to the Certificateholders..................................... S-3
Summary of Prospectus Supplement...................................... S-4
Risk Factors.......................................................... S-17
Sponsor's Mortgage Loan Program....................................... S-18
The Mortgage Pool..................................................... S-19
Prepayment and Yield Considerations................................... S-24
Use of Proceeds....................................................... S-31
Additional Information................................................ S-31
The Sponsor, The Servicer and The Sub-Servicer........................ S-31
The Originators....................................................... S-33
Description of the Certificates....................................... S-34
The Certificate Insurance Policy...................................... S-41
The Certificate Insurer............................................... S-42
The Pooling and Servicing Agreement................................... S-44
Certain Federal Income Tax Consequences............................... S-46
ERISA Considerations.................................................. S-46
Ratings............................................................... S-48
Legal Investment Considerations....................................... S-48
Underwriting.......................................................... S-49
Experts............................................................... S-49
Certain Legal Matters................................................. S-49
Index of Principal Prospectus Supplement Definitions.................. S-50
Appendix I Global Clearance, Settlement and Tax Documentation
Procedures........................................................... I-1
Appendix A -- Audited Financial Statements (Certificate Insurer)...... A-1
PROSPECTUS
Incorporation of Certain Documents by Reference....................... 3
Summary of Prospectus................................................. 4
Risk Factors.......................................................... 13
The Trusts............................................................ 18
The Mortgage Pools.................................................... 22
Mortgage Loan Program................................................. 26
Description of the Securities......................................... 33
Subordination......................................................... 45
Description of Credit Enhancement..................................... 47
Hazard Insurance; Claims Thereunder................................... 52
The Sponsor........................................................... 53
The Servicer.......................................................... 53
The Master Servicer................................................... 53
The Pooling and Servicing Agreement................................... 53
Yield Considerations.................................................. 57
Maturity and Prepayment Considerations................................ 59
Certain Legal Aspects of Mortgage Loans and Related Matters........... 61
Certain Federal Income Tax Consequences............................... 67
ERISA Considerations.................................................. 79
Legal Investment Matters.............................................. 82
Use of Proceeds....................................................... 83
Methods of Distribution............................................... 83
Legal Matters......................................................... 84
Financial Information................................................. 85
Additional Information................................................ 85
Index of Principal Definitions........................................ 86
</TABLE>
------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
LOGO
$100,000,000
EQUIVANTAGE HOME EQUITY LOAN TRUST 1996-2
$38,868,000
CLASS A-1 FIXED RATE CERTIFICATES
6.725% PASS-THROUGH RATE
$30,620,000
CLASS A-2 FIXED RATE CERTIFICATES
7.075% PASS-THROUGH RATE
$15,083,000
CLASS A-3 FIXED RATE CERTIFICATES
7.475% PASS-THROUGH RATE
$15,429,000
CLASS A-4 FIXED RATE CERTIFICATES
8.050% PASS-THROUGH RATE
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE INC.
SERVICER
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[LOGO]
PRUDENTIAL SECURITIES INCORPORATED
CS FIRST BOSTON
May 16, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
