<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 7, 1996)
- --------------------------------------------------------------------------------
[LOGO]
$100,000,000
EQUIVANTAGE HOME EQUITY LOAN TRUST 1996-3
$74,248,000 6.850% CLASS A-1 FIXED RATE CERTIFICATES
$10,000,000 7.275% CLASS A-2 FIXED RATE CERTIFICATES
$15,752,000 7.700% CLASS A-3 FIXED RATE CERTIFICATES
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1996-3
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE, INC.
SERVICER
------------------------
The Home Equity Loan Asset-Backed Certificates, Series 1996-3 (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")
and Class A-3 Fixed Rate Certificates ("Class A-3 Certificates", together with
the Class A-1 Certificates, and the Class A-2 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 1996-3 (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 Trustee.
(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 99.968750% of the principal amount thereof, the Class A-2
Certificates from the Sponsor at 99.968750% of the principal amount thereof and
the Class A-3 Certificates from the Sponsor at 99.906250% at the principal
amount thereof (representing $99,958,905.00 aggregate proceeds to the Sponsor,
before deducting expenses payable by the Sponsor estimated at $500,000), plus
accrued interest, if any from August 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 August 27,
1996 against payment in immediately available funds.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON BROTHERS INC
- ------------------------------------------------------------
The date of this Prospectus Supplement is August 20, 1996
<PAGE>
(cover continued from previous page)
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 September
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 Salomon Brothers Inc (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.
S-2
<PAGE>
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 1996-3
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", together with the Class
A-1 Certificates and the Class A-2
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 unaffiliated originators (the
"Originators"). See "The Mortgage Loan
Program" in the Prospectus.
Cut-Off Date The close of business on August 1, 1996.
Closing Date On or about August 27, 1996.
The Certificates The Home Equity Loan Asset-Backed
Certificates, Series 1996-3 (the
"Certificates") will consist of the
Class A Certificates, a subordinate class
of certificates (the "Class B
Certificates") and one or more classes of
Residual Certificates (the "Class R
Certificates"). The Certificates will be
issued pursuant to a pooling and servicing
agreement (the "Pooling and Servicing
Agreement") to be dated as of August 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.
S-4
<PAGE>
For purposes of receiving distributions
with respect to principal, the Class A
Certificates have been divided into three
"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.
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, September 25,
2015, the Class A-2 Certificates, March
25, 2021, the Class A-3 Certificates,
September 25, 2027. The final scheduled
Payment Date for the Class A-3
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.
The Certificate Insurer does not directly
or indirectly guarantee any specified rate
of prepayments; see "Risk Factors."
The statistical information presented in
this Prospectus Supplement concerning the
pool of Mortgage Loans as of the close of
business on July 31, 1996 (such date, the
"Statistic Calculation Date"), does not
reflect all of the Mortgage Loans which
will be included, on the Closing Date, in
the final pool. The Statistic Calculation
Date information reflects the Mortgage
Loans acquired by the Sponsor through such
date, and the statistical information
presented herein is based on the number
and the principal
S-5
<PAGE>
balances of such
Mortgage Loans as of such Date. The
aggregate principal balance of the
Mortgage Loans as of the Statistic
Calculation Date is $88,862,779.44. 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 to
be included in the final pool will
represent Mortgage Loans acquired or to be
acquired by the Sponsor prior to the
Closing Date. In addition, with respect
to the Statistic Calculation Date as to
which statistical information is presented
herein, some amortization of the Mortgage
Loans in such pool will occur prior to the
Closing Date. In addition, certain loans
included 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 such characteristics as of
the Closing Date in 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.,
approximately $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.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are measured by the aggregate principal
balance of the Mortgage Loans as of the
Statistic Calculation Date.
The Mortgage Loans 89.52% 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 Cut-Off Date, of 1,460 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
20 states. The Mortgage Loans are secured
by liens on real property of which
approximately 97.34% by principal balance
are first liens and 2.66% are secured by
junior
S-6
<PAGE>
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 Loan
Pool--Interest Payments on the Mortgage
Loans."
As of the Statistic Calculation Date, the
Mortgage Loans had an aggregate principal
balance of $88,862,779.44.
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 $74,248,000.
Original Class A-2 Certifi-
cate Principal Balance $10,000,000.
Original Class A-3 Certifi-
cate Principal Balance $15,752,000.
Class A-1 Pass-Through Rate 6.850% per annum.
Class A-2 Pass-Through Rate 7.275% per annum.
Class A-3 Pass-Through Rate 7.700% per annum.
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 September 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
S-7
<PAGE>
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,
and the Class A-3 Certificates will be the
interest which has accrued thereon at the
Class A-1 Pass-Through Rate, the Class A-2
Pass-Through Rate, and the Class A-3 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
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 three
"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.
S-8
<PAGE>
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 -- Subordination of Class B
Certificates." 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 -- Subordination of Class B
Certificates."
The Pooling and Servicing Agreement
defines the "Class A Principal
Distribution Amount" for the 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 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);
S-9
<PAGE>
(F) 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) any Subordination Increase
Amount for such Payment Date;
minus
(ii) 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 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 Payment Date
be (x) less than zero or (y) greater than
the then-outstanding Class A Certificate
Principal Balance of the 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 portion, if any, of the
related Class A Principal Distribution
Amount to which such Class is then
entitled to receive with respect to such
Payment
S-10
<PAGE>
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 Subordination
Deficit, if any, for the Class A
Certificates 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.
A "Subordination Deficit" with respect to
a Payment Date is the amount, if any, by
which (x) the aggregate Class A
Certificate Principal Balance, after
taking into account all distributions of
principal with respect to the Class A
Certificates 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.
S-11
<PAGE>
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 aggregate 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 --
Subordination of Class B Certificates."
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 amount, if any, by which the
Insured Distribution Amount 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
S-12
<PAGE>
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 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
S-13
<PAGE>
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 Originators, if any, it
may retain a portion of such Base
Servicing Fee with respect to such
Mortgage 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").
Subordination of
Class B Certificates The Class B Certificates are subordinated
to the Class A Certificates. Such
subordination is intended to enhance the
likelihood that the Owners of the Class A
Certificates will receive full and timely
receipt of all amounts due to them. See
" D e s c r i p t i o n o f t h e
Certificates -- Subordination of Class B
Certificates" herein.
Optional Termination The Owners of the Residual 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
S-14
<PAGE>
balance of the Mortgage Loans as
of the Closing Date. The first
such Remittance Date on which such
option may be exercised is the
"Clean-Up Call Date." The right of
the Residual Certificate Owners to
exercise such optional purchase
right is superior to such right
of the Servicer; the Servicer's
right may only be exercised if the
Residual 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. A class of Class R
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 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.
S-15
<PAGE>
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.
As of the Statistic Calculation Date, 35.38% of the Mortgage Loans by
aggregate principal balance 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 Loan 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 5.40% 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 60.57% of the
aggregate Loan Balances, as of the Statistic Calculation Date, represent
Mortgage Loans relating to Mortgaged Properties located in five states: Ohio,
15.87%; Michigan, 15.12%; Tennessee, 14.68%; Maryland, 7.75%; and Illinois,
7.15%.
SPONSOR'S MORTGAGE LOAN PROGRAM
The Mortgage Loan pools include loans which were either originated
directly by the Servicer or purchased by the Servicer from others on a
loan-by-loan basis or in bulk acquisitions of loan portfolios and in either
case acquired by the Sponsor.
Mortgage Loans may have been originated pursuant to the Sponsor's
underwriting guidelines or pursuant to the applicable guidelines of the
Originators and re-underwritten by the Servicer, pursuant to the Sponsor's
underwriting guidelines, and purchased by the Sponsor.
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 July 31, 1996
approximately 69,707 mortgage loans with an aggregate principal balance as of
such date of approximately $2.7 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 AS OF
PORTFOLIO OF MORTGAGE LOANS(1) JULY 31, 1996
-------------
Number of mortgage loans . . . . . . 5,785
Dollar amount of mortgage loans . . . $332,943
Delinquency Period
30-59 Days
% of number of loans(2) . . . . . . 1.66%
% of dollar amount of loans(3) . . 1.78%
60-89 days
% of number of loans(2) . . . . . . 0.76%
% of dollar amount of loans(3) . . 0.81%
90 days and over
% of number of loans(2) . . . . . . 1.85%
% of dollar amount of loans(3) . . 1.99%
Foreclosed Properties
% of number of loans(2) . . . . . . 0.35%
% of dollar amount of loans(3) . . 0.30%
(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
S-18
<PAGE>
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 0.02% of the
Sponsor's average portfolio unpaid principal balance of $85,713,227. The
Sponsor's net losses on mortgage loans in 1996, as of June 30, 1996, were
0.003% of the Sponsor's average portfolio unpaid principal balance of
$234,871,950. 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 1.10% of the Mortgage
Loans (by aggregate principal balance as of the Cut-Off Date) were originated
pursuant to a "no-income verification" program.
THE MORTGAGE LOAN POOL
GENERAL
89.52% 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 pool of Mortgage Loans contained, as of the Statistic Calculation
Date, 1,460 loans to be sold by the Sponsor to the Trust evidenced by
promissory notes (the "Notes") secured by Mortgages on the Mortgaged
Properties, which are located in 20 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 97.34% of loans secured by first lien mortgages on the related
Mortgaged Properties and 2.66% of loans secured by junior liens on the related
Mortgaged Properties.
The Mortgage Loans were required to satisfy the following criteria as of
the Cut-Off 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 0.21% of the aggregate
principal balance of all Mortgage Loans as of the Cut-Off Date were 30-59 days
delinquent).
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 Sponsor's Portfolio
of Mortgage Loans," and in the mortgage lending industry.
S-19
<PAGE>
DIFFERENCE BETWEEN STATISTIC CALCULATION DATE POOL AND CLOSING DATE POOL.
The statistical information presented in this Prospectus Supplement is
based on the Mortgage Loan Pool as of the Statistic Calculation Date. The
Mortgage Loan Pool as of the Statistic Calculation Date reflects the Mortgage
Loans acquired by the Sponsor through such date, and the statistical
information presented herein is based on the number and the principal balances
of such Mortgage Loans as of the Statistic Calculation Date. This pool
aggregated $88,862,779.44. 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 to be included in the final pool 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 Mortgage Loan Pool as of the
Statistic Calculation Date, as to which statistical information is presented
herein, some amortization of the Mortgage Loans contained in such pool will
occur prior to the Closing Date. Moreover, certain loans included 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
of the Statistic Calculation Pool 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., approximately
$100,000,000, the Sponsor will reduce the size of the offering (which will be
a PRO RATA reduction in each class of Offered 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.
The Mortgage Loans as of the Statistic Calculation Date consist of 1,460
loans under which the related Mortgaged Properties are located in 20 states,
as set forth herein. The Mortgage Loan Pool as of the Statistic Calculation
Date had an aggregate principal balance of $88,862,779.44, the minimum
principal balance of any of the Mortgage Loans as of the Statistic Calculation
Date was $7,000.00, the maximum principal balance thereof was $287,881.79 and
the average principal balance of the Mortgage Loans was $60,864.92. The
Mortgage Rates on the Mortgage Loans as of the Statistic Calculation Date
ranged from 8.60% to 16.25% per annum, and the weighted average Mortgage Rate
of the Mortgage Loans was 11.08% per annum. The original term to stated
maturity of the Mortgage Loans as of the Statistic Calculation Date 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 246 months, the weighted average remaining term to stated
maturity was 245 months, the weighted average seasoning was 0.55 months and
the weighted average CLTV was 76.83%. No Mortgage Loan as of the Statistic
Calculation Date had a stated maturity later than August 15, 2026. 64.62% of
the Mortgage Loans by aggregate principal balance require monthly payments of
principal that will fully amortize the Mortgage Loans by their respective
maturity dates, and 35.38% of the aggregate principal balance of the Mortgage
Loans are Balloon Loans.
S-20
<PAGE>
GEOGRAPHIC DISTRIBUTION
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE AS PRINCIPAL BALANCE
OF AS OF
NUMBER OF THE STATISTIC THE STATISTIC
STATE MORTGAGE LOANS CALCULATION DATE CALCULATION DATE
- ----- -------------- -------------------- ------------------
Delaware 2 $ 152,150.00 0.17%
Florida 76 4,185,334.74 4.71
Georgia 106 6,022,029.23 6.78
Iowa 3 228,915.29 0.26
Idaho 2 152,001.82 0.17
Illinois 95 6,357,002.37 7.15
Indiana 102 4,712,618.56 5.30
Kentucky 34 1,742,710.29 1.96
Louisiana 47 1,899,860.14 2.14
Maryland 70 6,889,396.58 7.75
Michigan 212 13,433,936.48 15.12
Missouri 8 383,812.23 0.43
Mississippi 19 940,011.36 1.06
North Carolina 100 6,118,360.76 6.89
Ohio 250 14,105,345.31 15.87
Oregon 11 1,023,639.61 1.15
South Carolina 51 2,772,078.16 3.12
Tennessee 217 13,042,321.04 14.68
Washington 49 4,242,647.64 4.77
Wisconsin 6 458,607.83 0.52
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%
----- -------------- ------
----- -------------- ------
DISTRIBUTION OF CLTV'S*
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE AS PRINCIPAL BALANCE
OF AS OF
RANGE OF CLTV NUMBER OF THE STATISTIC THE STATISTIC
RATIOS MORTGAGE LOANS CALCULATION DATE CALCULATION DATE
- ------------- -------------- -------------------- ------------------
15.01 to 20.00 4 $ 79,247.33 0.09%
20.01 to 25.00 4 108,091.06 0.12
25.01 to 30.00 6 132,205.02 0.15
30.01 to 35.00 5 130,221.71 0.15
35.01 to 40.00 16 410,388.03 0.46
40.01 to 45.00 10 326,701.83 0.37
45.01 to 50.00 26 826,914.55 0.93
50.01 to 55.00 36 1,574,452.16 1.77
55.01 to 60.00 53 1,987,301.50 2.24
60.01 to 65.00 77 3,745,204.51 4.21
65.01 to 70.00 128 6,881,112.40 7.74
70.01 to 75.00 213 11,651,771.17 13.11
75.01 to 80.00 570 36,825,276.65 41.44
80.01 to 85.00 270 20,538,808.42 23.11
85.01 to 90.00 40 3,310,722.58 3.73
90.01 to 95.00 2 334,360.52 0.38
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%
----- -------------- ------
----- -------------- ------
______________________
* LTVs used for Senior Lien Loans.
S-21
<PAGE>
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL BALANCE AS
NUMBER OF PRINCIPAL BALANCE AS OF OF
RANGE OF MORTGAGE THE STATISTIC THE STATISTIC
MORTGAGE RATES LOANS CALCULATION DATE CALCULATION DATE
- -------------- --------- ----------------------- --------------------
<S> <C> <C> <C>
8.501% to 8.750% . . . 2 $ 102,618.39 0.12%
8.751% to 9.000% . . . 6 389,878.82 0.44
9.001% to 9.250% . . . 9 670,005.58 0.75
9.251% to 9.500% . . . 36 2,452,220.98 2.76
9.501% to 9.750% . . . 64 4,252,213.47 4.79
9.751% to 10.000% . . . 113 7,478,046.21 8.42
10.001% to 10.250% . . 92 5,181,153.12 5.83
10.251% to 10.500% . . 114 7,519,091.75 8.46
10.501% to 10.750% . . 175 12,051,450.56 13.56
10.751% to 11.000% . . 157 11,104,075.24 12.50
11.001% to 11.250% . . 102 5,989,928.53 6.74
11.251% to 11.500% . . 97 5,582,770.87 6.28
11.501% to 11.750% . . 107 6,573,096.80 7.40
11.751% to 12.000% . . 64 3,550,364.16 4.00
12.001% to 12.250% . . 50 2,342,694.45 2.64
12.251% to 12.500% . . 40 2,558,442.27 2.88
12.501% to 12.750% . . 55 2,911,765.76 3.28
12.751% to 13.000% . . 40 2,190,131.76 2.46
13.001% to 13.250% . . 39 1,731,997.83 1.95
13.251% to 13.500% . . 27 1,114,808.67 1.25
13.501% to 13.750% . . 23 1,039,091.96 1.17
13.751% to 14.000% . . 12 629,495.86 0.71
14.001% to 14.250% . . 14 607,282.20 0.68
14.251% to 14.500% . . 11 403,130.97 0.45
14.501% to 14.750% . . 1 136,000.00 0.15
14.751% to 15.000% . . 6 225,050.39 0.25
15.001% to 15.250% . . 1 28,875.00 0.03
15.501% to 15.750% . . 1 18,200.00 0.02
15.751% to 16.000% . . 1 18,897.84 0.02
16.001% to 16.250% . . 1 10,000.00 0.01
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
REMAINING TERM TO MATURITY DISTRIBUTION
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF AS OF AS OF
MORTGAGE THE STATISTIC THE STATISTIC
MONTHS LOANS CALCULATION DATE CALCULATION DATE
- ------ --------- ----------------- -----------------
48 to 60 6 $ 129,167.02 0.15%
72 to 84 2 54,324.73 0.06
84 to 96 1 21,475.00 0.02
96 to 108 1 63,776.34 0.07
108 to 120 45 1,237,524.47 1.39
132 to 144 3 249,522.77 0.28
168 to 180 829 48,112,864.59 54.14
228 to 240 164 8,617,095.66 9.70
288 to 300 2 164,887.80 0.19
348 to 360 407 30,212,141.06 34.00
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%*
----- -------------- ------
----- -------------- ------
_________________________
* Due to rounding, may not add up.
S-22
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE AS PRINCIPAL BALANCE AS
NUMBER OF OF OF
RANGE OF MORTGAGE THE STATISTIC THE STATISTIC
PRINCIPAL BALANCES LOANS CALCULATION DATE CALCULATION DATE
- ------------------ --------- -------------------- --------------------
<S> <C> <C> <C>
0 to 25,000 122 $ 2,354,225.44 2.65%
25,000.01 to 50,000.00 543 20,667,937.21 23.26
50,000.01 to 75,000.00 448 27,314,280.34 30.74
75,000.01 to 100,000.00 177 15,309,088.10 17.23
100,000.01 to 150,000.00 130 15,330,073.77 17.25
150,000.01 to 202,300.00 27 4,768,807.87 5.37
202,300.01 to 250,000.00 7 1,505,384.92 1.69
250,000.01 to 300,000.00 6 1,612,981.79 1.82
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
DISTRIBUTION OF PROPERTY TYPE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE AS PRINCIPAL BALANCE AS
NUMBER OF OF OF
MORTGAGE THE STATISTIC THE STATISTIC
PROPERTY TYPE LOANS CALCULATION DATE CALCULATION DATE
------------- --------- -------------------- --------------------
<S> <C> <C> <C>
Detached . . . . . . . 1,293 $80,535,956.20 90.63%
Single-family
Attached . . . . . . . 38 1,795,573.66 2.02
Two-to-four Family
Homes . . . . . . . . 15 741,533.69 0.83
PUD . . . . . . . . . . 10 1,016,725.86 1.14
Condominiums . . . . . 14 559,487.32 0.63
Manufactured Home . . . 75 3,419,261.43 3.85
Townhouse . . . . . . . 10 580,199.67 0.65
Blanket (2 Units
Detached). . . . . . . 5 214,041.61 0.24
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
DISTRIBUTION OF OCCUPANCY
AGGREGATE
PRINCIPAL BALANCE AS % OF AGGREGATE
NUMBER OF OF PRINCIPAL BALANCE AS OF
MORTGAGE THE STATISTIC THE STATISTIC
OCCUPANCY TYPE LOANS CALCULATION DATE CALCULATION DATE
- -------------- --------- -------------------- -----------------------
Owner occupied 1,347 $84,065,683.85 94.60%
Investor . . . 113 4,797,095.59 5.40
----- -------------- ------
TOTAL 1,460 $88,862,779.44 100.00%
----- -------------- ------
----- -------------- ------
S-23
<PAGE>
DISTRIBUTION OF TERM OF SEASONING
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE AS OF PRINCIPAL BALANCE AS OF
NUMBER OF THE STATISTIC THE STATISTIC
MONTHS OF SEASONING MORTGAGE LOANS CALCULATION DATE CALCULATION DATE
- ------------------- -------------- ----------------------- -----------------------
<S> <C> <C> <C>
0 to 6 . . . . . . 1,460 $88,862,779.44 100.00%
----- -------------- ------
</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, September 25, 2015; Class A-2 Certificates,
March 25, 2021; Class A-3 Certificates, September 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-3 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 or 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 average lives of the
Class A Certificates set forth in the tables. In addition, since the actual
Mortgage Loans
S-25
<PAGE>
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 August 27,
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 September 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, (viii) the
"Specified Subordinated Amount" (as defined under "Description of the
Certificates -- Subordination of Class B Certificates") 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> <C>
LEVEL $20,717,700.16 11.017 10.313 174 173 174
LEVEL 9,674,698.90 11.048 10.337 240 239 240
LEVEL 34,309,309.50 10.835 10.15 360 359 360
BALLOON 35,298,291.44 11.380 10.695 180 179 360
</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 and Class A-3 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% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
August 25, 1997 96 81 77 73 69 65
August 25, 1998 93 60 52 45 38 31
August 25, 1999 92 43 33 24 16 8
August 25, 2000 90 29 19 9 2 0
August 25, 2001 87 18 7 0 0 0
August 25, 2002 85 9 0 0 0 0
August 25, 2003 82 1 0 0 0 0
August 25, 2004 79 0 0 0 0 0
August 25, 2005 75 0 0 0 0 0
August 25, 2006 72 0 0 0 0 0
August 25, 2007 67 0 0 0 0 0
August 25, 2008 62 0 0 0 0 0
August 25, 2009 57 0 0 0 0 0
August 25, 2010 51 0 0 0 0 0
August 25, 2011 8 0 0 0 0 0
August 25, 2012 6 0 0 0 0 0
August 25, 2013 3 0 0 0 0 0
August 25, 2014 1 0 0 0 0 0
August 25, 2015 0 0 0 0 0 0
August 25, 2016 0 0 0 0 0 0
August 25, 2017 0 0 0 0 0 0
August 25, 2018 0 0 0 0 0 0
August 25, 2019 0 0 0 0 0 0
August 25, 2020 0 0 0 0 0 0
August 25, 2021 0 0 0 0 0 0
August 25, 2022 0 0 0 0 0 0
August 25, 2023 0 0 0 0 0 0
August 25, 2024 0 0 0 0 0 0
August 25, 2025 0 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0
August 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 11.7 2.9 2.4 2.0 1.8 1.6
Modified Duration
(Years)(1): 7.5 2.5 2.1 1.8 1.6 1.4
First Principal
Payment Date(1): 9/96 9/96 9/96 9/96 9/96 9/96
Last Principal
Payment Date(1): 1/15 10/03 6/02 6/01 10/00 4/00
(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% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
August 25, 1997 100 100 100 100 100 100
August 25, 1998 100 100 100 100 100 100
August 25, 1999 100 100 100 100 100 100
August 25, 2000 100 100 100 100 100 61
August 25, 2001 100 100 100 87 33 0
August 25, 2002 100 100 86 25 0 0
August 25, 2003 100 100 33 0 0 0
August 25, 2004 100 58 0 0 0 0
August 25, 2005 100 18 0 0 0 0
August 25, 2006 100 0 0 0 0 0
August 25, 2007 100 0 0 0 0 0
August 25, 2008 100 0 0 0 0 0
August 25, 2009 100 0 0 0 0 0
August 25, 2010 100 0 0 0 0 0
August 25, 2011 100 0 0 0 0 0
August 25, 2012 100 0 0 0 0 0
August 25, 2013 100 0 0 0 0 0
August 25, 2014 100 0 0 0 0 0
August 25, 2015 87 0 0 0 0 0
August 25, 2016 65 0 0 0 0 0
August 25, 2017 52 0 0 0 0 0
August 25, 2018 37 0 0 0 0 0
August 25, 2019 20 0 0 0 0 0
August 25, 2020 1 0 0 0 0 0
August 25, 2021 0 0 0 0 0 0
August 25, 2022 0 0 0 0 0 0
August 25, 2023 0 0 0 0 0 0
August 25, 2024 0 0 0 0 0 0
August 25, 2025 0 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0
August 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 21.2 8.3 6.7 5.6 4.8 4.2
Modified Duration
(Years)(1): 10.5 6.0 5.1 4.5 3.9 3.5
First Principal
Payment Date(1): 1/15 10/03 6/02 6/01 10/00 4/00
Last Principal
Payment Date(1): 9/20 2/06 5/04 2/03 3/02 6/01
(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% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
August 25, 1997 100 100 100 100 100 100
August 25, 1998 100 100 100 100 100 100
August 25, 1999 100 100 100 100 100 100
August 25, 2000 100 100 100 100 100 100
August 25, 2001 100 100 100 100 100 91
August 25, 2002 100 100 100 100 83 59
August 25, 2003 100 100 100 84 57 37
August 25, 2004 100 100 93 61 38 22
August 25, 2005 100 100 71 43 25 13
August 25, 2006 100 89 53 30 15 6
August 25, 2007 100 71 39 20 9 2
August 25, 2008 100 55 29 13 4 0
August 25, 2009 100 43 20 7 1 0
August 25, 2010 100 32 13 3 0 0
August 25, 2011 100 10 2 0 0 0
August 25, 2012 100 7 0 0 0 0
August 25, 2013 100 4 0 0 0 0
August 25, 2014 100 2 0 0 0 0
August 25, 2015 100 0 0 0 0 0
August 25, 2016 100 0 0 0 0 0
August 25, 2017 100 0 0 0 0 0
August 25, 2018 100 0 0 0 0 0
August 25, 2019 100 0 0 0 0 0
August 25, 2020 100 0 0 0 0 0
August 25, 2021 87 0 0 0 0 0
August 25, 2022 72 0 0 0 0 0
August 25, 2023 55 0 0 0 0 0
August 25, 2024 36 0 0 0 0 0
August 25, 2025 15 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0
August 25, 2027 0 0 0 0 0 0
Weighted Average
Life (Years)(1): 27.2 12.7 10.8 9.2 7.9 6.8
Modified Duration
(Years)(1): 11.0 7.8 7.0 6.3 5.6 5.1
First Principal
Payment Date(1): 9/20 2/06 5/04 2/03 3/02 6/01
Last Principal
Payment Date(1): 4/26 8/15 6/12 7/11 11/09 3/08
(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>
PAYMENT DELAY FEATURE OF CLASS A CERTIFICATES
The effective yield to the Owners of the Class A-1 Certificates, the Class
A-2 Certificates and the Class A-3 Certificates will be lower than the yield
otherwise produced by the Class A-1 Pass-Through Rate, the Class A-2 Pass-
Through Rate and the Class A-3 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.
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 July 31, 1996, the Sub-Servicer was servicing 5,785
Mortgage Loans in the Sponsor's Servicing Portfolio representing an aggregate
outstanding principal balance of approximately $332.9 million. In addition to
the Sponsor's Portfolio, the Sub-Servicer serviced as of July 31, 1996
approximately 69,707 mortgage loans with an aggregate principal balance as of
such date of approximately $2.7 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.
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.
S-30
<PAGE>
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 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
S-31
<PAGE>
(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 Originators including various retail mortgage lenders.
EquiVantage Inc. 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 Inc. 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 representations and warranties related to the origination of
the loans. Appraisers and closing agents must meet specified standards,
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 and closings are coordinated 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 and the Subordinate Certificates.
The Certificates will be issued by EquiVantage Home Equity Loan Trust 1996-3,
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.
S-32
<PAGE>
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 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
S-33
<PAGE>
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.
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.
S-34
<PAGE>
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 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
S-35
<PAGE>
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 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.
S-36
<PAGE>
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 September 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.
SUBORDINATION OF CLASS B CERTIFICATES
The Class B Certificates are subordinated to the Class A Certificates.
Such subordination is intended to enhance the likelihood that the Owners of
the Class A Certificates will receive full and timely receipt of all amounts
due to them.
The Pooling and Servicing Agreement requires that the excess of the
aggregate principal balance of the Mortgage Loans over the aggregate Class A
Certificate Principal Balance be maintained at a certain amount (which amount
may vary over time) over the life of the transaction, which amount is
specified by the Certificate Insurer. The actual amount of this excess is the
"Subordinated Amount", and the specified target amount of the excess at a
point in time is the "Specified Subordinated Amount".
The Certificate Insurer may permit the reduction of the Specified
Subordinated Amount without the consent of, or the giving of notice to, the
Owners of the Class A Certificates; PROVIDED, that the Certificate Insurer is
not then in default; and PROVIDED, FURTHER, that such reduction would not
change materially the weighted average life of the related Class A
Certificates or the current rating thereof.
The Pooling and Servicing Agreement generally provides that the Owners of
the Class B Certificates will only receive distributions of principal to the
extent that the actual Subordinated Amount exceeds the then Specified
Subordinated Amount; I.E., to the extent that there is a level of
subordination greater than that required by the Certificate Insurer, as will
be the case when the Specified Subordinated Amount decreases or "steps down"
in accordance with its terms. Consequently, unless there exists on any
particular Payment Date such an excess level of subordination, the Owners of
the Class A Certificates will be entitled to receive 100% of the principal to
be distributed on such Payment Date.
The Class B Certificates are also entitled to receive all excess interest
available on any Payment Date, I.E., the interest remitted by the Servicer to
the Trustee relating to the prior Remittance Period (which interest remittance
is itself net of the aggregate monthly Servicing Fees) less the interest due
and payable to the Owners of the Class A Certificates, together with the fees
and premium due and payable to the Trustee and the Certificate Insurer (such
interest to which the Class B Certificates are entitled, the "Class B
Interest").
On each Payment Date, the Class B Interest will be used, to the extent
available, to fund any shortfalls in amounts due to the Owners of the Class A
Certificates on such Payment Date. In addition, to the extent that the
Specified Subordinated Amount increases or "steps up" due to the effect of the
triggers set forth in the definition thereof or if, due to Realized Losses,
the Subordinated Amount has been reduced below the Specified Subordinated
Amount, the Pooling and Servicing Agreement requires that Class B Interest be
used to make payments of principal to the Owners of the Class A Certificates
for the purposes of accelerating the amortization of the Class A Certificates
relative to the amortization of the Mortgage Loans. Such accelerated payments
of principal will be made to the extent necessary to increase the Subordinated
Amount to its then-applicable Specified Subordinated Amount. To the extent
that, on any Payment Date, the actual Subordinated Amount is less than the
Specified Subordinated Amount, a "Subordination Deficiency" will exist. The
Insurance Agreement defines a "Subordination Deficit" with respect to a
Payment Date to be the amount, if any, by which (x) the aggregate Class A
Certificate Principal Balance as of such Payment Date, and following the
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 related Certificate
Insurance Policy), exceeds (y) an amount equal to the
S-37
<PAGE>
aggregate principal balances of the Mortgage Loans as of the close of business
on the last day of the preceding Remittance Period.
"Subordination Increase Amount" means, as of any Payment Date and with
respect to the Mortgage Loans, the lesser of (i) the Subordination Deficiency
applicable to such Mortgage Loans as of such Payment Date and (ii) the actual
amount available to pay the Class B Interest on such Payment Date.
"Subordination Reduction Amount" means, with respect to any Payment Date
and with respect to the Mortgage Loans, an amount equal to the lesser of (x)
the excess of the actual Subordinated Amount over the Specified Subordinated
Amount for such Payment Date and (y) the amount described in clause (b)(i) of
the definition of "Class A Principal Distribution Amount" for such Payment
Date.
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 aggregate Class A
Certificate Principal Balance as of such Payment Date, and following the
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;
S-38
<PAGE>
(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;
(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.
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.
S-39
<PAGE>
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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 govern-
mental 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
S-40
<PAGE>
credit and guaranty insurance in France. The Certificate Insurer
is subject to regulation by the State of New York Insurance Department.
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 June 30, 1996 and December 31, 1995 and 1994 the Certificate
Insurer had written directly or assumed through reinsurance, guaranties of
approximately $190.7 billion, $180.0 billion and $160.2 billion par value of
securities, respectively (of which approximately 87 percent, 88 percent and 89
percent constituted guaranties of municipal bonds), for which it had collected
gross premiums of approximately $1.99 billion, $1.95 billion and $1.78
billion, respectively. As of June 30, 1996, the Certificate Insurer had
reinsured approximately 18 percent of the risks it had written, 36 percent
through quota share reinsurance and 64 percent through facultative
arrangements.
CAPITALIZATION
The following table sets forth capitalization of the Certificate Insurer
as of December 31, 1994 and December 31, 1995 and June 30, 1996, respectively,
on the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since
June 30, 1996.
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, June 30,
1994 1995 1996
(in millions) (in millions) (in millions)
------------- ------------- -------------
<S> <C> <C> <C>
Unearned Premiums $757 $728 $698
Other Liabilities 261 304 276
Stockholder's Equity
Common Stock 15 15 15
Additional Paid-in Capital 334 334 334
Unrealized Gains (Losses) (42) 64 (6)
Foreign Currency
Translation Adjustment (1) (2) (2)
Retained Earnings 974 1,137 1,229
------ ------ ------
Total Stockholder's Equity 1,280 1,548 1,570
------ ------ ------
Total Liabilities and
Stockholder's Equity $2,298 $2,580 $2,544
====== ====== ======
</TABLE>
S-41
<PAGE>
For further financial information concerning the Certificate Insurer,
see the audited and unaudited financial statements of the Certificate Insurer
included as Appendix A and Appendix B, respectively.
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 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 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.
S-42
<PAGE>
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 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 RESIDUAL CERTIFICATE OWNERS AND THE SERVICER. At their option,
the Residual 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 Residual Certificate Owners so to
exercise such optional purchase right is superior to such right of Servicer;
the Servicer may exercise its right if the Residual 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 Residual
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 Residual
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
S-43
<PAGE>
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.
If, during the Purchase Option Period, the Residual 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 Residual 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 Residual 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 Residual 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 24% 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.
S-44
<PAGE>
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.
The DOL has issued to each of Prudential Securities Incorporated and
Salomon Brothers Inc an individual prohibited transaction exemption,
Prohibited Transaction Exemption 90-32 and Prohibited Transaction Exemption
89-89, 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.
S-45
<PAGE>
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 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-46
<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:
Percentage Percentage Percentage
Interest of Interest of Interest of
Class A-1 Class A-2 Class A-3
Underwriter Certificates Certificates Certificates
----------- ------------ ------------ ------------
Prudential Securities 50% 50% 50%
Incorporated . . . . . . . . . .
Salomon Brothers Inc . . . . . . 50% 50% 50%
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 and the registration
statement, 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 and the registration statement, 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-47
<PAGE>
INDEX OF PRINCIPAL PROSPECTUS SUPPLEMENT DEFINITIONS
Page
----
1933 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Actuarial Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certificate Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . 2
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Class A Certificate Principal Balance . . . . . . . . . . . . . . . . . . . 25
Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 B Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class B Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Class R Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Clean-Up Call Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CLTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
D&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 34
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DTC Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EquiVantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
EquiVantage Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Euroclear Participants . . . . . . . . . . . . . . . . . . . . . . . . . . 35
European Depositaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
European Depositories . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Final Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Global Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
S-48
<PAGE>
HEP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Insured Distribution Amount . . . . . . . . . . . . . . . . . . . . . . . . 11
Insured Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . 11
Loan Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Master Transfer Agreements . . . . . . . . . . . . . . . . . . . . . . . . 42
Monthly Remittance Amount . . . . . . . . . . . . . . . . . . . . . . . . . 33
Morgan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Mortgage Loan File . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgagor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 10
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 issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Owners of Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . 1
Preference Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Preference Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Property Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Purchase Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Reimbursement Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Relevant Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Remittance Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Remittance Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Schedule of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . 42
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Specified Subordinated Amount . . . . . . . . . . . . . . . . . . . . . . . 37
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sponsor's Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statistic Calculation Date . . . . . . . . . . . . . . . . . . . . . . . . 5
Structuring Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Subordinate Certificate Owners . . . . . . . . . . . . . . . . . . . . . . 13
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 1
S-49
<PAGE>
Subordinated Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Subordination Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . 37
Subordination Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Subordination Increase Amount . . . . . . . . . . . . . . . . . . . . . . . 38
Subordination Reduction Amount . . . . . . . . . . . . . . . . . . . . . . 38
Substitution Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Termination Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Third-Party Servicing Portfolio . . . . . . . . . . . . . . . . . . . . . . 18
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Weighted average life . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
S-50
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
EquiVantage Home Equity Loan Trust 1996-3 Class A-1, Class A-2 and Class A-3
(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>
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
A-1
<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
A-2
<PAGE>
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
A-3
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
- --------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
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 $2,298,210
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
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 $165,360
--------- -------- --------
--------- -------- --------
</TABLE>
See accompanying notes to financial statements.
A-5
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
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) $1,136,584
------- -------- --------- --------- ----------
------- -------- --------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
A-6
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
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 - - (3,008)
principle, net of tax
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.
A-7
<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.
A-8
<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 managements
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.
A-9
<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.
A-10
<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>
A-11
<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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
1995 COST VALUE
---- ----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
A-12
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED 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 1,839,566 25,809 (85,200) 1,780,175
subdivisions
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>
<CAPTION>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of
its investment portfolio concentrated in a single issuer or industry.
A-13
<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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
------- ------- -------
------- ------- -------
</TABLE>
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
-------- -------- -------
-------- -------- -------
</TABLE>
A-14
<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):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
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
-------- -------
-------- -------
</TABLE>
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.
A-15
<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.
A-16
<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.
A-17
<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.
A-18
<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
-------- ----- -------- -----
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
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 2,141,58 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.
A-19
<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):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
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
---------
---------
</TABLE>
A-20
<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):
<TABLE>
<CAPTION>
Net
Principal
Outstanding
-----------
<S> <C>
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
----------
----------
</TABLE>
(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):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
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 $16,844
-------
-------
</TABLE>
A-21
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
SIX MONTHS ENDED JUNE 30, 1996
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1996
Balance Sheets 1
Statements of Income 2
Statements of Cash Flows 3
Notes to Unaudited Interim Financial Statements 4
B-1
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
<TABLE>
<CAPTION>
($ IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturity securities, available for sale,
at fair value (amortized cost of $2,066,231 in
1996 and $2,043,453 in 1995) $2,057,812 $2,141,584
Short-term investments, at cost, which
approximates market 133,832 91,032
Cash 1,294 199
Accrued investment income 37,753 37,347
Reinsurance receivable 7,358 7,672
Deferred policy acquisition costs 93,100 94,868
Property, plant and equipment net of
accumulated depreciation of $14,094 in
1996 and $12,861 in 1995 5,573 6,314
Prepaid reinsurance premiums 156,055 162,088
Prepaid expenses and other assets 50,908 39,198
---------- ----------
Total assets $2,543,685 $2,580,302
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums 698,149 727,535
Losses and loss adjustment expenses 71,034 77,808
Ceded reinsurance payable 2,777 1,942
Accounts payable and accrued expenses 38,035 32,811
Due to parent 267 1,647
Current federal income taxes payable 67,077 51,296
Deferred federal income taxes payable 63,850 99,171
Payable for securities purchased 32,186 40,211
---------- ----------
Total liabilities 973,375 1,032,421
---------- ----------
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30,
1996 and at December 31, 1995: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized (losses) gains on fixed maturity
securities available for sale, net of tax (5,472) 63,785
Foreign currency translation adjustment (2,296) (1,499)
Retained earnings 1,229,067 1,136,584
---------- -----------
Total stockholder's equity 1,570,310 1,547,881
---------- ----------
Total liabilities and stockholder's equity $2,543,685 $2,580,302
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to interim financial statements
B-2
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
(UNAUDITED)
<S> <C> <C>
REVENUES:
Gross premiums written $ 45,481 $ 42,773
Ceded premiums (6,643) (5,965)
-------- --------
Net premiums written 38,838 36,808
Decrease in net unearned premiums 23,353 18,136
-------- --------
Net premiums earned 62,191 54,944
Net investment income 61,513 59,327
Net realized gains 8,348 17,446
-------- --------
Total revenues 132,052 131,717
-------- --------
EXPENSES:
Losses and loss adjustment expenses (2,702) 815
Policy acquisition costs 9,637 5,308
Other underwriting expenses 7,561 8,662
-------- --------
Total expenses 14,496 14,785
-------- --------
Income before provision for federal income taxes 117,556 116,932
Provision for federal income taxes 25,071 25,066
-------- --------
Net income $ 92,485 $ 91,866
-------- --------
-------- --------
</TABLE>
See accompanying notes to interim financial statements
B-3
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOW
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 92,485 $ 91,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 2,400 11,991
Amortization of fixed maturity securities 398 1,096
Policy acquisition costs deferred (8,565) (10,254)
Amortization of deferred policy
acquisition costs 10,333 5,308
Depreciation of fixed assets 1,233 1,167
Change in reinsurance receivable 314 4,569
Change in prepaid reinsurance premiums 6,033 5,877
Foreign currency translation adjustment (1,226) 972
Change in accrued investment income, prepaid
expenses and other assets (12,116) (3,483)
Change in unearned premiums (29,386) (24,013)
Change in losses and loss adjustment
expense reserves (6,774) (4,617)
Change in other liabilities 4,678 (11,076)
Change in current income taxes payabl 15,781 (9,625)
Net realized gains on investments (8,348) (17,446)
-------- --------
Net cash provided by operating activities 67,240 42,332
-------- --------
Investing activities:
Sales or maturities of fixed maturity securities 406,676 478,328
Purchases of fixed maturity securities (429,529) (413,181)
Sales or maturities (purchases) of short-term
investments, net (42,800) (102,414)
Purchases of property and equipment, net (492) (354)
------- --------
Net cash used for investing activities (66,145) (37,621)
------- --------
Increase (decrease) in cash 1,095 4,711
Cash at beginning of period 199 1,766
------- --------
Cash at end of period $ 1,294 $ 477
------- --------
------- --------
</TABLE>
See accompanying notes to interim financial statements
B-4
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
(Unaudited)
(1) BASIS OF PRESENTATION
The interim financial statements of Financial Guaranty
Insurance Company (the Company) in this report reflect all
adjustments necessary, in the opinion of management, for a
fair statement of (a) results of operations for the six
months ended June 30, 1996 and 1995, (b) the financial
position at June 30, 1996 and December 31, 1995, and (c)
cash flows for the six months ended June 30, 1996 and 1995.
These interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 1995 audited financial statements. The
1995 financial statements have been reclassified to conform to
the 1996 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") 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) 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 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.
B-5
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
The following is a reconciliation of the net income and stockholder's
equity of Financial Guaranty prepared on a GAAP basis to the corresponding
amounts reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------
1996 1995
-------------------------- --------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
GAAP basis amount $92,485 $1,570,310 $ 91,866 $1,441,820
Premium revenue recognition (4,061) (170,988) (9,905) (154,322)
Deferral of acquisition costs 1,768 (93,100) (4,946) (95,874)
Contingency reserve - (415,603) - (357,817)
Non-admitted assets - (4,837) - (6,579)
Case-basis losses incurred and
salvage recoverable (3,394) (3,446) 6,631 2,531
Portfolio loss reserves - 24,000 (10,900) 35,200
Deferral of income tax 2,400 66,796 11,991 57,466
Unrealized gains on fixed maturity
securities held at fair value, net
of taxes - 5,472 - (27,827)
Profit commission 1,273 (4,471) 4,909 (3,931)
Contingency reserve tax deduction - 85,176 - 78,196
Provision for unauthorized reinsurance - - - (266)
Allocation of tax benefits due to
Parent's net operating loss to the
Company (4) 10,287 244 9,898
-------- ---------- ------- --------
Statutory basis amount $ 90,467 $1,069,596 $89,845 $978,495
-------- ---------- ------- --------
-------- ---------- ------- --------
</TABLE>
B-6
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
(Unaudited)
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
- Statutory surplus after dividends may not be less than
the minimum required paid-in capital, which was
$2,100,000 in 1996.
- Dividends may not exceed the lesser of 10 percent of
its surplus or 100 percent of adjusted net investment
income, as defined therein, for the twelve month
period ending on the preceding December 31, without
the prior approval of the Superintendent of the New
York State Insurance Department.
The amount of the Company's surplus available for dividends
during 1996 is approximately $106.2 million.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (21.3
percent and 21.4 percent for the six months ended June 30,
1996 and 1995, respectively) is less than the statutory
corporate tax rate (35 percent in 1996 and 1995) on ordinary
income due to permanent differences between financial and
taxable income, principally tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting
Standards No. 113 ("SFAS 113"), "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration
Contracts", adopted in 1993, the Company reports assets
and liabilities relating to reinsured contracts gross of the
effects of reinsurance. Net premiums earned are shown net
of premiums ceded of $12.7 million and $11.6 million,
respectively, for the six months ended June 30, 1996 and 1995.
B-7
<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 OF CONTENTS
Caption Page
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
Cross-Collateralization . . . . . . 50
Overcollateralization . . . . . . . 50
Agreements . . . . . . . . . 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
2
<PAGE>
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
7
<PAGE>
Securities wil 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
8
<PAGE>
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,
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
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."
13
<PAGE>
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.
14
<PAGE>
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,
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
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
18
<PAGE>
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
19
<PAGE>
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
20
<PAGE>
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
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.
21
<PAGE>
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).
22
<PAGE>
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.
23
<PAGE>
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
24
<PAGE>
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."
25
<PAGE>
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
26
<PAGE>
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
27
<PAGE>
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
28
<PAGE>
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
29
<PAGE>
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."
30
<PAGE>
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'
31
<PAGE>
notice to the Sub-Servicer without cause upon payment ofan 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.
32
<PAGE>
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.
33
<PAGE>
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;
34
<PAGE>
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.
35
<PAGE>
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.
36
<PAGE>
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.
37
<PAGE>
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
38
<PAGE>
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
31
<PAGE>
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
40
<PAGE>
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
41
<PAGE>
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;
42
<PAGE>
(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.
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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
46
<PAGE>
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.
47
<PAGE>
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.
48
<PAGE>
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.
49
<PAGE>
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
50
<PAGE>
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
51
<PAGE>
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.
52
<PAGE>
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
53
<PAGE>
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
54
<PAGE>
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,
55
<PAGE>
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
56
<PAGE>
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.
57
<PAGE>
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."
58
<PAGE>
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
59
<PAGE>
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."
60
<PAGE>
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
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
61
<PAGE>
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
62
<PAGE>
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
63
<PAGE>
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
64
<PAGE>
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.
65
<PAGE>
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
66
<PAGE>
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"
67
<PAGE>
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.
68
<PAGE>
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.
69
<PAGE>
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
ontinue 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
70
<PAGE>
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
71
<PAGE>
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.
72
<PAGE>
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
73
<PAGE>
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.
74
<PAGE>
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.
75
<PAGE>
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
76
<PAGE>
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).
77
<PAGE>
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.
78
<PAGE>
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
79
<PAGE>
("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.
80
<PAGE>
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.
81
<PAGE>
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.
82
<PAGE>
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:
83
<PAGE>
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.
84
<PAGE>
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.
85
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
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
86
<PAGE>
Page
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
87
<PAGE>
Page
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
88
<PAGE>
Page
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
89
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Loan Pool................................................ S-19
Prepayment and Yield Considerations................................... S-24
Use of Proceeds....................................................... S-30
The Sponsor, The Servicer and The Sub-Servicer........................ S-30
The Originators....................................................... S-32
Description of the Certificates....................................... S-32
The Certificate Insurance Policy...................................... S-39
The Certificate Insurer............................................... S-40
The Pooling and Servicing Agreement................................... S-42
Certain Federal Income Tax Consequences............................... S-44
ERISA Considerations.................................................. S-45
Ratings............................................................... S-46
Legal Investment Considerations....................................... S-46
Underwriting.......................................................... S-47
Experts............................................................... S-47
Certain Legal Matters................................................. S-47
Index of Principal Prospectus Supplement Definitions.................. S-48
Appendix I Global Clearance, Settlement and Tax Documentation
Procedures........................................................... I-1
Appendix A -- Audited Financial Statements (Certificate Insurer)...... A-1
Appendix B -- Unaudited Financial Statements (Certificate Insurer).... B-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 1996-3
$74,248,000
CLASS A-1 FIXED RATE CERTIFICATES
6.850% PASS-THROUGH RATE
$10,000,000
CLASS A-2 FIXED RATE CERTIFICATES
7.275% PASS-THROUGH RATE
$15,752,000
CLASS A-3 FIXED RATE CERTIFICATES
7.700% PASS-THROUGH RATE
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE INC.
SERVICER
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[LOGO]
PRUDENTIAL SECURITIES INCORPORATED
SALOMON BROTHERS INC
August 20, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
