<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 3, 1997)
- -------------------------------------------------------------------------------
[LOGO]
$100,000,000
EQUIVANTAGE HOME EQUITY LOAN TRUST 1997-2
$23,800,000 6.575% CLASS A-1 FIXED RATE CERTIFICATES
$15,600,000 6.800% CLASS A-2 FIXED RATE CERTIFICATES
$11,683,000 7.275% CLASS A-3 FIXED RATE CERTIFICATES
$5,675,000 7.000% CLASS A-4 FIXED RATE CERTIFICATES
$43,242,000 CLASS A-5 ADJUSTABLE RATE CERTIFICATES
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-2
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE INC.
SERVICER
-----------------------
The Home Equity Loan Asset-Backed Certificates, Series 1997-2 (the
"Certificates"), will consist of the Class A-1 Fixed Rate Certificates (the
"Class A-1 Certificates"), the Class A-2 Fixed Rate Certificates (the "Class
A-2 Certificates"), the Class A-3 Fixed Rate Certificates (the "Class A-3
Certificates"), the Class A-4 Fixed Rate Certificates (the "Class A-4
Certificates") and the Class A-5 Adjustable Rate Certificates (the "Class A-5
Certificates" and, together with the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the Class A-4 Certificates, the
"Class A Certificates") and one or more classes of subordinate certificates
(collectively, the "Subordinate Certificates" and, together with the Class A
Certificates, the "Certificates"). Only the Class A Certificates are offered
hereby. The Certificates will represent undivided ownership interests in one
of two groups of closed-end mortgage loans (the "Mortgage Loans") held by the
EquiVantage Home Equity Loan Trust 1997-2 (the "Trust"). The Trust will be
created pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") among EquiVantage Acceptance Corp., in its capacity as
the sponsor (the "Sponsor") of the Trust, EquiVantage Inc., in its capacity
as servicer (the "Servicer") of the Mortgage Loans, and Norwest Bank
Minnesota, National Association, as Trustee.
For a discussion of certain risk factors regarding an investment in the Class
A Certificates offered hereby, see "Risk Factors" starting on page S-17
hereof and on page 16 of the accompanying Prospectus.
[LOGO] Financial Guaranty Insurance
Company
FGIC is a registered service mark used by Financial Guaranty Insurance Company,
a private company not affiliated with any U.S. Government agency
--------------------------------------------------
The Underwriters have agreed to purchase the Class A-1 Certificates from the
Sponsor at 99.96875% of the principal amount thereof, the Class A-2
Certificates from the Sponsor at 99.96875% of the principal amount thereof,
the Class A-3 Certificates from the Sponsor at 99.984375% of the principal
amount thereof, the Class A-4 Certificates from the Sponsor at 99.96875% of
the principal amount thereof and the Class A-5 Certificates from the Sponsor
at 100% of the principal amount thereof (representing $100,263,793.57
aggregate proceeds to the Sponsor, before deducting expenses payable by the
Sponsor estimated at $500,000), plus accrued interest, if any, from June 1,
1997 for the Class A-1 Certificates, the Class A-2 Certificates, the Class
A-3 Certificates and the Class A-4 Certificates and from June 27, 1997 for
the Class A-5 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. In addition to the profits on resale received by the
Underwriters in connection with such at the market offerings, the Sponsor has
agreed to pay the Underwriters a fee of 0.30% of the aggregate original
principal amount of the Class A Certificates. 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.
--------------------------
THE CLASS A CERTIFICATES WILL REPRESENT BENEFICIAL OWNERSHIP INTERESTS ONLY
IN THE TRUST AND WILL NOT REPRESENT ANY INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE SERVICER, ANY ORIGINATOR, THE TRUSTEE, THE CERTIFICATE INSURER
OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE 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 Bank, societe
anonyme and the Euroclear System on or about June 27, 1997 against payment in
immediately available funds.
MORGAN STANLEY DEAN WITTER PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus Supplement is June 19, 1997
- -------------------------------------------------------------------------------
<PAGE>
(continued from cover)
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 and adjustable-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 pool of
Mortgage Loans will be divided into two groups (each, a "Mortgage Loan
Group"). Distributions on the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates and Class A-4 Certificates will be derived primarily
from amounts received, collected or recovered in respect of the Mortgage Loan
Group comprised entirely of Mortgage Loans bearing fixed interest rates (the
"Fixed Rate Group"). Distributions on the Class A-5 Certificates will be
derived primarily from amounts received, collected or recovered in respect of
the Mortgage Loan Group comprised entirely of Mortgage Loans bearing interest
at rates that are subject to periodic adjustment (the "Adjustable Rate
Group").
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 Cedel Bank, societe
anonyme ("Cedel") or the Euroclear System ("Euroclear") in Europe. The Class
A Certificates will be offered in Europe and the United States.
The Sponsor has obtained a financial guaranty insurance policy (the
"Certificate Insurance Policy") from Financial Guaranty Insurance Company
(the "Certificate Insurer"), which policy will unconditionally and
irrevocably guarantee payment of amounts due to the registered holders 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 July 25, 1997.
One or more elections will be made to treat the Trust as one or more "real
estate mortgage investment conduits" ("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 "Material Federal Income
Tax Consequences" in the Prospectus.
There is no secondary market for the Class A Certificates prior to the
offering thereof and the Class A Certificates will not be listed on any
national securities exchange. There can be no assurance that a secondary
market for the Class A Certificates will develop, or if one does develop,
that it will offer sufficient liquidity of investment or will continue.
Morgan Stanley & Co. Incorporated and Prudential Securities Incorporated (the
"Underwriters") intend, but are not obligated, to make a market in the Class
A Certificates.
--------------------
The Class A Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by the Sponsor pursuant to its
Prospectus dated June 3, 1997 of which this Prospectus Supplement is a part
and that accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering that is not contained herein,
and prospective investors are urged to read the Prospectus and this
Prospectus Supplement in full. Sales of Class A Certificates may not be
consummated unless the prospective investor has received both this Prospectus
Supplement and the Prospectus.
Reference is made to the Index of Principal Terms herein for the location in
this Prospectus Supplement of the definitions of certain capitalized terms
used herein, and reference is also made to the Index of Principal Definitions
in the Prospectus for the location in the Prospectus of the definitions of
certain capitalized terms used but not otherwise defined herein.
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.
ii
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CLASS A
CERTIFICATES, INCLUDING PURCHASES OF THE CLASS A CERTIFICATES TO STABILIZE
ITS MARKET PRICE AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
iii
<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 June 3, 1997
and this Prospectus Supplement. For further information, reference is made to
the Registration Statement 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; Seven
World Trade Center, 13th Floor, New York, New York 10048; and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of the Registration Statement 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. Electronic filings made through
the Electronic Data Gathering Analysis and Retrieval System are publicly
available through the Commission's Web Site (http://www.sec.gov).
REPORTS TO CERTIFICATE HOLDERS
So long as any Class A Certificate is 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 the 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
"Exchange Act"), 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-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Caption Page
- ------- ----
<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT............................... S-3
RISK FACTORS................................................... S-17
SPONSOR'S MORTGAGE LOAN PROGRAM................................ S-19
Delinquencies............................................... S-19
THE MORTGAGE LOAN GROUPS....................................... S-21
General..................................................... S-21
Difference Between Statistic Calculation Date
Mortgage Loan Groups and Closing Date
Mortgage Loan Groups..................................... S-21
Fixed Rate Group............................................ S-22
Adjustable Rate Group....................................... S-28
Interests Payments on the Mortgage Loans.................... S-37
PREPAYMENT AND YIELD
CONSIDERATIONS................................................. S-37
Projected Prepayments and Yields for Class A
Certificates................................................ S-37
Payment Delay Feature of Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates and
Class A-4 Certificates...................................... S-47
USE OF PROCEEDS................................................ S-47
THE SPONSOR, THE SERVICER
AND THE SUB-SERVICER........................................ S-47
THE ORIGINATORS................................................ S-49
DESCRIPTION OF THE CERTIFICATES................................ S-50
General..................................................... S-50
Payment Dates and Distributions............................. S-50
Book Entry Registration of the Class A Certificates......... S-51
Distributions............................................... S-54
Subordination of Class B Certificates....................... S-54
Cross-collateralization Provisions.......................... S-55
Overcollateralization and the Certificate
Insurance Policy......................................... S-57
Credit Enhancement Does Not Apply to Prepayment Risk........ S-57
Class A Distributions and Insured Payments
to the Owners of the Class A Certificates................ S-57
Flow of Funds............................................... S-58
Certain Activities.......................................... S-60
THE CERTIFICATE INSURANCE POLICY............................... S-60
THE CERTIFICATE INSURER........................................ S-61
General..................................................... S-61
Capitalization.............................................. S-62
</TABLE>
<TABLE>
<CAPTION>
Caption Page
- ------- ----
<S> <C>
THE POOLING AND SERVICING AGREEMENT............................ S-63
Formation of the Trust...................................... S-63
Sale of Mortgage Loans...................................... S-63
Governing Law............................................... S-64
Termination of the Trust.................................... S-64
Optional Termination........................................ S-64
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES................................................ S-65
REMIC Elections............................................. S-65
Class A-5 Certificates...................................... S-66
ERISA CONSIDERATIONS........................................... S-66
RATINGS........................................................ S-68
LEGAL INVESTMENT CONSIDERATIONS................................ S-68
UNDERWRITING................................................... S-68
EXPERTS........................................................ S-69
CERTAIN LEGAL MATTERS.......................................... S-69
INDEX OF PRINCIPAL TERMS....................................... S-70
ANNEX I........................................................ I-1
APPENDIX A..................................................... A-1
APPENDIX B..................................................... B-1
</TABLE>
S-2
<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.
<TABLE>
<S> <C>
Issuer......................... EquiVantage Home Equity Loan Trust 1997-2.
Securities Offered............. The Class A-1 Fixed Rate Certificates (the
"Class A-1 Certificates"), the Class A-2
Fixed Rate Certificates (the "Class A-2
Certificates"), the Class A-3 Fixed Rate
Certificates (the "Class A-3 Certificates"),
the Class A-4 Fixed Rate Certificates (the
"Class A-4 Certificates") and the Class A-5
Adjustable Rate Certificates (the "Class A-5
Certificates," together with the Class A-1
Certificates, the Class A-2 Certificates, the
Class A-3 Certificates and the Class A-4
Certificates, the "Class A Certificates").
Sponsor........................ EquiVantage Acceptance Corp., a Delaware
corporation (the "Sponsor"). The Sponsor's
principal office is located at 13111
Northwest Freeway, Suite 301, Houston, Texas
77040, and its phone number is (713)
895-1957.
Servicer....................... EquiVantage Inc., a Delaware corporation (in
such capacity, the "Servicer"). The
Servicer's principal office is located at
13111 Northwest Freeway, Suite 300, Houston,
Texas 77040. Its telephone number is (713)
895-1900.
Sub-Servicer................... Transworld Mortgage Corporation, a Texas
corporation (the "Sub-Servicer"). The Sub-
Servicer's principal office is located at
13111 Northwest Freeway, Suite 600, Houston,
Texas 77040.
Trustee........................ Norwest Bank Minnesota, National Association
(the "Trustee").
Originators.................... The Mortgage Loans to be acquired by the
Trust from the Sponsor will be acquired by
the Sponsor from EquiVantage Inc., which has
heretofore originated the Mortgage Loans or
acquired the Mortgage Loans from certain
unaffiliated originators (the "Originators").
See "Mortgage Loan Program" in the
Prospectus.
Cut-off Date................... The close of business on June 1, 1997 (the
"Cut-off Date").
Closing Date................... On or about June 27, 1997 (the "Closing
Date").
Description of the Certificates The Home Equity Loan Asset-Backed
Certificates, Series 1997-2 (the
"Certificates"), will consist of the Class
A-1 Certificates, the Class A-2 Certificates,
the Class A-3 Certificates, the Class A-4
Certificates, the Class A-5 Certificates, a
subordinate class of certificates (the "Class
B Certificates") and one or more classes of
Residual Certificates (the "Class R
Certificates"). Only the Class A Certificates
are offered hereby.
The Certificates will represent undivided
beneficial ownership interests in the Trust
to be created pursuant to a pooling and
servicing agreement (the "Pooling and
Servicing Agreement") to
S-3
<PAGE>
be dated as of June 1, 1997 among the
Sponsor, the Servicer and the Trustee. Only
the Class A Certificates are offered hereby.
The assets of the Trust will include two
investment pools (each, a "Mortgage Loan
Group"). Distributions on the Class A-1
Certificates, Class A-2 Certificates, Class
A-3 Certificates and Class A-4 Certificates
will be derived primarily from amounts
received, collected or recovered in respect
of the Mortgage Loan Group comprised entirely
of Mortgage Loans bearing fixed interest
rates (the "Fixed Rate Group"). Distributions
on the Class A-5 Certificates will be derived
primarily from amounts received, collected or
recovered in respect of the Mortgage Loan
Group comprised entirely of Mortgage Loans
bearing interest at rates that are subject to
periodic adjustment (the "Adjustable Rate
Group").
The "Final Scheduled Payment Dates" for the
Class A Certificates are set forth below,
although it is anticipated that the actual
final payment date for each class of Class A
Certificates will occur significantly earlier
than such Final Scheduled Payment Date. See
"Prepayment and Yield Considerations" herein.
</TABLE>
<TABLE>
<CAPTION>
PAYMENT DATE
OCCURRING IN
---------------
<S> <C>
Class A-1 Certificates..............April 2012
Class A-2 Certificates............January 2019
Class A-3 Certificates...............July 2028
Class A-4 Certificates...............July 2028
Class A-5 Certificates............January 2027
Each class of Class A Certificates is
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" herein.
The Mortgage Loans........... The statistical information presented in this
Prospectus Supplement concerning the two
Mortgage Loan Groups is as of the close of
business on May 31, 1997 (the "Statistic
Calculation Date"). The statistical
information presented herein is based on the
number and the principal balances of the
Mortgage Loans in each Mortgage Loan Group as
of such date. Some amortization of the
Mortgage Loans in each Mortgage Loan Group
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 related
final Mortgage Loan Group, and may not be
included in the related final Mortgage Loan
Group. As a result of the foregoing, the
statistical distribution of the
characteristics of the Mortgage Loans in the
final Mortgage Loan Groups as of the
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Closing Date 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.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are measured by the aggregate principal
balance of the Mortgage Loans of the related
Mortgage Loan Group as of the Statistic
Calculation Date.
General................... The aggregate principal balance of the
Mortgage Loans as of the Statistic
Calculation Date is $56,775,402.14 in the
case of the Fixed Rate Group and
$44,196,157.20 in the case of the Adjustable
Rate Group. The Sponsor expects that, as of
the Closing Date, the Fixed Rate Group will
represent approximately $56,760,000 in
Mortgage Loans and the Adjustable Rate Group
will represent approximately $44,190,000 in
Mortgage Loans.
Approximately 88.72% of the Mortgage Loans
are home equity loans, i.e., loans used (x)
to refinance an existing mortgage loan on
more favorable terms, (y) to consolidate
debt or (z) to obtain cash proceeds by
borrowing against the Mortgagor's equity in
the related Mortgaged Property; the
remaining Mortgage Loans are "purchase
money" loans, the proceeds of which were
used to purchase the related Mortgaged
Property. The Mortgage Loans to be sold to
the Trust by the Sponsor consisted, as of
the Statistic Calculation Date, of 1,399
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 28 states. The Mortgage Loans are
secured by liens on real property of which,
in the case of the Fixed Rate Group,
approximately 95.09% by principal balance
are first liens and approximately 4.91% ar
junior liens and, in the case of the
Adjustable Rate Group, approximately 99.55%
by principal balance are first liens and
approximately 0.45% are junior liens. The
Mortgage Loans in the Trust are all
closed-end mortgage loans in that the
mortgagee is not required to make future
advances thereunder. All of the Mortgage
Loans are Actuarial Loans, as described
under "The Mortgage Loan Groups --Interest
Payments on the Mortgage Loans" herein.
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
S-5
<PAGE>
that it services for itself and others. See
"Description of the Securities -- Collection
and Other Servicing Procedures" in the
Prospectus.
Ballon Loans............... As of the Statistic Calculation Date,
approximately 35% of the Mortgage Loans in
the Fixed Rate Group by aggregate principal
balance (19.64% of the aggregate Loan
Balances) are Balloon Loans. No Mortgage
Loan in the Adjustable Rate Group is a
Balloon Loan.
Program Loans.............. As of the Statistic Calculation Date,
approximately 7.80% of the Mortgage Loans in
the Fixed Rate Group by aggregate principal
balance and approximately 0.25% of the
Mortgage Loans in the Adjustable Rate Group
by aggregate principal balance (together,
4.50% of the aggregate Loan Balances) are
Program Loans. A "Program Loan" is a
Mortgage Loan evidenced by a Note amended to
reflect the participation of the borrower
thereunder in a loan program (the "Incentive
Program") created by the Sponsor to
encourage timely mortgage loan payments from
certain borrowers through the use of an
automatic interest rate reduction mechanism,
as more fully described under "Risk Factors
herein.
Original Class A-1 Certificate
Principal Balance.............. $23,800,000.00.
Original Class A-2 Certificate
Principal Balance.............. $15,600,000.00.
Original Class A-3 Certificate
Principal Balance.............. $11,683,000.00.
Original Class A-4 Certificate
Principal Balance.............. $5,675,000.00.
Original Class A-5 Certificate
Principal Balance.............. $43,242,000.00.
Class A-1 Pass-Through Rate.... The Class A-1 Pass-Through Rate will be
6.575% per annum.
Class A-2 Pass-Through Rate.... The Class A-2 Pass-Through Rate will be
6.800% per annum.
Class A-3 Pass-Through Rate.... The Class A-3 Pass-Through Rate will be
equal to (x) with respect to any Payment
Date that occurs prior to the Step-Up
Payment Date, 7.275% per annum, and (y) with
respect to any Payment Date thereafter,
7.775% per annum.
Class A-4 Pass-Through Rate.... The Class A-4 Pass-Through Rate will be
equal to (x) with respect to any Payment
Date that occurs prior to the Step-Up
Payment Date, 7.000% per annum, and (y) with
respect to any Payment Date thereafter,
7.500% per annum.
Class A-5 Pass-Through Rate.... The Class A-5 Pass-Through Rate for the
initial Accrual Period will be a per annum
rate equal to LIBOR plus 0.22%. The Class
A-5 Pass-Through Rate for each subsequent
Accrual Period will be a per annum rate
equal to the lesser of (i) for each Accrual
Period ending prior to the Step-Up Payment
Date, LIBOR plus 0.22%, and for each Accrual
Period ending thereafter, LIBOR plus 0.44%
and (ii) the Available Funds Cap. "LIBOR" is
the London interbank offered rate for
one-month United States
S-6
<PAGE>
dollar deposits, calculated as described
under "Description of the Certificates
--Flow of Funds" herein, determined on the
second Business Day preceding the first day
of any Accrual Period as provided herein
(or, in the case of the first Accrual
Period, the second business day prior to the
Closing Date).
The "Step-Up Payment Date" is the second
Payment Date which immediately follows the
Clean-Up Call Date.
The "Available Funds Cap" will be, with
respect to any Payment Date and the Class
A-5 Certificates, the per annum rate equal
to the percentage obtained by (I) dividing
(x) the amount of interest included in
monthly payments due on the Mortgage Loans
in the Adjustable Rate Group during the
related Remittance Period, reduced by the
sum of (i) the Servicing Fee and the Trustee
Fee with respect to the Mortgage Loans in
the Adjustable Rate Group for such
Remittance Period, (ii) the premium due to
the Certificate Insurer for such Payment
Date with respect to the Certificate
Insurance Policy relating to the Class A-5
Certificates, and (iii) in the case of each
Payment Date occurring after the Payment
Date in November 1997, an amount equal to
one-twelfth of 0.75% multiplied by the
aggregate principal balance of the Mortgage
Loans in the Adjustable Rate Group as of the
first day of such Remittance Period, by (y)
the product of (i) the then outstanding
aggregate principal balance of the Class A-5
Certificates as of the first day of the
Accrual Period and (ii) the actual number of
days elapsed during such Accrual Period
divided by 360 and (II) multiplying the
result by 100. See "Description of the
Certificates --Flow of Funds" herein.
The "Class A-5 Formula Pass-Through Rate"
for a Payment Date is the rate determined by
clause (i) of the definition of "Class A-5
Pass-Through Rate" on such Payment Date.
The Pooling and Servicing Agreement provides
that if, on any Payment Date, the Class A-5
Pass-Through Rate is less than the Class A-5
Formula Pass-Through Rate, then the amount
of any such shortfall will be payable from
Net Monthly Excess Cashflow in amounts
otherwise available for distribution to the
Servicer or the Trustee on account of
certain reimbursable amounts, or to the
Owners of the Subordinate Certificates
following the satisfaction of the
overcollateralization and
cross-collateralization requirements on such
Payment Date, and, if not paid from such
amounts on such Payment Date, will be
carried forward and be due and payable to
the Owners of the Class A-5 Certificates on
future Payment Dates and shall accrue
interest at the Class A-5 Formula
Pass-Through Rate, until paid (such
shortfall, together with such accrued
interest thereon, the "Available Funds Cap
Carry-Forward Amount").
The Certificate Insurance Policy does not
guarantee payment of any Available Funds Cap
Carry-Forward Amount (or any interest
thereon), nor will the ratings assigned to
the Class A-5 Certificates address the
likelihood of the payment of the Available
Funds Cap Carry-Forward Amount. The payment
of
S-7
<PAGE>
such amount will be funded only from Net
Monthly Excess Cashflow. Upon the occurrence
of certain trigger events, all Net Monthly
Excess Cashflow may be required to be
applied to increase the level of
overcollateralization, leaving no amounts
remaining for distributions in respect of
any Available Funds Cap Carry-Forward
Amount. No Available Funds Cap Carry-Forward
Amount will be due to the Owners of the
Class A-5 Certificates once the Class A-5
Certificate Principal Balance has been
reduced to zero.
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 July 25, 1997, to the Owners
of Record. See "Description of the
Certificates --General" and "-- Payment
Dates and Distributions" herein. With
respect to any Payment Date, the "Owners of
Record" of the Class A Certificates shall be
such Owners as of the last day of the
calendar month immediately preceding the
calendar month in which such Payment Date
occurs (or with respect to the first Payment
Date, such Owners as of the Closing Date),
whether or not such day is a Business Day.
A "Business Day" means any day that is not a
Saturday, Sunday or other day on which
commercial banking institutions in New York,
Texas or the city in which the corporate
trust office of the Trustee is located
(initially, Minneapolis, Minnesota) are
authorized or obligated by law or executive
order to be closed.
For each Payment Date, the interest due with
respect to the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3
Certificates and the Class A-4 Certificates
will be the interest that has accrued thereon
at the applicable Class A-1 Pass-Through Rate,
Class A-2 Pass-Through Rate, Class A-3
Pass-Through Rate and Class A-4 Pass-Through
Rate, respectively, during the calendar
month immediately preceding the calendar
month in which such Payment Date occurs, and
the interest due with respect to the Class
A-5 Certificates will be the interest that
has accrued thereon at the applicable Class
A-5 Pass-Through Rate from and including the
preceding Payment Date (or, in the case of
the first Payment Date, from and including
the Closing Date) to but excluding the
current Payment Date. Each period referred
to in the prior sentence relating to the
accrual of interest is the "Accrual Period"
for the related class of Class A
Certificates. All calculations of interest
on the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates and
Class A-4 Certificates will be made on the
basis of a 360-day year assumed to consist
of twelve 30-day months, and all
calculations of interest on the Class A-5
Certificates will be made on the basis of
the actual number of days elapsed in the
related Accrual Period, divided by 360.
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
S-8
aggregate amount of interest accrued on such
class of Class A Certificates during the
related Accrual Period at the related
Pass-Through Rate (but in the case of the
Class A-5 Certificates, not the amount of
any Available Funds Cap Carry-Forward Amount
or any interest thereon) relating to such
class of Class A Certificates from prior
periods.
Distributions of Principal..... The Owners of each class of Class A
Certificates will be entitled to receive
monthly distributions of principal on each
Payment Date that generally reflect
unscheduled collections of principal (e.g.,
prepayments) received in respect of the
related Mortgage Loan Group during the
related Remittance Period, and scheduled
collections of principal due and collected
in respect of the related Mortgage Loan
Group during the related Remittance Period,
in each case to the extent described in this
Prospectus Supplement. 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.
The Pooling and Servicing Agreement does not
require that the amount of any loss realized
on a Liquidated Mortgage Loan (a "Realized
Loss") during a Remittance Period be
distributed to the Owners of a class of
Class A Certificates in respect of the
related Mortgage Loan Group on the Payment
Date that immediately follows the event of
such loss. However, based on the
subordination provisions of the Trust and
the Certificate Insurance Policy, the Owners
of each class of related 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. With respect
to any Certificate and any date, the
"Certificate Principal Balance" is the
original certificate principal balance of
such Certificate reduced by all amounts
distributed on such Certificate in reduction
of principal on prior Payment Dates.
The subordination provisions of the Trust
result in acceleration of principal payments
on the Class A Certificates relative to the
ownership interests of the Mortgage Loans in
the Trust evidenced by the Class A
Certificates, which has the effect of
shortening the weighted average lives of the
Class A Certificates. See "Description of
the Certificates --Subordination of Class B
Certificates" and "Prepayment and Yield
Considerations" herein.
The Pooling and Servicing Agreement
generally defines the "Class A Principal
Distribution Amount" for the Class A
Certificates issued in respect of a Mortgage
Loan Group with respect to each Payment Date
as being the sum, without duplication, of
all amounts received, recovered or collected
on the Mortgage Loans in the related
Mortgage Loan Group in respect of principal
(including amounts received from the
Sponsor, the Servicer or any Originator in
connection with a repurchase, purchase or
substitution of such Mortgage Loans or
S-9
<PAGE>
termination of the Trust) during the related
Remittance Period, together with any
Subordination Deficit or any Subordination
Increase Amount relating to such Payment
Date, and less any Subordination Reduction
Amount relating to such Payment Date. See
"Description of the Certificates
--Cross-collateralization Provisions"
herein.
In no event will the Class A Principal
Distribution Amount for either Mortgage Loan
Group on any Payment Date be (x) less than
zero or (y) greater than the aggregate of
the then outstanding principal balances of
the related Class A Certificates.
With respect to any Payment Date, the
Certificate Insurer is obligated only to
cover the aggregate of the Class A Interest
Distribution Amounts for each class of Class
A Certificates and any Subordination Deficit
with respect to the related Mortgage Loan
Group for such Payment Date. The Certificate
Insurance Policy guarantees ultimate
recovery of 100% of the original Certificate
Principal Balance on each class of Class A
Certificates, but does not provide for
current payments of Realized Losses or other
shortfalls in recoveries on the Mortgage
Loans in a given Mortgage Loan Group.
A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which
(x) the Class A Certificate Principal
Balance of the Class A Certificates issued
in respect of the related Mortgage Loan
Group (not including any amount attributable
to the Available Funds Cap Carry-Forward
Amount), after taking into account all
distributions of principal with respect to
such 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 Loan Balances of the Mortgage
Loans in the related Mortgage Loan Group as
of the close of business on the last day of
the preceding Remittance Period; provided,
that with respect to the Final Scheduled
Payment Date for the Class A-5 Certificates,
the Subordination Deficit shall include, in
addition to amounts calculated as described
above with respect to the Class A-5
Certificates and the Adjustable Rate Group,
any additional amounts representing the
aggregate outstanding Certificate Principal
Balance of the Class A-5 Certificates plus
accrued interest thereon (but not including
any Available Funds Cap Carry-Forward
Amount), if the Servicer has not purchased
all of the outstanding Mortgage Loans in the
Adjustable Rate Group as of such Payment
Date in accordance with the Pooling and
Servicing Agreement.
With respect to the Class A Certificates
issued in respect of a Mortgage Loan Group
and any Payment Date, the sum of the Class A
Interest Distribution Amount for such
Certificates and the portion, if any, of the
Class A Principal Distribution Amount to
which such Class A Certificates are then
entitled is the "Class A Required
Distribution Amount" for such Payment Date.
S-10
<PAGE>
The actual amount distributed with respect
to the Class A Certificates on any Payment
Date is the "Class A Distribution Amount"
for such Certificates for such Payment Date.
Generally, the Class A-4 Certificates are
entitled to receive payments of principal on
each Payment Date in an amount equal to the
product of the applicable Class A-4 Lockout
Percentage and the Class A-4 Pro Rata
Distribution Amount for such Payment Date
until the Class A-4 Principal Amount is
reduced to zero.
The "Class A-4 Lockout Percentage" for each
Payment Date is as follows :
</TABLE>
<TABLE>
<CAPTION>
Payment Date Class A-4
Occuring In Lockout Percentage
-------------- ------------------
<S> <C>
July 1997--June 2000 0%
July 2000--June 2002 45%
July 2002--June 2003 80%
July 2003--June 2004 100%
July 2004 and thereafter 300%
</TABLE>
<TABLE>
<S> <C>
The "Class A-4 Pro Rata Distribution Amount"
for any Payment Date means an amount equal to
the product of (i) a fraction, the numerator
of which is the Class A-4 Certificate
Principal Balance and the denominator of
which is the aggregate of the Certificate
Principal Balances of the Class A
Certificates issued in respect of the Fixed
Rate Group, in each case immediately prior to
such Payment Date, and (ii) the portion of
the Class A Principal Distribution Amount
collected in respect of such Mortgage Loan
Group.
The Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates are
"sequential pay" classes. Generally, on each
Payment Date, any portion of the Class A
Principal Distribution Amount collected in
respect of the Fixed Rate Group and not
otherwise payable to the Class A-4
Certificates will be allocated first to the
Class A-1 Certificates, until the Class A-1
Certificate Principal Balance has been
reduced to zero, second to the Class A-2
Certificates, until the Class A-2 Certificate
Principal Balance has been reduced to zero,
and third to the Class A-3 Certificates,
until the Class A-3 Certificate Principal
Balance has been reduced to zero. Thereafter,
to the extent that distributions of principal
described above in respect of the Class A-4
Certificates have not resulted in the
reduction of the Class A-4 Certificate
Principal Balance to zero, any additional
principal collected in respect of the Fixed
Rate Group will be applied to the Class A-4
Certificates until the Class A-4 Certificate
Principal Balance has been reduced to zero.
Generally, the Class A-5 Certificates receive
payments of principal on each Payment Date in
an amount equal to the portion of the Class A
Principal Distribution Amount collected in
respect of the Adjustable Rate Group.
S-11
<PAGE>
With respect to any Payment Date, the sum of
the Class A Interest Distribution Amount for
the Class A Certificates and any
Subordination Deficit with respect to the
related Mortgage Loan Group for such Payment
Date is the "Insured Distribution Amount" for
such Payment Date.
Credit Enhancement............. The Credit Enhancement provided for the
benefit of the Owners of the Class A
Certificates consists of (x) the
overcollateralization and cross-
collateralization mechanics which utilize the
internal cash flows of the Trust and (y) the
Certificate Insurance Policy.
Overcollateralization and
Cross-collateralization... The subordination provisions of the Trust
result in acceleration of the Class A
Certificates relative to the amortization of
the Mortgage Loans in the early months of the
transaction and the beneficial interests in
the Trust evidenced thereby. The accelerated
amortization is achieved by applying the
interest received during the related
Remittance Period on the Mortgage Loans
included in the related Mortgage Loan Group
in excess of that required to cover the Class
A Interest Distribution Amount for the
related Class A Certificates on the
applicable Payment Date to the reduction of
the Certificate Principal Balance of such
Class A Certificates on the related Payment
Date. This acceleration feature is intended,
with respect to each Mortgage Loan Group, to
result in overcollateralization in that the
aggregate principal balances of the Mortgage
Loans in the related Mortgage Loan Group are
expected to exceed the Certificate Principal
Balances of the related Class A Certificates.
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.
Subject to certain floors, caps and triggers,
the required level of overcollateralization
with respect to a Mortgage Loan Group may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the related 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 of the
related Class A Certificates to reduce the
actual level of overcollateralization to its
required level.
In addition to the foregoing, the Pooling and
Servicing Agreement provides that such excess
interest, together with certain other excess
amounts, generated by one Mortgage Loan Group
may be used to fund shortfalls in Available
Funds in the other Mortgage Loan Group,
subject to certain prior requirements of such
Mortgage Loan Group.
See "Description of the Certificates --
Overcollateralization and the Certificate
Insurance Policy" and "--
Cross-collateralization Provisions" herein.
S-12
<PAGE>
The Certificate Insurance
Policy..................... The Sponsor will obtain the Certificate
Insurance Policy (the "Certificate Insurance
Policy"), which is non-cancelable, 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
for each class of Class A Certificates
exceeds the related 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, nor does the Certificate
Insurance Policy insure the payment of any
Available Funds Cap Carry-Forward Amount. 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 -- Financial Guaranty
Insurance Policies" in the Prospectus.
The Trustee or paying agent will (i) receive
as attorney-in-fact of each Owner of each
class of Class A Certificates any Insured
Payment from the Certificate Insurer and (ii)
disburse the same to each Owner of each class
of Class A Certificates in accordance with
the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement will provide
that to the extent the Certificate Insurer
makes Insured Payments, either directly or
indirectly (as by paying through the Trustee
or a paying agent), to the Owners of the
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 (the "Certificate
Insurer").
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 amounts
held for future distributions on the Mortgage
Loans generally and are reimbursable from (i)
future collections on the Mortgage Loan that
gave rise to the Delinquency Advance, (ii)
Liquidation Proceeds for such Mortgage Loan
and (iii) certain excess moneys that 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 the Compensating Interest
with respect to any full or partial
Prepayment received on a Mortgage
S-13
<PAGE>
Loan during the related Remittance Period
out of its own funds without any right of
reimbursement therefor. 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 Cedel Bank, societe anonyme
("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, such Class A
Certificates will be evidenced by one or more
Class A Certificates of each class registered
in the name of Cede & Co. ("Cede"), as the
nominee of DTC or one of the relevant
depositories (collectively, the "European
Depositories"). Cross-market transfers
between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other,
will be effected in the DTC system 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 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 Certificates -- Book
Entry Registration of the Class A
Certificates" herein, Annex I to this
Prospectus Supplement and "Description of the
Securities -- Form of Securities" in the
Prospectus.
Monthly Servicing Fee.......... The Servicer 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 of 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
S-14
<PAGE>
Mortgage Loans (such amounts retained by the
Servicer, including any Base Servicing Fee,
the "Servicing Fee").
Trustee Fee................... The Trustee will receive a "Trustee Fee"
equal to one-twelfth of the product of 0.025%
and the outstanding principal amount of the
Class A Certificates.
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 "Description of the
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
generally equal to the aggregate Loan
Balances of the Mortgage Loans, together with
any unpaid accrued interest thereon, on any
Remittance Date on or after the Remittance
Date on which the then outstanding aggregate
Loan Balances of the Mortgage Loans in the
Trust has declined to 10% or less of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date. The first such
Remittance Date on which such option may be
exercised is the "Clean-Up Call Date". The
right of the 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
that is in default. See "The Pooling and
Servicing Agreement -- Optional Termination"
herein.
Ratings....................... It is a condition of the original issuance of
the Class A Certificates that each class of
Class A Certificates receives ratings of
"AAA" by Standard & Poor's Ratings Group, 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. The ratings assigned to the Class A-5
Certificates do not address the likelihood of
the payment of the "Available Funds Cap
Carry-Forward Amount." See "Prepayment and
Yield Considerations" and "Ratings" herein
and "Yield Considerations" in the Prospectus.
Federal Tax Aspects............ For 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. In addition, for federal income
tax purposes, the Class A-5 Certificates will
represent an undivided beneficial ownership
interest in an interest rate cap contract. A
class of Class R Certificates will be
designated as the "residual interest" with
respect to each REMIC
S-15
<PAGE>
election made by the Trust. Any other
classes of Subordinate Certificates that may
be issued will be designated as "regular
interests." See "Material Federal Income Tax
Consequences" herein and "Material Federal
Income Tax Consequences" 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.............. The Class A Certificates will not constitute
"mortgage related securities" for purposes of
SMMEA. See "Legal Investment Considerations"
herein and "Legal Investment Matters --
SMMEA" in the Prospectus.
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.
</TABLE>
S-16
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the factors set forth under "Risk Factors" in
the Prospectus) in connection with the purchase of the Class A Certificates.
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 of such Mortgage Loan). 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
that 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 85%.
Information is provided under "The Mortgage Loan Groups -- General" herein
with respect to the LTVs and CLTVs 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 LTVs or CLTVs of the Mortgage Loans determined as
of a date subsequent to the origination date will be the same or lower than the
LTVs or CLTVs 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 any collections.
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 (determined solely on the basis of statements made
by the borrowers at the time of origination of the related Mortgage Loan)
represent, as a percentage of the aggregate principal balance of the Mortgage
Loans as of the Statistic Calculation Date, approximately 5.13% of the Mortgage
Loans in the Fixed Rate Group and approximately 3.31% of the Mortgage Loans in
the Adjustable Rate Group. 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 borrower's residence.
Geographic Concentration of Mortgage Loans. Approximately 81.55% of the
aggregate Loan Balances, as of the Statistic Calculation Date, represent
Mortgage Loans in the Fixed Rate Group relating to Mortgaged Properties located
in eight states: Ohio (19.50%); Tennessee (19.05%); South Carolina (8.50%);
North Carolina (7.34%); Georgia (7.30%); Florida (7.22%); Michigan (6.56%); and
Indiana (6.08%). Approximately 68.66% of the aggregate Loan Balances, as of the
Statistic Calculation Date, represent Mortgage Loans in the Adjustable Rate
Group relating to
S-17
<PAGE>
Mortgaged Properties located in four states: Ohio (27.31%); Michigan
(26.24%); Tennessee (8.94%); and Illinois (6.17%).
Concentration of Balloon Loans. As of the Statistic Calculation Date,
approximately 35% of the Mortgage Loans in the Fixed Rate Group by aggregate
principal balance (19.64% of the aggregate Loan Balances) are Balloon Loans. No
Mortgage Loan in the Adjustable Rate Group is a Balloon Loan. Each Mortgage Loan
that is a Balloon Loan has its "balloon" payment due not less than 15 years
after the origination date of such Balloon Loan. See "Risk Factors -- Risks
Related to the Mortgage Loans -- Decline in Property Values and Non-Standard
Loan Terms -- Risk of Losses Associated with Balloon Loans" in the Prospectus.
Program Loans. As of the Statistic Calculation Date, approximately 7.80% of
the Mortgage Loans in the Fixed Rate Group by aggregate principal balance and
approximately 0.25% of the Mortgage Loans in the Adjustable Rate Group by
aggregate principal balance (together, 4.50% of the aggregate Loan Balances) are
Program Loans originated under the Sponsor's Incentive Program. Borrowers that
qualify under the Incentive Program and make each of the first twelve payments
on the related Mortgage Loan in full prior to the due date for the next
succeeding payment are automatically entitled to a reduction (i) effective on
the first anniversary date of the related Note, of the related Mortgage Rate by
0.50% for the remaining term of such Mortgage Loan, and (ii) effective on the
thirteenth payment due date, of the loan payment amount to an amount sufficient
to repay the unpaid principal balance over the remaining term of such Mortgage
Loan at the new Mortgage Rate. Correspondingly, such borrower is also entitled,
on each of the second and third anniversary dates of the related Note, to a
reduction of an additional 0.50% in the related Mortgage Rate provided such
borrower was eligible for a rate reduction on the previous anniversary date of
the related Note and has made timely mortgage loan payments in full in respect
of the previous twelve payment dates. The maximum reduction under the Sponsor's
Incentive Program to which a Note may be subject is 1.50%. To the extent that
Mortgagors under Program Loans qualify for any reductions in the Mortgage Rate
on such Program Loans, the Total Monthly Excess Spread for the related Mortgage
Loan Group will be less than would have been the case in the absence of any
reduction in such Mortgage Rate, which may have an affect on the weighted
average lives of the related class of Class A Certificates.
Effect of Mortgage Loan Yield on Class A-5 Pass Through Rate. Subject to
the Available Funds Cap, the Class A-5 Pass Through Rate is based upon the
value of an index (LIBOR) that is different from the value of the index
applicable to the Mortgage Loans in the Adjustable Rate Group (the London
interbank offered rate for six-month United States dollar deposits
("six-month LIBOR")), as described under "The Mortgage Loan Groups --
Adjustable Rate Group" herein. In addition, the Adjustable Rate Group
Mortgage Loans have different rate determination dates, rate adjustment dates
and rate caps and floors. Consequently, the Class A-5 Pass Through Rate for
any Payment Date may not equal the Class A-5 Formula Pass-Through Rate for
such Payment Date. In particular, the Class A-5 Pass Through Rate adjusts
monthly, while the interest rates of the Mortgage Loans in the Adjustable
Rate Group adjust less frequently, with the result that the Class A-5
Pass-Through Rate may be lower than the Class A-5 Formula Pass-Through Rate
for extended periods in a rising interest rate environment. As of the
Statistic Calculation Date, approximately 84.50% of the Mortgage Loans
included in the Adjustable Rate Group have initial Interest Rates that will
remain fixed for two years or more from the Statistic Calculation Date before
initial adjustment. The inclusion of such Mortgage Loans in the Adjustable
Rate Group may increase the likelihood that the Class A-5 Pass-Through Rate
will be determined based on the Available Funds Cap rather than on the basis
of LIBOR plus 0.22% if LIBOR increases appreciably prior to the time that
such Mortgage Loans have reached their respective dates of first adjustment.
In addition, LIBOR and the indices applicable to such Mortgage Loans may
respond to different economic and market factors, and there is no necessary
correspondence between them. Thus it is possible, for example, that LIBOR may
rise during a period in which one or more of such indices are stable or are
falling or that, even if both LIBOR and such indices rise during the same
period, LIBOR may rise much more rapidly than such indices. In addition, the
Adjustable Rate Group Mortgage Loans are generally subject to periodic rate
caps of 1.50% per semi-annual adjustment period and to specified lifetime
rate caps and, in some instances, lifetime rate floors.
Condition of Mortgaged Properties. With respect to each Mortgage Loan,
EquiVantage Inc. will represent and warrant in the Master Transfer Agreements
that, to the best of its knowledge, as of the Cut-off Date the related Mortgaged
Property is free of material damage and is in good repair. In the event a breach
of such representation and warranty materially and adversely affects the
interest of the Owners of the Certificates or the Certificate Insurer
(notwithstanding that such representation and warranty was made to the best of
EquiVantage Inc.'s knowledge), such
S-18
<PAGE>
breach is not cured within the time limits specified in the Master Transfer
Agreements, EquiVantage Inc. will substitute another mortgage loan for such
Mortgage Loan in accordance with the terms of the Master Transfer Agreements
or, if unable to do so, repurchase such Mortgage Loan. In the event
EquiVantage Inc. is unable to effect a substitution and instead repurchases
such Mortgage Loan, the rate of principal payments on the Mortgage Loans in
the related Mortgage Loan Group will increase, affecting the yield on the
related Certificates. See "Prepayment and Yield Considerations" herein.
SPONSOR'S MORTGAGE LOAN PROGRAM
The Mortgage Loan Groups include loans that were either originated directly
or indirectly by the Sponsor or purchased by the Sponsor from others on a
loan-by-loan basis or in bulk acquisitions of loan portfolios.
Approximately 97.10% of the aggregate Loan Balances, as of the Statistic
Calculation Date, represent Mortgage Loans in the Fixed Rate Group and
approximately 97.87% of the aggregate Loan Balances, as of the Statistic
Calculation Date, represent Mortgage Loans in the Adjustable Rate Group that
were originated by the Sponsor directly, indirectly or through Unaffiliated
Originators in accordance with the Sponsor's guidelines. See "Mortgage Loan
Program -- The Sponsor's Underwriting Process" in the Prospectus. The balance of
the Mortgage Loans in the Fixed Rate Group and the Adjustable Rate Group have
been acquired by the Sponsor from Unaffiliated Originators in Bulk Acquisitions.
All of the Mortgage Loans that were acquired in Bulk Acquisitions have been
reunderwritten by the Sponsor through a review of the related mortgage loan
files and reclassified in accordance with the Sponsor's guidelines. See
"Mortgage Loan Program -- Bulk Guidelines" in the Prospectus.
Delinquencies
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 May 31, 1997 approximately 61,843 mortgage loans with an
aggregate principal balance as of such date of approximately $2.3 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
the Government National Mortgage Association (also known as "Ginnie Mae" or
"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.
S-19
<PAGE>
DELINQUENCY EXPERIENCE OF THE SPONSOR'S PORTFOLIO OF MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
As of
May 31, 1997
------------
<S> <C>
Number of mortgage loans.............................................. 8,753
Dollar amount of mortgage loans................................ $525,092,237
Delinquency Period:
30-59 Days
% of number of loans(2)....................................... 1.68%
% of dollar amount of loans(3)................................ 1.63%
60-89 Days
% of number of loans(2)....................................... 0.58%
% of dollar amount of loans(3)................................ 0.57%
90 Days and over
% of number of loans(2)....................................... 2.42%
% of dollar amount of loans(3)................................ 2.64%
Foreclosed Properties
% of number of loans(2)....................................... 0.74%
% of dollar amount of loans(3)................................ 0.83%
</TABLE>
- ------------------------
(1) The mortgage loans comprising the Sponsor's Portfolio were originated
beginning in August 1993 and acquired by the 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 date 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 August 1st installment would be
considered delinquent if the payment were not received by the close
of business on September 1st. Such loan would be shown as current in
the August delinquency report and as 30 days' delinquent in the
September 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 gross and net losses on mortgage loans in 1996 were 0.07% of
the Sponsor's average portfolio unpaid principal balance of $308,289,602. The
Sponsor's gross and net losses on mortgage loans in 1995 were 0.07% of the
Sponsor's average portfolio unpaid principal balance of $85,713,227. 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
Mortgage Loan Groups will be similar. The Sponsor can neither quantify the
impact of any recent property value declines on the Mortgaged Properties
securing any of 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 rates of delinquencies, foreclosures and losses
and, accordingly, the timely payment of scheduled payments of principal and
interest on the Mortgage Loans.
The Originators will represent that not more than 0.65% of the Mortgage
Loans (by aggregate principal balance as of the Cut-off Date) were originated
pursuant to a "no-income verification" program.
S-20
<PAGE>
THE MORTGAGE LOAN GROUPS
General
Approximately 88.72% 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 Loan Groups contained, as of the Statistic Calculation Date,
1,399 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 28 states. The Mortgaged Properties securing the Mortgage Loans
consist primarily of single-family residences (each of 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. Approximately 95.09% of the Mortgage Loans in
the Fixed Rate Group are secured by first lien mortgages or deeds of trust on
the related Mortgaged Properties and approximately 4.91% of the Mortgage Loans
in the Fixed Rate Group are secured by junior liens on the related Mortgaged
Properties. Approximately 99.55% of the Mortgage Loans in the Adjustable Rate
Group are secured by first lien mortgages or deeds of trust on the related
Mortgaged Properties and 0.45% of the Mortgage Loans in the Adjustable Rate
Group are secured by junior liens on the related Mortgaged Properties.
As of the Cut-off Date, no Mortgage Loan had a remaining term to maturity
greater than 30 years and no Mortgage Loan was 30 or more days delinquent.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage loan
groups (the "Fixed Rate Group" and the "Adjustable Rate Group" and, each, a
"Mortgage Loan Group") comprised of Mortgage Loans that bear interest at fixed
rates only (except that, with respect to Program Loans included in the Fixed
Rate Group, the related Mortgage Rate may be reduced by as much as 1.50% under
certain circumstances described under "Risk Factors -- Program Loans" herein),
in the case of the Fixed Rate Group, and Mortgage Loans that bear interest at
rates subject to periodic adjustment only, in the case of the Adjustable Rate
Group. Approximately 7.80% of the Mortgage Loans in the Fixed Rate Group and
approximately 0.25% of the Mortgage Loans in the Adjustable Rate Group are
Program Loans that provide for reductions in the related Mortgage Rates by as
much as 1.50% under certain circumstances. See "Risk Factors -- Program Loans"
herein. The Class A-1, Class A-2, Class A-3 and Class A-4 Certificates represent
undivided ownership interests in all Mortgage Loans contained in the Fixed Rate
Group, and the Class A-5 Certificates represent undivided ownership interests in
all Mortgage Loans contained in the Adjustable Rate Group.
The LTVs or CLTVs 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 in the Sponsor's Portfolio, as
set forth above under "Sponsor's Mortgage Loan Program," and in the mortgage
lending industry in general.
Difference between Statistic Calculation Date Mortgage Loan Groups and
Closing Date Mortgage Loan Groups
The statistical information presented in this Prospectus Supplement is
based on the Mortgage Loan Groups as of the Statistic Calculation Date. Each
Mortgage Loan Group as of the Statistic Calculation Date reflects the
Mortgage Loans comprised thereof, 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. The aggregate principal balance
of the Mortgage Loans as of such date is $100,971,559.34. The Sponsor expects
that, as of the Closing Date, the Fixed Rate Group will represent
approximately $56,760,000 in Mortgage Loans and the Adjustable Rate Group
will represent approximately $44,190,000 in Mortgage Loans. With respect to
each Mortgage Loan Group as of the Statistic Calculation Date, as to which
statistical information is presented herein, some amortization of the
Mortgage Loans contained in such
S-21
<PAGE>
Mortgage Loan Group 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 related
final Mortgage Loan Group, and may not be included in the related final
Mortgage Loan Group. As a result of the foregoing, the statistical
distribution of characteristics as of the Closing Date for the final Mortgage
Loan Groups 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.
Fixed Rate Group
As of the Statistic Calculation Date, the Mortgage Loans in the Fixed Rate
Group consist of 898 loans secured by Mortgaged Properties located in 25 states,
as set forth herein. As of the Statistic Calculation Date, the Mortgage Loans in
the Fixed Rate Group had an aggregate principal balance of $56,775,402.14, the
minimum principal balance of any of such Mortgage Loans was $7,811.08, the
maximum principal balance thereof was $596,000.00 and the average principal
balance of such Mortgage Loans was $63,224.27. The Mortgage Rates on the
Mortgage Loans in the Fixed Rate Group as of the Statistic Calculation Date
ranged from 7.25% to 15.00% per annum, and the weighted average Mortgage Rate of
the Mortgage Loans in the Fixed Rate Group was 10.96% per annum. The original
term to stated maturity of the Mortgage Loans in the Fixed Rate Group as of the
Statistic Calculation Date ranged from 60 months to 360 months, the remaining
term to stated maturity ranged from 53 months to 360 months, the weighted
average original term to stated maturity was approximately 250 months, the
weighted average remaining term to stated maturity was approximately 248 months,
the weighted average seasoning was approximately two months and the weighted
average CLTV was 78.09%. As of the Statistic Calculation Date, no Mortgage Loan
in the Fixed Rate Group had a stated maturity later than June 15, 2027.
Approximately 65.06% of the Mortgage Loans in the Fixed Rate Group by aggregate
principal balance require monthly payments of principal that will fully amortize
the Mortgage Loans by their respective maturity dates, and 34.94% of the
aggregate principal balance of the Mortgage Loans in the Fixed Rate Group are
Balloon Loans.
As of the Statistic Calculation Date, 8 Mortgage Loans with an aggregate
principal balance of approximately $682,086.64 and representing approximately
1.20% of the Fixed Rate Group were secured by "blanket mortgages". A blanket
mortgage is a mortgage or deed of trust that covers either more than one parcel
of land, which may or may not be contiguous with the other parcels covered by
the related blanket mortgage, or more than one residential dwelling on a single
parcel of land. Approximately 0.68% of the Mortgage Loans in the Fixed Rate
Group are blanket mortgages secured by investment properties of the related
borrower.
S-22
<PAGE>
FIXED RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
State Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------- ---------------- -------------------------- --------------------------
<S> <C> <C> <C>
Arkansas..................................... 3 $ 143,964.02 0.25%
Delaware..................................... 2 125,203.79 0.22
Florida...................................... 67 4,098,873.06 7.22
Georgia...................................... 62 4,143,524.49 7.30
Iowa......................................... 5 164,783.50 0.29
Idaho........................................ 4 272, 687.37 0.48
Illinois..................................... 33 2,071,952.28 3.65
Indiana...................................... 71 3,452,412.63 6.08
Kentucky..................................... 27 1,294,717.73 2.28
Louisiana.................................... 47 2,150,766.66 3.79
Maryland..................................... 23 1,991,430.76 3.51
Michigan..................................... 57 3,723,264.63 6.56
Missouri..................................... 1 40,928.30 0.07
Mississippi.................................. 13 468,246.34 0.82
North Carolina............................... 61 4,168,964.67 7.34
New Mexico................................... 1 11,990.25 0.02
Ohio......................................... 159 11,073,860.46 19.50
Oregon....................................... 5 800,778.29 1.41
South Carolina............................... 80 4,823,244.52 8.50
Tennessee.................................... 163 10,816,623.95 19.05
Texas........................................ 5 157,774.53 0.28
Utah......................................... 3 341,974.16 0.60
Virginia..................................... 2 149,222.58 0.26
Washington................................... 3 249,813.17 0.44
Wisconsin.................................... 1 38,400.00 0.07
- --------- ----
TOTAL........................................ 898 $ 56,775,402.14 100.00%
--- ------------- ------
--- ------------- ------
</TABLE>
S-23
<PAGE>
FIXED RATE GROUP
DISTRIBUTION OF CLTVs
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
CLTV Ratios Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ------------------ -------------- -------------------------- --------------------------
<S> <C> <C> <C>
10.01 to 20.00 3 $ 63,272.77 0.11%
20.01 to 30.00 9 258,829.32 0.46
30.01 to 40.00 19 543,845.09 0.96
40.01 to 50.00 30 1,036,385.45 1.83
50.01 to 60.00 48 2,271,015.58 4.00
60.01 to 70.00 124 7,105,621.64 12.52
70.01 to 80.00 329 19,718,211.65 34.73
80.01 to 90.00 333 25,521,689.81 44.95
90.01 to 100.00 1 102,000.00 0.18
100.01 to 110.00 1 56,609.90 0.10
110.01 to 120.00 1 97,920.93 0.17
- --------- ----
TOTAL 898 $56,775,402.14 100.00%
--- ------------- ------
--- ------------- ------
</TABLE>
S-24
<PAGE>
FIXED RATE GROUP
DISTRIBUTION OF MORTGAGE RATES(1)
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
Mortgage Rates Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ---------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
7.001 to 7.500 3 $ 120,802.38 0.21%
7.501 to 8.000 1 441,407.53 0.78
8.001 to 8.500 3 229,858.72 0.40
8.501 to 9.000 16 1,523,614.45 2.68
9.001 to 9.500 49 4,040,514.71 7.12
9.501 to 10.000 103 7,289,467.34 12.84
10.001 to 10.500 111 7,587,151.20 13.36
10.501 to 11.000 177 11,725,824.17 20.65
11.001 to 11.500 103 6,039,687.80 10.64
11.501 to 12.000 110 6,666,820.39 11.74
12.001 to 12.500 74 4,024,533.79 7.09
12.501 to 13.000 76 3,616,070.51 6.37
13.001 to 13.500 40 2,105,494.09 3.71
13.501 to 14.000 16 656,569.47 1.16
14.001 to 14.500 10 445,906.35 0.79
14.501 to 15.000 6 261,679.24 0.46
- ---------- ----
TOTAL 898 $56,775,402.14 100.00%
--- ------------- ------
</TABLE>
- ------------------------
(1) Does not reflect any reductions of Mortgage Rates that may be permitted on
Program Loans originated under the Sponsor's Incentive Program.
S-25
<PAGE>
FIXED RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal
Balance as of the % of Aggregate Principal
Number of Statistic Calculation Balance as of the
Months Mortgage Loans Date Statistic Calculation Date
- ------ -------------- --------------------- --------------------------
<S> <C> <C> <C>
60 or less 6 $ 145,270.55 0.26%
61 to 120 28 703,701.03 1.24
121 to 180 507 29,120,520.72 51.29
181 to 240 124 6,637,198.01 11.69
241 to 300 1 40,800.00 0.07
301 to 360 232 20,127,911.83 35.45
--- ------------- -----
TOTAL 898 $56,775,402,14 100.00%
--- ------------- -----
--- ------------- -----
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL BALANCE AS OF % OF AGGREGATE PRINCIPAL BALANCE AS OF
RANGE OF NUMBER OF THE THE
PRINCIPAL BALANCES MORTGAGE LOANS STATISTIC CALCULATION DATE STATISTIC CALCULATION DATE
- --------------------- ------------------- ---------------------------------- ---------------------------------------
<S> <C> <C> <C>
$ 25,000 or less 108 $ 2,034,458.39 3.58%
25,001 to 50,000 311 12,064,595.17 21.25
50,001 to 75,000 273 16,686,742.18 29.39
75,001 to 100,000 106 9,264,520.44 16.32
100,001 to 125,000 34 3,765,307.50 6.63
125,001 to 150,000 26 3,516,038.53 6.19
150,001 to 175,000 8 1,295,655.48 2.28
175,001 to 200,000 14 2,615,322.06 4.61
200,001 to 225,000 3 622,537.06 1.10
225,001 to 250,000 3 702,234.75 1.24
250,001 to 275,000 1 267,563.85 0.47
275,001 to 300,000 4 1,134,675.48 2.00
325,001 to 350,000 2 665,932.67 1.17
350,001 to 375,000 3 1,102,411.05 1.94
425,001 to 450,000 1 441,407.53 0.78
575,000 to 600,000 1 596,000.00 1.05
--- ------------------ ------
TOTAL 898 $ 56,775,402.14 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-26
<PAGE>
FIXED RATE GROUP
DISTRIBUTION OF PROPERTY TYPE
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS DATE DATE
- ---------------------------------------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Blanket Mortgage.............................. 8 $ 682,086.64 1.20%
Condominiums.................................. 8 295,514.89 0.52
Manufactured Housing.......................... 63 3,162,653.04 5.57
PUD........................................... 4 323,569.47 0.57
Single Family Attached........................ 4 100,430.71 0.18
Single Family Detached........................ 785 50,679,150.25 89.27
Townhouse..................................... 6 519,275.61 0.91
Two- to Four-Family........................... 20 1,012,721.53 1.78
--- ----------------------- ------
TOTAL......................................... 898 $ 56,775,402.14 100.00%
--- ----------------------- ------
--- ----------------------- ------
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF OCCUPANCY
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
BALANCE AS OF THE % OF AGGREGATE PRINCIPAL BALANCE AS OF
NUMBER OF STATISTIC CALCULATION THE
OCCUPANCY TYPE MORTGAGE LOANS DATE STATISTIC CALCULATION DATE
- ------------------------------- ------------------- ----------------------- ---------------------------------------
<S> <C> <C> <C>
Owner Occupied................. 831 $ 53,823,557.81 94.80%
Investor....................... 66 2,912,868.83 5.13
Second Home.................... 1 38,975.50 0.07
--- ----------------------- ------
TOTAL.......................... 898 $ 56,775,402.14 100.00%
--- ----------------------- ------
--- ----------------------- ------
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF TERM SEASONING
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL BALANCE AS OF % OF AGGREGATE PRINCIPAL BALANCE AS OF
MONTHS OF NUMBER OF THE THE
SEASONING MORTGAGE LOANS STATISTIC CALCULATION DATE STATISTIC CALCULATION DATE
- ----------- ------------------- ---------------------------------- ---------------------------------------
<S> <C> <C> <C>
0 136 $ 8,974,610.00 15.81%
1 to 6 753 47,204,444.55 83.14
7 to 12 8 554,828.97 0.98
13 to 18 1 41,518.62 0.07
--- ------------------ ------
TOTAL 898 $ 56,775,402.14 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-27
<PAGE>
ADJUSTABLE RATE GROUP
The Mortgage Loans in the Adjustable Rate Group consist of 501 loans secured
by Mortgaged Properties located in 25 states, as set forth herein. As of the
Statistic Calculation Date, the Mortgage Loans in the Adjustable Rate Group had
an aggregate principal balance of $44,196,157.20, the minimum principal balance
of any of such Mortgage Loans was $6,000.00, the maximum principal balance
thereof was $345,871.21 and the average principal balance of such Mortgage Loans
was $88,215.88. As of the Statistic Calculation Date, the weighted average
current Mortgage Rate of the Mortgage Loans in the Adjustable Rate Group was
9.97% and the weighted average margin was 6.81%.
For the Mortgage Loans in the Adjustable Rate Group as of the Statistic
Calculation Date, the original term to stated maturity ranged from 180 months to
360 months, the remaining term to stated maturity ranged from 174 months to 360
months, the weighted average remaining term to stated maturity was 355 months,
the weighted average original term to stated maturity was 357 months and the
weighted average seasoning was approximately two months. No Mortgage Loan in the
Adjustable Rate Group had a stated maturity later than June 15, 2027. All of the
Mortgage Loans in the Adjustable Rate Group require monthly payments of
principal that will fully amortize the Mortgage Loans by their respective
maturity dates. As of the Statistic Calculation Date, all of the Mortgage Loans
in the Adjustable Rate Group were Actuarial Loans.
As of the Statistic Calculation Date the weighted average original LTV of
the Adjustable Rate Group was 80.64%. Approximately 99.55% of the Mortgage Loans
in the Adjustable Rate Group are secured by first lien mortgages or deeds of
trust on the related Mortgaged Properties and the remainder of Mortgage Loans in
the Adjustable Rate Group are secured by junior liens on the related Mortgaged
Properties.
All of the Mortgage Loans in the Adjustable Rate Group bear interest at a
rate equal to six-month LIBOR plus a margin. Approximately 2.13% are indexed on
the average of six-month LIBOR based on quotations at five major banks as set
forth in the "Money Rates" section of The Wall Street Journal on the 45th
business day of the month prior to the adjustment date; and approximately 97.87%
are indexed on the average of six-month LIBOR based on quotations at five major
banks as set forth in the "Money Rates" section of The Wall Street Journal on
the first business day of the month prior to the adjustment date.
The Adjustable Rate Group Mortgage Loans have semi-annual interest rate and
semi-annual payment adjustment frequencies. Approximately 84.50% of the Mortgage
Loans in the Adjustable Rate Group have fixed Mortgage Rates and payments for 24
months from the date of origination thereof before such Mortgage Loans become
subject to the semi-annual adjustment described in the preceding sentence. The
margins for the Adjustable Rate Group Mortgage Loans range from 3.80% to 11.35%.
All Adjustable Rate Group Mortgage Loans have a periodic (i.e., semi-annual)
rate adjustment cap of 1.5%, with approximately 97% having a lifetime adjustment
cap of 7.0% in excess of the related initial Mortgage Rate, and less than 3%
having lifetime caps other than 7.0%. As of the Statistic Calculation Date, the
weighted average number of months until the next adjustment date is 19. The
weighted average maximum Mortgage Rate as of the Statistic Calculation Date was
16.96%. The weighted average minimum Mortgage Rate as of the Statistic
Calculation Date was 9.98%.
S-28
<PAGE>
ADJUSTABLE RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
STATE MORTGAGE LOANS DATE DATE
- ---------------------------------------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Arkansas...................................... 1 $ 74,367.72 0.17%
Arizona....................................... 1 51,937.45 0.12
Colorado...................................... 1 51,942.99 0.12
Delaware...................................... 1 68,000.00 0.15
Florida....................................... 23 1,970,054.16 4.46
Georgia....................................... 14 1,268,578.82 2.87
Iowa.......................................... 2 127,039.11 0.29
Idaho......................................... 6 624,995.74 1.41
Illinois...................................... 19 2,725,966.42 6.17
Indiana....................................... 20 1,394,527.28 3.16
Kansas........................................ 1 37,450.00 0.08
Kentucky...................................... 8 549,074.46 1.24
Louisiana..................................... 3 364,921.43 0.83
Maryland...................................... 11 1,187,543.69 2.69
Michigan...................................... 122 11,598,078.08 26.24
North Carolina................................ 19 1,287,916.26 2.91
Ohio.......................................... 156 12,069,711.81 27.31
Oregon........................................ 9 1,243,176.63 2.81
South Carolina................................ 21 1,709,368.31 3.87
Tennessee..................................... 44 3,949,769.08 8.94
Texas......................................... 2 109,602.42 0.25
Utah.......................................... 5 474,266.88 1.07
Virginia...................................... 3 525,341.36 1.19
Washington.................................... 5 560,003.22 1.27
Wisconsin..................................... 4 172,523.88 0.39
--- ----------------------- ------
TOTAL......................................... 501 $ 44,196,157.20 100.00%
--- ----------------------- ------
--- ----------------------- ------
</TABLE>
S-29
<PAGE>
ADJUSTABLE RATE GROUP DISTRIBUTION OF CLTVs
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
RANGE OF NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
CLTV RATIOS MORTGAGE LOANS DATE DATE
- ----------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
20.01 to 30.00 2 $ 81,873.19 0.19%
40.01 to 50.00 5 284,771.85 0.64
50.01 to 60.00 13 712,345.32 1.61
60.01 to 70.00 57 3,927,801.79 8.89
70.01 to 80.00 180 15,395,616.18 34.83
80.01 to 90.00 240 23,296,674.01 52.71
90.01 to 100.00 4 497,074.86 1.12
--- ------------- -----
TOTAL 501 $ 44,196,157.20 100.00%
=== ================= ========
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MORTGAGE RATES(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
RANGE OF NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
MORTGAGE RATES MORTGAGE LOANS DATE DATE
- ------------------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
7.501 to 8.000 1 $ 282,000.00 0.64%
8.001 to 8.500 12 1,079,157.68 2.44
8.501 to 9.000 42 3,652,522.05 8.26
9.001 to 9.500 96 8,760,784.64 19.82
9.501 to 10.000 126 10,758,501.34 24.34
10.001 to 10.500 105 9,696,240.55 21.94
10.501 to 11.000 70 6,379,611.26 14.43
11.001 to 11.500 33 2,449,324.99 5.54
11.501 to 12.000 11 748,134.54 1.69
12.001 to 12.500 4 236,030.15 0.53
14.001 to 14.500 1 153,850.00 0.35
--- ------------ -----
TOTAL 501 $ 44,196,157.20 100.00%
=== ================= =======
</TABLE>
- ------------------------
(1) As of the Statistic Calculation Date. Does not reflect any reductions of
Mortgage Rates that may be permitted on Program Loans originated under the
Sponsor's Incentive Program.
S-30
<PAGE>
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
MONTHS MORTGAGE LOANS DATE DATE
- ------------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
121 to 180 6 $ 379,836.67 0.86%
181 to 240 9 459,802.10 1.04
301 to 360 486 43,356,518.43 98.10
--- ------------- -----
TOTAL 501 $ 44,196,157.20 100.00%
==== ================= =======
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
RANGE OF NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS DATE DATE
- --------------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
$ 25,000 or less 8 $ 164,776.44 0.37%
25,001 to 50,000 87 3,503,562.20 7.93
50,001 to 75,000 144 8,826,177.96 19.97
75,001 to 100,000 118 10,123,737.51 22.91
100,001 to 125,000 57 6,328,760.08 14.32
125,001 to 150,000 34 4,629,595.71 10.48
150,001 to 175,000 23 3,741,198.94 8.46
175,001 to 200,000 10 1,860,172.64 4.21
200,001 to 225,000 8 1,689,273.48 3.82
225,001 to 250,000 5 1,168,876.35 2.64
250,001 to 275,000 1 269,871.34 0.61
275,001 to 300,000 2 571,000.00 1.29
300,001 to 325,000 1 306,000.00 0.69
325,001 to 350,000 3 1,013,154.55 2.29
--- ------------ -----
TOTAL 501 $ 44,196,157.20 100.00%
=== ================= =======
</TABLE>
S-31
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF PROPERTY TYPE
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
PROPERTY TYPE MORTGAGE LOANS DATE DATE
- ---------------------------------------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Condominium................................... 9 $ 616,063.40 1.39%
Manufactured Housing.......................... 3 176,922.50 0.40
PUD........................................... 1 182,750.00 0.41
Single Family Attached........................ 2 82,024.68 0.19
Single Family Detached........................ 469 42,124,268.40 95.31
Townhouse..................................... 3 167,978.00 0.38
Two- to Four-Family........................... 14 846,150.22 1.91
--- ----------------------- ------
TOTAL......................................... 501 $ 44,196,157.20 100.00%
--- ----------------------- ------
--- ----------------------- ------
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF OCCUPANCY
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF AGGREGATE
BALANCE AS OF THE PRINCIPAL BALANCE AS OF THE
NUMBER OF STATISTIC CALCULATION STATISTIC
OCCUPANCY TYPE MORTGAGE LOANS DATE CALCULATION DATE
- ------------------------------------- ------------------- ----------------------- ---------------------------------
<S> <C> <C> <C>
Owner Occupied....................... 471 $ 42,734,250.68 96.69%
Investment........................... 30 1,461,906.52 3.31
--- ----------------------- ------
TOTAL................................ 501 $ 44,196,157.20 100.00%
--- ----------------------- ------
--- ----------------------- ------
</TABLE>
S-32
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF TERM OF SEASONING
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE BALANCE
MORTGAGE STATISTIC CALCULATION AS OF THE
MONTHS OF SEASONING LOANS DATE STATISTIC CALCULATION DATE
- ------------------- ------------- ------------------------- -------------------------------
<S> <C> <C> <C>
0 71 $ 6,728,736.00 15.22%
1 to 6 419 36,227,898.37 81.97
7 to 12 11 1,239,522.83 2.80
---- ----------------- -------
TOTAL 501 $ 44,196,157.20 100.00%
==== ================= =======
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MAXIMUM MORTGAGE RATES(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
MAXIMUM NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
MORTGAGE RATES MORTGAGE LOANS DATE DATE
- ------------------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
14.501 to 15.000 2 $ 373,800.00 0.85%
15.001 to 15.500 13 1,368,157.68 3.10
15.501 to 16.000 43 3,785,912.37 8.57
16.001 to 16.500 96 8,581,735.68 19.42
16.501 to 17.000 123 10,144,482.43 22.95
17.001 to 17.500 106 10,066,918.10 22.78
17.501 to 18.000 70 6,379,611.26 14.43
18.001 to 18.500 32 2,357,524.99 5.33
18.501 to 19.000 11 748,134.54 1.69
19.001 to 19.500 4 236,030.15 0.53
21.001 to 21.500 1 153,850.00 0.35
---- ----------------- -------
TOTAL 501 $ 44,196,157.20 100.00%
==== ================= =======
</TABLE>
- ------------------------
(1) Does not reflect any reductions of Mortgage Rates that may be permitted
on Program Loans originated under the Sponsor's Incentive Program.
S-33
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MINIMUM MORTGAGE RATES(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
MINIMUM NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
MORTGAGE RATES MORTGAGE LOANS DATE DATE
- ------------------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
3.501 to 4.000 1 $ 100,526.82 0.23%
4.501 to 5.000 1 239,997.08 0.54
5.001 to 5.500 1 85,438.29 0.19
5.501 to 6.000 4 466,983.42 1.06
6.001 to 6.500 1 135,667.84 0.31
7.001 to 7.500 2 159,649.62 0.36
8.001 to 8.500 11 1,130,872.07 2.56
8.501 to 9.000 35 3,181,506.42 7.20
9.001 to 9.500 88 7,693,811.63 17.41
9.501 to 10.000 119 9,548,650.92 21.61
10.001 to 10.500 99 8,564,024.07 19.38
10.501 to 11.000 74 6,779,427.31 15.34
11.001 to 11.500 44 4,454,553.27 10.08
11.501 to 12.000 15 1,338,898.44 3.03
12.001 to 12.500 4 106,200.00 0.24
12.501 to 13.000 1 56,100.00 0.13
14.001 to 14.500 1 153,850.00 0.35
---- ----------------- -------
TOTAL 501 $ 44,196,157.20 100.00%
==== ================= =======
</TABLE>
- ------------------------
(1) Does not reflect any reductions of Mortgage Rates that may be permitted
on Program Loans originated under the Sponsor's Incentive Program.
S-34
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MARGINS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
MARGINS MORTGAGE LOANS DATE DATE
- ------------------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
3.500 to 3.999 7 $ 689,848.09 1.56%
4.000 to 4.499 2 169,161.00 0.38
4.500 to 4.999 2 110,963.33 0.25
5.000 to 5.499 14 1,896,649.00 4.29
5.500 to 5.999 56 4,749,308.65 10.75
6.000 to 6.499 87 7,886,405.44 17.84
6.500 to 6.999 111 9,440,529.86 21.36
7.000 to 7.499 89 7,348,656.23 16.63
7.500 to 7.999 74 7,544,980.84 17.07
8.000 to 8.499 39 3,209,665.35 7.26
8.500 to 8.999 13 754,133.05 1.71
9.000 to 9.499 6 242,006.36 0.55
11.000 to 11.499 1 153,850.00 0.35
---- ----------------- -------
TOTAL 501 $ 44,196,157.20 100.00%
==== ================= =======
</TABLE>
- ------------------------
(1) Does not reflect any reductions of Mortgage Rates that may be permitted
on Program Loans originated under the Sponsor's Incentive Program.
S-35
<PAGE>
ADJUSTABLE RATE GROUP
NEXT INTEREST RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
BALANCE AS OF THE BALANCE AS OF THE
NEXT INTEREST NUMBER OF STATISTIC CALCULATION STATISTIC CALCULATION
ADJUSTMENT DATE MORTGAGE LOANS DATE DATE
- --------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
09/01/97 4 $ 405,596.09 0.92%
10/01/97 18 2,253,227.88 5.10
11/01/97 18 1,983,808.20 4.49
12/01/97 17 2,205,810.00 4.99
07/01/98 1 51,937.45 0.12
10/01/98 2 95,679.98 0.22
11/01/98 6 872,925.63 1.98
12/01/98 4 314,190.76 0.71
01/01/99 31 2,564,649.55 5.80
02/01/99 31 2,789,580.55 6.31
03/01/99 107 9,333,833.01 21.12
04/01/99 112 8,864,426.78 20.06
05/01/99 82 6,689,822.82 15.14
06/01/99 64 5,533,868.50 12.52
07/01/99 4 236,800.00 0.54
---- ----------------- -------
TOTAL 501 $ 44,196,157.20 100.00%
==== ================= =======
</TABLE>
S-36
<PAGE>
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-1 Certificates, Class A-2 Certificates, Class A-3 Certificates and
Class A-4 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
in the related Mortgage Loan Group, including for this purpose voluntary
payment in full of Mortgage Loans in the related Mortgage Loan Group prior to
stated maturity (a "Prepayment"), liquidations due to defaults, casualties
and condemnations, and repurchases of Mortgage Loans in the related Mortgage
Loan Group 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 in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group 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 in the related Mortgage Loan Group 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.
All of the Mortgage Loans in the Fixed Rate Group are fixed-rate mortgage
loans (except that, with respect to Program Loans included in the Fixed Rate
Group, the related Mortgage Rate may be reduced by as much as 1.50% under
certain circumstances described under "Risk Factors -- Program Loans"
herein). 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
S-37
<PAGE>
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.
All of the Mortgage Loans in the Adjustable Rate Group are adjustable
rate mortgage loans. As is the case with conventional fixed-rate mortgage
loans, adjustable rate mortgage loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable rate mortgage
loans could be subject to higher prepayment rates than if prevailing interest
rates remain constant because the availability of fixed-rate mortgage loans
at competitive interest rates may encourage mortgagors to refinance their
adjustable rate mortgage loans to "lock-in" a lower fixed interest rate.
However, no assurance can be given as to the level of prepayments that the
Mortgage Loans will experience. In addition, the Mortgage Loans in the
Adjustable Rate Group generally are assumable by qualifying subsequent
purchasers of the related Mortgaged Property.
The "Final Scheduled Payment Date" for each class of Class A Certificates
is the Payment Date occurring in the following months: Class A-1
Certificates, April 2012; Class A-2 Certificates, January 2019; Class A-3
Certificates, July 2028; Class A-4 Certificates, July 2028; and Class A-5
Certificates, January 2027. Each such date is the date on which the
Certificate Principal Balance of the related class of Class A Certificates
would be reduced to zero, assuming, among other things that (i) no
Prepayments are received on any of the Mortgage Loans in the related Mortgage
Loan Group, (ii) each distribution of principal and interest on each of the
Mortgage Loans in the related Mortgage Loan Group is timely received, (iii)
no excess interest will be used to make accelerated payments of principal,
and (iv) the Mortgage Loans in the related Mortgage Loan Group have the
applicable characteristics set forth herein. The original principal amounts
of the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates and Class A-5 Certificates as of the
Closing Date less all amounts previously distributed to the Owners of each
such class of Class A Certificates (other than the Certificate Insurer) on
account of principal shall be the "Class A-1 Certificate Principal Balance",
the "Class A-2 Certificate Principal Balance", the "Class A-3 Certificate
Principal Balance", the "Class A-4 Certificate Principal Balance" and the
"Class A-5 Certificate Principal Balance", respectively, and, collectively,
the "Class A Certificate Principal Balances". The Final Scheduled Payment
Date for the Class A-3 and Class A-4 Certificates is the Payment Date in the
calendar month thirteen months after the month in which the final payment on
the Mortgage Loan in the Fixed Rate Group with the latest maturity occurs. In
the event that, due to delinquencies on one or more Mortgage Loans in the
Fixed Rate Group, or the acquisition by the Trust of one or more Mortgaged
Properties securing any of such Mortgage Loans by foreclosure or otherwise,
principal collections on such Mortgage Loans are delayed, the date on which
the Class A Certificate Principal Balances of one or more Classes of Class A
Certificates related to the Fixed Rate Group are reduced to zero may be
delayed beyond the Final Scheduled Payment Date for such class(es). In such
circumstances the timing of reductions in the Class A Certificate Principal
Balances of such Class A Certificates will depend on the timing of
foreclosures and collections with respect to such Mortgage Loans. The Pooling
and Servicing Agreement will provide that, at the Remittance Date preceding
the Final Scheduled Payment Date for the Class A-3 Certificates, the Class
A-4 Certificates or the Class A-5 Certificates, if any Mortgage Loan in the
related Mortgage Loan Group has not been paid in full, the Certificate
Insurer will, on such Remittance Date, make an Insured Payment equal to the
remaining aggregate outstanding Certificate Principal Balances of the related
Certificates, in each case plus accrued interest thereon (but not including,
in the case of the Class A-5 Certificates, any Available Funds Cap
Carry-Forward Amount) if the Servicer has not purchased all of the remaining
Mortgage Loans in the Adjustable Rate Group in accordance with the Pooling
and Servicing Agreement.
The actual final Payment Date with respect to each class of Class A
Certificates could occur significantly earlier than its 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 each class of Class A Certificates, which payments will have
the effect of shortening the weighted average lives of each class of Class A
Certificates, (ii) Prepayments are likely to occur that shall be applied to
the payment of the related Class A Certificate Principal Balances and (iii)
the Owners of the Residual Certificates and the Servicer may cause a
termination of the Trust on or after the Clean-Up Call Date.
S-38
<PAGE>
The "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 each class of Class A Certificates will be influenced by the
rate at which principal payments on the Mortgage Loans in the related
Mortgage Loan Group 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 that represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. The model used in this
Prospectus Supplement with respect to the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates and Class A-4 Certificates is the
Prepayment Model ("PPM"). PPM assumes a conditional prepayment rate of 4% per
annum of the then outstanding principal balance of the Mortgage Loans in the
first month of the life of the Mortgage Loans and an additional 1.45%
(precisely, 16/11%) per annum in each month thereafter until the twelfth
month. Beginning in the twelfth month and in each month thereafter during the
life of the Mortgage Loans, PPM assumes a conditional prepayment rate of 20%
per annum each month. As used in the table below, 0% PPM assumes prepayment
rates equal to 0% of the PPM, i.e., no prepayments on the synthetic mortgage
loans having the characteristics described below. Correspondingly, 100% PPM
assumes prepayment rates equal to 100% of the PPM, and so forth. The model
used in this Prospectus Supplement with respect to the Class A-5 Certificates
is the CPR. 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 Sponsor believes that no
existing statistics of which it is aware provide a reliable basis for holders
of Class A Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
The tables below were prepared on the basis of the assumptions in the
following paragraph ("Structuring Assumptions"). There are discrepancies
between the characteristics of the actual Mortgage Loans in each Mortgage
Loan Group 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 Balances outstanding and the weighted
average lives of the Class A Certificates set forth in the tables. In
addition, because the actual Mortgage Loans in each Mortgage Loan Group have
characteristics that 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 June 27, 1997,
(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 July 1997, in accordance with the priorities described herein,
(iv) the Mortgage Loans prepay at the specified percentages of PPM or CPR, as
applicable, as specified above, (v) prepayments include 30 day's interest
thereon, (vi) early termination of the Trust occurs on the Clean-Up Call
Date, (vii) the Specified Subordinated Amount 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, (viii) no Mortgage Loan in
the related Mortgage Loan Group is ever delinquent, (ix) six-month LIBOR
remains constant at 5.875%, (x) the Mortgage Rate for each Mortgage Loan in
the Adjustable Rate Group is adjusted on its next Mortgage Rate adjustment
date (and on subsequent Mortgage Rate adjustment dates, if necessary) to
equal the sum of the applicable gross margin set forth below plus six-month
LIBOR specified in clause (ix) above (such sum being subject to the
applicable assumed periodic adjustment cap set forth below), (xi) for the
Class A-1, Class A-2, Class A-3 and Class A-4 Certificates, the Mortgage
Loans in the Fixed Rate Group prepay according to the indicated percentages
of PPM under the "Percentage of Original Certificate Principal Balance
Outstanding" table for each such class set forth below and the Mortgage Loans
in the Adjustable Rate Group prepay at 25% CPR, (xii) for the Class A-5
Certificates, the Mortgage Loans in the Adjustable Rate Group prepay
according to the indicated percentages of CPR under the "Percentage of
Original Certificate Principal Balance Outstanding" table for such class set
forth below and the Mortgage Loans in the Fixed Rate Group prepay at 120%
PPM, (xiii) LIBOR remains constant at 5.6875% and (xiv) the Mortgage Rates
for Program Loans in each Mortgage Loan Group are not reduced below the
Mortgage Rate established at origination of the related Program Loan.
S-39
<PAGE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Group(1)............. 0% 50% 100% 120% 150% 200%
Adjustable Rate Group(2)........ 0% 10% 15% 25% 40% 50%
</TABLE>
- ------------------------
(1) As a percentage of PPM.
(2) As a conditional prepayment rate (CPR) percentage.
FIXED RATE GROUP
<TABLE>
<CAPTION>
MORTGAGE RATE ORIGINAL
NET OF THE ORIGINAL TERM REMAINING AMORTIZATION
AMORTIZATION PRINCIPAL MORTGAGE SERVICING TO MATURITY TERM MATURITY TERM
METHODOLOGY BALANCE RATE FEES (IN MONTHS) (IN MONTHS) (IN MONTHS)
- --------------- -------------- ---------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balloon........ $19,869,284.56 11.130 10.630 180 178 360
Level.......... 833,240.77 11.248 10.748 111 109 111
Level.......... 15,664,740.93 10.959 10.459 205 203 205
Level.......... 20,390,733.74 10.794 10.294 360 358 360
</TABLE>
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL
TERM TO
MATURITY/ REMAINING PERIODIC
MAXIMUM AMORTIZATION TERM RATE
AMORTIZATION PRINCIPAL MONTHS MORTGAGE MORTGAGE TERM MATURITY (IN ADJUSTMENT
METHODOLOGY BALANCE TO RESET RATE MARGIN RATE (IN MONTHS) MONTHS) CAP
- -------------- --------------- ---------- ---------- -------- ---------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Level....... $ 2,264,810.12 4 9.389 6.740 16.378 357 355 1.500%
Level....... 1,994,005.55 5 9.658 6.795 16.512 360 359 1.500%
Level....... 2,166,891.47 6 10.118 7.413 17.118 354 354 1.500%
Level....... 37,748,365.80 22 10.033 6.799 17.022 358 355 1.500%
</TABLE>
S-40
<PAGE>
The following tables indicate, based on the Structuring Assumptions, the
percentages of the Original Certificate Principal Balance of each class of Class
A Certificates that would be outstanding after each of the dates shown based on
prepayment scenarios described in the table entitled "Prepayment Scenarios", and
the corresponding weighted average life of the related class of Class A
Certificates. It is not likely that (i) all of the Mortgage Loans in the related
Mortgage Loan Group will have the characteristics assumed and (ii) the Mortgage
Loans in the related Mortgage Loan Group will prepay at the specified
percentages of PPM or CPR, as applicable, or at any other constant percentage.
Moreover, the diverse remaining terms to maturity of the Mortgage Loans in the
related Mortgage Loan Group could produce slower or faster principal
distributions than indicated in the tables at the specified percentages of PPM
or CPR, if applicable, even if the weighted average remaining term to maturity
of the Mortgage Loans in the related Mortgage Loan Group is consistent with the
remaining terms to maturity of the Mortgage Loans specified in the Structuring
Assumptions.
S-41
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-1 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PAYMENT DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
6/25/97 100 100 100 100 100 100
6/25/98 90 72 55 48 38 20
6/25/99 87 48 13 0 0 0
6/25/00 84 26 0 0 0 0
6/25/01 81 8 0 0 0 0
6/25/02 77 0 0 0 0 0
6/25/03 73 0 0 0 0 0
6/25/04 69 0 0 0 0 0
6/25/05 65 0 0 0 0 0
6/25/06 61 0 0 0 0 0
6/25/07 57 0 0 0 0 0
6/25/08 52 0 0 0 0 0
6/25/09 47 0 0 0 0 0
6/25/10 40 0 0 0 0 0
6/25/11 33 0 0 0 0 0
4/25/12 0 0 0 0 0 0
6/25/12 0 0 0 0 0 0
6/25/13 0 0 0 0 0 0
6/25/14 0 0 0 0 0 0
6/25/15 0 0 0 0 0 0
6/25/16 0 0 0 0 0 0
6/25/17 0 0 0 0 0 0
6/25/18 0 0 0 0 0 0
6/25/19 0 0 0 0 0 0
6/25/20 0 0 0 0 0 0
6/25/21 0 0 0 0 0 0
6/25/22 0 0 0 0 0 0
6/25/23 0 0 0 0 0 0
6/25/24 0 0 0 0 0 0
6/25/25 0 0 0 0 0 0
6/25/26 0 0 0 0 0 0
5/25/27 0 0 0 0 0 0
Weighted Average Life 9.77 2.07 1.19 1.04 0.88 0.71
(Years)(1)
Weighted Average Life 9.77 2.07 1.19 1.04 0.88 0.71
(Years)(2)
</TABLE>
(1) To Maturity.
(2) To Clean-Up Call Date.
S-42
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-2 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PAYMENT DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
6/25/97 100 100 100 100 100 100
6/25/98 100 100 100 100 100 100
6/25/99 100 100 100 99 71 27
6/25/00 100 100 68 45 14 0
6/25/01 100 100 34 10 0 0
6/25/02 100 87 7 0 0 0
6/25/03 100 67 0 0 0 0
6/25/04 100 50 0 0 0 0
6/25/05 100 40 0 0 0 0
6/25/06 100 29 0 0 0 0
6/25/07 100 18 0 0 0 0
6/25/08 100 8 0 0 0 0
6/25/09 100 0 0 0 0 0
6/25/10 100 0 0 0 0 0
6/25/11 100 0 0 0 0 0
6/25/12 47 0 0 0 0 0
6/25/13 34 0 0 0 0 0
6/25/14 20 0 0 0 0 0
6/25/15 17 0 0 0 0 0
6/25/16 13 0 0 0 0 0
6/25/17 8 0 0 0 0 0
6/25/18 3 0 0 0 0 0
1/25/19 0 0 0 0 0 0
6/25/19 0 0 0 0 0 0
6/25/20 0 0 0 0 0 0
6/25/21 0 0 0 0 0 0
6/25/22 0 0 0 0 0 0
6/25/23 0 0 0 0 0 0
6/25/24 0 0 0 0 0 0
6/25/25 0 0 0 0 0 0
6/25/26 0 0 0 0 0 0
5/25/27 0 0 0 0 0 0
Weighted Average Life 16.10 7.54 3.64 3.02 2.40 1.80
(Years)(1)
Weighted Average Life 16.10 7.54 3.64 3.02 2.40 1.80
(Years)(2)
</TABLE>
(1) To Maturity.
(2) To Clean-Up Call Date.
S-43
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-3 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PAYMENT DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
6/25/97 100 100 100 100 100 100
6/25/98 100 100 100 100 100 100
6/25/99 100 100 100 100 100 100
6/25/00 100 100 100 100 100 62
6/25/01 100 100 100 100 74 27
6/25/02 100 100 100 79 44 0
6/25/03 100 100 84 57 0 0
6/25/04 100 100 66 42 0 0
6/25/05 100 100 59 38 0 0
6/25/06 100 100 49 0 0 0
6/25/07 100 100 39 0 0 0
6/25/08 100 100 30 0 0 0
6/25/09 100 97 0 0 0 0
6/25/10 100 84 0 0 0 0
6/25/11 100 73 0 0 0 0
6/25/12 100 32 0 0 0 0
6/25/13 100 25 0 0 0 0
6/25/14 100 0 0 0 0 0
6/25/15 100 0 0 0 0 0
6/25/16 100 0 0 0 0 0
6/25/17 100 0 0 0 0 0
6/25/18 100 0 0 0 0 0
6/25/19 97 0 0 0 0 0
6/25/20 88 0 0 0 0 0
6/25/21 79 0 0 0 0 0
6/25/22 69 0 0 0 0 0
6/25/23 57 0 0 0 0 0
6/25/24 43 0 0 0 0 0
6/25/25 28 0 0 0 0 0
10/25/25 0 0 0 0 0 0
6/25/26 0 0 0 0 0 0
5/25/27 0 0 0 0 0 0
Weighted Average Life 26.24 15.50 9.35 7.61 5.64 3.57
(Years)(1)
Weighted Average Life 26.08 14.65 8.79 6.56 4.80 3.39
(Years)(2)
</TABLE>
(1) To Maturity.
(2) To Clean-Up Call Date.
S-44
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-4 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PAYMENT DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ---------- ----------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
6/25/97 100 100 100 100 100 100
6/25/98 100 100 100 100 100 100
6/25/99 100 100 100 100 100 100
6/25/00 100 100 100 100 100 100
6/25/01 99 94 90 88 85 79
6/25/02 99 89 81 77 72 0
6/25/03 97 80 66 61 0 0
6/25/04 95 71 52 45 0 0
6/25/05 88 48 24 17 0 0
6/25/06 80 32 11 0 0 0
6/25/07 73 21 5 0 0 0
6/25/08 66 14 2 0 0 0
6/25/09 58 9 0 0 0 0
6/25/10 50 6 0 0 0 0
6/25/11 43 3 0 0 0 0
4/25/12 0 0 0 0 0 0
6/25/12 0 0 0 0 0 0
6/25/13 0 0 0 0 0 0
6/25/14 0 0 0 0 0 0
6/25/15 0 0 0 0 0 0
6/25/16 0 0 0 0 0 0
6/25/17 0 0 0 0 0 0
6/25/18 0 0 0 0 0 0
6/25/19 0 0 0 0 0 0
6/25/20 0 0 0 0 0 0
6/25/21 0 0 0 0 0 0
6/25/22 0 0 0 0 0 0
6/25/23 0 0 0 0 0 0
6/25/24 0 0 0 0 0 0
6/25/25 0 0 0 0 0 0
6/25/26 0 0 0 0 0 0
5/25/27 0 0 0 0 0 0
Weighted Average Life 12.11 8.18 6.81 6.46 6.06 5.51
(Years)(1)
Weighted Average Life 12.11 8.18 6.80 6.31 5.20 4.03
(Years)(2)
</TABLE>
(1) To Maturity.
(2) To Clean-Up Call Date.
S-45
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-5 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PAYMENT DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI
------------ ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
6/25/97 100 100 100 100 100 100
6/25/98 96 86 81 71 56 46
6/25/99 95 76 67 51 30 19
6/25/00 95 67 56 37 19 11
6/25/01 94 60 46 27 11 5
6/25/02 94 53 38 20 7 0
6/25/03 93 47 32 15 0 0
6/25/04 92 41 27 11 0 0
6/25/05 91 36 23 8 0 0
6/25/06 90 32 19 0 0 0
6/25/07 89 29 16 0 0 0
6/25/08 88 26 14 0 0 0
6/25/09 87 23 0 0 0 0
6/25/10 85 20 0 0 0 0
6/25/11 84 18 0 0 0 0
6/25/12 82 16 0 0 0 0
6/25/13 79 14 0 0 0 0
6/25/14 77 0 0 0 0 0
6/25/15 74 0 0 0 0 0
6/25/16 71 0 0 0 0 0
6/25/17 67 0 0 0 0 0
6/25/18 63 0 0 0 0 0
6/25/19 58 0 0 0 0 0
6/25/20 53 0 0 0 0 0
6/25/21 47 0 0 0 0 0
6/25/22 40 0 0 0 0 0
6/25/23 33 0 0 0 0 0
6/25/24 25 0 0 0 0 0
6/25/25 16 0 0 0 0 0
10/25/25 0 0 0 0 0 0
6/25/26 0 0 0 0 0 0
5/25/27 0 0 0 0 0 0
Weighted Average Life 21.19 7.57 5.27 3.09 1.78 1.32
(Years)(1)
Weighted Average Life 21.10 6.89 4.70 2.88 1.73 1.28
(Years)(2)
</TABLE>
(1) To Maturity.
(2) To Clean-Up Call Date.
S-46
<PAGE>
The weighted average life of each class of Class A Certificates has been
determined by (a) multiplying the amount of the reduction, if any, of the Class
A Certificate Principal Balance of such class 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 Certificate Principal Balance of such class referred to in clause (a). The
actual characteristics and performance of the Mortgage Loans will differ from
the assumptions used in constructing the tables set forth above, which only
demonstrate how the Mortgage Loans may behave under varying prepayment
scenarios. It is unlikely that the Mortgage Loans will prepay at the same levels
of CPR or in accordance with PPM. Moreover, the varying remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal payments
than indicated in the foregoing tables.
PAYMENT DELAY FEATURE OF CLASS A-1 CERTIFICATES, CLASS A-2 CERTIFICATES,
CLASS A-3 CERTIFICATES AND CLASS A-4 CERTIFICATES
The effective yield to the Owners of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates and Class A-4 Certificates will be lower
than the yield otherwise produced by the related Pass-Through Rate and the
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 or origination 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" in the Prospectus. Transworld
Mortgage Corporation is an approved servicer for the Federal Housing
Administration, the Veteran's Administration, GNMA, FHLMC and FNMA, as well as
other major private investors.
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 with affiliates
of the Servicer that 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-Servicing"
in the Prospectus. The Servicer will employ the Sub-Servicer to service the
Mortgage Loans. The Servicer anticipates terminating the sub-servicing
arrangement with the Sub-Servicer and assuming the direct servicing of the
Mortgage Loans by September 1997. The Servicer has taken steps to implement
this change. In order to effect a smooth transition, the Servicer will (i)
employ substantially the same personnel who are currently sub-servicing
mortgage loans as employees of the Sub-Servicer, (ii) utilize substantially
the same types of servicing software that is used by the Sub-Servicer and
(iii) implement substantially similar operational procedures as maintained by
the Sub-Servicer. As of May 31, 1997, the Sub-Servicer was servicing 8,753
Mortgage Loans in the Sponsor's Portfolio representing an aggregate
outstanding principal balance of approximately $525.1 million. In addition to
the Sponsor's Portfolio, the Sub-Servicer serviced as of May 31, 1997
approximately 61,843 mortgage loans with an aggregate principal balance as of
such date of approximately $2.3 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.
S-47
<PAGE>
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. Oral arguments were presented to the Court of Appeals in
March 1997 and a decision with respect to this matter is anticipated later this
year. The Sub-Servicer does not expect the outcome of the RTC Lawsuit to have a
material adverse effect on the Sub-Servicer's financial position, its operations
or its ability to perform its obligations with respect to the Mortgage Loans.
The Trustee and the Certificate Insurer may remove the Servicer, and the
Servicer may resign, only in accordance with the terms of the Pooling and
Servicing Agreement. No removal or resignation shall become effective until the
Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Pooling and Servicing
Agreement, in whole or in part, unless it shall have first obtained the written
consent of the Trustee and the Certificate Insurer, which consent is required
not to be unreasonably withheld; provided, however, that any assignee must meet
the eligibility requirements for a successor servicer set forth in the Pooling
and Servicing Agreement.
The Certificate Insurer (or with the consent of the Certificate Insurer, the
majority of Owners of Class A Certificates) may, pursuant to the Pooling and
Servicing Agreement, remove the Servicer upon the occurrence of, without
limitation, any of the events described in clauses (i) through (xi) 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
S-48
<PAGE>
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 thirty (30) days following the earlier of (x) the date on
which an Authorized Officer knows or reasonably should know of such failure
or (y) receipt by the Servicer of a written notice from the Trustee, any
Owner, the Sponsor or the Certificate Insurer of such failure; or
(vii) The failure by the Servicer (x) to make any required advance (each,
a "Delinquency Advance"), with respect to any delinquent Mortgage Loan and
Remittance Period, of interest due, but not collected, with respect to such
Mortgage Loan during such Remittance Period, (y) to pay any Compensating
Interest or to pay over any Monthly Remittance Amount or (z) other amounts
required to be remitted by the Servicer pursuant to the Pooling and
Servicing Agreement; or
(viii) The delinquency or loss experience of the Mortgage Loan Groups
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 Servicer's or
Sub-Servicer's general servicing standards for similar mortgage loans and
the Servicer's or 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; or
(xi) The Servicer fails to meet the net worth requirement specified in
the Pooling and Servicing Agreement.
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
Except in the case of Mortgage Loans acquired in Bulk Acquisitions, the
Sponsor or EquiVantage Inc. originated the Mortgage Loans or acquired the
Mortgage Loans from Originators, including various retail mortgage lenders.
Mortgage loans that are not acquired in Bulk Acquisitions are originated or
purchased by the Sponsor or EquiVantage Inc. on a flow basis from retail
correspondents and brokers. Correspondents and brokers are subjected
S-49
<PAGE>
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 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 in Bulk Acquisitions)
generally are closed utilizing the Sponsor's loan closing documents, and
closings are coordinated by its central loan closing department. See
"Mortgage Loan Program" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates and the Subordinate Certificates. The Certificates will be issued
by EquiVantage Home Equity Loan Trust 1997-2, a trust to be organized under the
laws of the State of New York. The Subordinate Certificates will be retained by
the Sponsor or affiliates thereof, and are not being offered hereby.
The Certificates will not represent an interest in or obligation of, nor are
the Mortgage Loans guaranteed by, the Sponsor or the Servicer, nor will they be
insured or guaranteed by the Federal Deposit Insurance Corporation (the "FDIC")
or any other governmental agency or instrumentality.
Persons in whose name a Certificate is registered in the Register maintained
by the Trustee are the "Owners" of the Certificates. For so long as the Class A
Certificates are in book-entry form with DTC, the only "Owner" of the Class A
Certificates as the term "Owner" is used in the Pooling and Servicing Agreement
will be Cede. No person acquiring a beneficial interest in a Class A Certificate
(a "Beneficial Owner") will be entitled to receive a definitive certificate
representing such person's interest in the Trust, except in the event that
Definitive Certificates are issued under the 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 related 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 the Class A Certificates on such Payment Date. For so long as any
Class A Certificate is in book-entry form with DTC, Cede 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
S-50
<PAGE>
Compensating Interest, less the sum of certain amounts the Servicer is permitted
to withdraw from the Principal and Interest Account, as described under
"Description of the Securities -- Withdrawals from the Principal and Interest
Account" in the Prospectus.
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 that 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 of Class A
Certificates and will initially be registered in the name of Cede, the nominee
of DTC. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries, which in turn will hold
such positions in customers' securities accounts in the depositaries' names on
the books of DTC. Citibank will act as depositary for Cedel and Morgan will act
as depositary for Euroclear (in such capacities, individually, the "Relevant
Depositary" and, collectively, the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only "Owner" of
such Class A Certificates will be Cede, 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
S-51
<PAGE>
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant 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 "Material Federal Income Tax Consequences -- Foreign
Investors" and "-- Backup Withholding" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to this Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Cedel Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of 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.
S-52
<PAGE>
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms
and Conditions only on behalf of Euroclear Participants, and has no record of
or relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing funds
to the Beneficial Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Class A
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates, to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of such
Book-Entry Certificates, may be limited due to the lack of physical certificates
for such Book-Entry Certificates. In addition, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede, as
nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through 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.
S-53
<PAGE>
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among Participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DISTRIBUTIONS
Distributions on the Certificates are required to be made on each Payment
Date, commencing on July 25, 1997, 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 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 Loan Balances of the Mortgage Loans in a Mortgage Loan Group as of the
last day of a particular Remittance Period over the Class A Certificate
Principal Balance of the Class A Certificates issued in respect of the related
Mortgage Loan Group (after application of the Class A Required Distribution for
such Class A Certificates on the then related Payment Date) 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 with respect to a Mortgage Loan Group is the "Subordinated
Amount" for such Mortgage Loan Group, and the specified target amount of the
excess at a point in time with respect to a Mortgage Loan Group is the
"Specified Subordinated Amount" for such Mortgage Loan Group. The Certificate
Insurer may permit the reduction of the Specified Subordinated Amount for a
Mortgage Loan Group 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, subject to the
priorities described below under "-- Cross-collateralization Provisions," the
Owners of the Class B Certificates will receive distributions of principal on
each Payment Date equal to the Subordination Reduction Amount. "Subordination
Reduction Amount" means, with respect to any Payment Date and with respect to a
Mortgage Loan Group, an amount equal to the lesser of (x) the excess of (i) the
actual Subordinated Amount for such Mortgage Loan Group over (ii) the Specified
Subordinated Amount for such Mortgage Loan Group, in each case for such Payment
Date and (y) the amount described in either clause (a) or clause (b)(i) of the
definition of "Class A Principal Distribution Amount," whichever is applicable,
for such Payment Date. Thus, the Owners of the Class B Certificates will receive
principal distributions to the extent that there is a level of subordination
greater than that required by the Certificate Insurer for a Mortgage Loan Group,
as will be the case when amortization of the Class A Certificates Principal
Balance is accelerated by application of Net Monthly Excess Spread (described
below), or when the Specified Subordinated Amount for a Mortgage Loan Group
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 related Class A Certificates will be entitled
to receive 100% of the principal of a Mortgage Loan Group to be distributed on
such Payment Date. To the extent a Subordination Reduction Amount is payable to
the Owners of the Class B Certificates, such payment will have the effect of
decelerating the amortization of the related Class A Certificates relative to
the amortization of the Mortgage Loans in such Mortgage Loan Group.
The Subordinate Certificates are also entitled to receive the Net Monthly
Excess Spread available on any Payment Date. "Net Monthly Excess Spread"
means, with respect to a Mortgage Loan Group, the difference between Total
Monthly Excess Spread for such Mortgage Loan Group and any portion thereof
used to cover an Available Funds
S-54
<PAGE>
Shortfall with respect to such Mortgage Loan Group, or with respect to the
other Mortgage Loan Group, or to pay to the Certificate Insurer any
Reimbursement Amounts. "Total Monthly Excess Spread" means, with respect to
the related Mortgage Loan Group, the difference between (x) the interest that
is collected on the Mortgage Loans in such Mortgage Loan Group during a
Remittance Period (net of the Servicing Fee, the Trustee Fee and the
Certificate Insurer's premium, in each case for the related Mortgage Loan
Group) plus any Delinquency Advances and Compensating Interest relating to
such Mortgage Loan Group and (y) the interest that accrues on the related
Class A Certificates during the related Accrual Period.
On each Payment Date, the Total Monthly Excess Spread will be used, to the
extent available, to fund any shortfalls in amounts due to the Owners of the
Class A Certificates and Reimbursement Amounts due to the Certificate Insurer on
such Payment Date. See "Cross-collateralization Provisions" below. In addition,
after application to any such shortfalls and Reimbursement Amounts, until the
Subordinated Amount reaches the Specified Subordinated Amount, or to the extent
that the Specified Subordinated Amount for a Mortgage Loan Group increases or
"steps up" due to the effect of the triggers set forth in the Pooling and
Servicing Agreement or if, due to Realized Losses, the Subordinated Amount for a
Mortgage Loan Group has been reduced below the Specified Subordinated Amount for
such Mortgage Loan Group, the Pooling and Servicing Agreement requires that Net
Monthly Excess Spread be used to make payments of principal to the Owners of the
related Class A Certificates for the purposes of accelerating the amortization
of the related Class A Certificates relative to the amortization of the Mortgage
Loans in such Mortgage Loan Group. Such accelerated payments of principal will
be applied to the "Subordination Increase Amount," which will equal, as of any
Payment Date and with respect to a Mortgage Loan Group, the excess of (x) the
Specified Subordinated Amount for such Mortgage Loan Group over (y) the actual
Subordinated Amount for such Mortgage Loan Group.
CROSS-COLLATERALIZATION PROVISIONS
On each Payment Date, an amount equal to the sum of (x) the Total Monthly
Excess Spread with respect to each Mortgage Loan Group plus (y) any
Subordination Reduction Amount with respect to such Mortgage Loan Group (such
amount being the "Total Monthly Excess Cashflow" with respect to such Mortgage
Loan Group and Payment Date) with respect to each Mortgage Loan Group will be
required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on such Payment Date
with respect to the related Mortgage Loan Group and equal to the difference,
if any, between (x) the Class A Required Distribution Amount for the Class A
Certificates issued in respect of the related Mortgage Loan Group for such
Payment Date and (y) the Available Funds with respect to such Mortgage Loan
Group for such Payment Date (the amount of such difference being equal to an
"Available Funds Shortfall" with respect to the related Mortgage Loan
Group);
(ii) any portion of the Total Monthly Excess Cashflow with respect to
such Mortgage Loan Group remaining after the application described in clause
(i) above shall be used to fund any Available Funds Shortfall with respect
to the other Mortgage Loan Group;
(iii) any portion of the Total Monthly Excess Cashflow with respect to
such Mortgage Loan Group remaining after the applications described in
clauses (i) and (ii) above shall be paid to the Certificate Insurer in
respect of amounts owed on account of any Insured Payments theretofore made
with respect to the related Mortgage Loan Group and other payments made by
the Certificate Insurer pursuant to the Certificate Insurance Policy and not
previously repaid (any such amount so owed to the Certificate Insurer and
not theretofore paid, together with accrued interest thereon, the
"Reimbursement Amount" with respect to the related Mortgage Loan Group); and
(iv) any portion of the Total Monthly Excess Cashflow with respect to
such Mortgage Loan Group remaining after the applications described in
clauses (i), (ii) and (iii) above shall be paid to the Certificate Insurer
in respect of any Reimbursement Amount with respect to the other Mortgage
Loan Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect to a
Mortgage Loan Group on a Payment Date remaining after such applications is the
"Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for such
Payment Date; such amount is required to be applied in the following order of
priority on such Payment Date:
S-55
<PAGE>
(i) such amount shall be used to fund the payment of any required
Subordination Increase Amount with respect to the related Mortgage Loan
Group as a portion of the distribution of the Class A Principal Distribution
Amount on such Payment Date; and
(ii) any portion of the Net Monthly Excess Cashflow remaining after the
application described in clause (i) immediately above shall be used to make
any required Subordination Increase Amount with respect to the other
Mortgage Loan Group.
The Pooling and Servicing Agreement defines the "Class A Principal
Distribution Amount" with respect to each Payment Date for the Classes of Class
A Certificates issued in respect of a Mortgage Loan Group as being the sum,
without duplication, of:
(A) the portion of any Subordination Deficit due from any prior period
with respect to the related Mortgage Loan Group, together with accrued
interest thereon;
(B) the principal actually collected by the Servicer with respect to the
Mortgage Loans in the related Mortgage Loan Group during the related
Remittance Period;
(C) the Loan Balance of each Mortgage Loan in the related Mortgage Loan
Group 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 in the related Mortgage Loan Group, 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 in the related Mortgage Loan Group during the
related Remittance Period (to the extent such Net Liquidation Proceeds
relate to principal);
(F) the portion of any Subordination Deficit with respect to such
Mortgage Loan Group for such Payment Date;
(G) the proceeds received by the Trustee from any termination of the
related Mortgage Loan Group (to the extent such proceeds relate to
principal);
(H) the portion of any Subordination Increase Amount with respect to
such Mortgage Loan Group for such Payment Date to the extent of any Net
Monthly Excess Cashflow available for such purpose, after giving effect to
the cross-collateralization provisions described above;
minus
the portion of any Subordination Reduction Amount to be applied for such
Payment Date.
The "Loan Balance" is the outstanding principal balance of each Mortgage
Loan on the Cut-off Date (but not including any amounts in respect of accrued
interest thereon, even if the terms of the Mortgage Loan permit such amounts to
be added to the principal balance thereof), 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
S-56
<PAGE>
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. 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), the Loan
Balance of which shall be zero following such determination. 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 and (y) the Loan
Balance of the replacement Mortgage Loan, as of the date the Trust acquired
it, plus accrued and unpaid interest on such amount.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICY
The Pooling and Servicing Agreement defines a "Subordination Deficit" with
respect to a Mortgage Loan Group and a Payment Date to be the amount, if any, by
which (x) the Class A Certificate Principal Balance of the Class A Certificates
issued in respect of the related Mortgage Loan Group 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 Loan Balances of the
Mortgage Loans in the related Mortgage Loan Group as of the close of business on
the last day of the preceding Remittance Period[; provided, that with respect to
the Final Scheduled Payment Date for the Class A-5 Certificates, the
Subordination Deficit shall include, in addition to amounts calculated as
described above with respect to the Class A-5 Certificates and the Adjustable
Rate Group, any additional amounts representing the aggregate outstanding
Certificate Principal Balance of the Class A-5 Certificates plus accrued
interest thereon (but not including any Available Funds Cap Carry-Forward
Amount), if the Servicer has not purchased all of the outstanding Mortgage Loans
in the Adjustable Rate Group as of such Payment Date in accordance with the
Pooling and Servicing Agreement]. 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 related Class A Certificates on such Payment
Date. Thus, neither the Certificate Insurance Policy nor the subordination
provisions described above guarantees 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 related Mortgage Loan Group, 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 for each Mortgage Loan Group
to be on deposit in the Distribution Account on such Payment Date (including
amounts available with respect to such Mortgage Loan Group as a result of the
cross-collateralization described above) (less the Servicing Fee for such
Mortgage Loan Group, such amount being the "Available Funds"), but net of the
Trustee Fee and the Certificate Insurer's premium (and without regard to the
amount of any Insured Payment), in each case for the related Mortgage Loan
Group. If the amount of the Insured Distribution Amount for a Mortgage Loan
Group for any Payment Date exceeds the related Available Funds for such
Payment Date, net of the Trustee Fee and the Certificate Insurer's premium,
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.
S-57
<PAGE>
FLOW OF FUNDS
On each Payment Date, the Trustee shall distribute for each Mortgage Loan
Group, to the extent of the Available Funds on deposit in the Distribution
Account for such Mortgage Loan Group and the amount of any Insured Payment for
such Mortgage Loan Group 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 Fee then due;
(c) from the remaining Available Funds then on deposit for such Mortgage
Loan Group 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 for such Mortgage Loan Group over (ii) the Insured
Distribution Amount for such Mortgage Loan Group for such Payment Date and
(y) the Reimbursement Amount, if any, for such Mortgage Loan Group as of
such Payment Date;
(d) from remaining Available Funds then on deposit in the Distribution
Account for the related Mortgage Loan Group, together with the amount of any
related Insured Payment, concurrently to the Owners of the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates and the Class A-5 Certificates, respectively, the
Class A Interest Distribution Amount for each such class of Class A
Certificates;
(e) from remaining Available Funds then on deposit in the Distribution
Account for the Fixed Rate Group, together with the amount of any related
Insured Payment, to the Owners of the Class A-4 Certificates, in reduction
of the Class A-4 Certificate Principal Balance, an amount equal to the Class
A-4 Lockout Distribution, if any;
(f) from remaining Available Funds then on deposit in the Distribution
Account for the Fixed Rate Group, together with the amount of any related
Insured Payment, in respect of the Class A Principal Distribution Amount and
net of amounts distributed pursuant to clause (e) above, to the Owners of
the Class A-1 Certificates, in reduction of the Class A-1 Certificate
Principal Balance, until such Class A-1 Certificate Principal Balance is
reduced to zero, then to the Owners of the Class A-2 Certificates, in
reduction of the Class A-2 Certificate Principal Balance, until such Class
A-2 Certificate Principal Balance is reduced to zero, then to the Owners of
the Class A-3 Certificates, in reduction of the Class A-3 Certificate
Principal Balance, until such Class A-3 Certificate Principal Balance is
reduced to zero, then to the Owners of the Class A-4 Certificates, in
reduction of the Class A-4 Certificate Principal Balance, until such Class
A-4 Certificate Principal Balance is reduced to zero;
(g) from remaining amounts then on deposit in the Distribution Account
for the Adjustable Rate Group, together with the amount of any related
Insured Payment, in respect of the Class A Principal Distribution Amount, to
the Owners of the Class A-5 Certificates, in reduction of the Class A-5
Certificate Principal Balance, until such Class A-5 Certificate Principal
Balance is reduced to zero;
(h) from remaining amounts then on deposit in the Distribution Account
for the Adjustable Rate Group, to the Owners of the Class A-5 Certificates,
an amount equal to the Available Funds Cap Carry-Forward Amount for such
Distribution Date;
(i) from remaining amounts then on deposit in the Distribution Account,
to the Servicer and/or the Trustee, reimbursement for certain permitted
reimbursable amounts; and
(j) 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.
S-58
<PAGE>
Notwithstanding the foregoing, on any Payment Date on or after which a
Certificate Insurer Default has occurred, any amounts of principal (including
any Class A-4 Lockout Distribution) that would otherwise be distributed
sequentially to the Owners of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificate and Class A-4 Certificates shall instead be
distributed concurrently to the Owners of such Certificates, pro rata, until the
Certificate Principal Balance of each such class has been reduced to zero. A
"Certificate Insurer Default" means the occurrence and continuation of a failure
by the Certificate Insurer to make any Insured Payment under the terms of the
Certificate Insurance Policy or certain events of insolvency or bankruptcy with
respect to the Certificate Insurer.
The "Class A-4 Lockout Distribution" on each Payment Date means an amount
equal to the lesser of (i) the product of the applicable Class A-4 Lockout
Percentage and the Class A-4 Pro Rata Distribution Amount for such Payment Date
and (ii) the Class A Principal Distribution Amount in respect of the Fixed Rate
Group for such Payment Date.
The "Class A-4 Lockout Percentage" for each Payment Date is as follows:
PAYMENT DATE CLASS A-4
OCCURRING IN LOCKOUT PERCENTAGE
------------- ------------------
July 1997--June 2000.............. 0%
July 2000--June 2002.............. 45%
July 2002--June 2003.............. 80%
July 2003--June 2004.............. 100%
July 2004 and thereafter.......... 300%
The "Class A-4 Pro Rata Distribution Amount" for any Payment Date means an
amount equal to the product of (i) a fraction, the numerator of which is the
Class A-4 Certificate Principal Balance and the denominator of which is the
aggregate of the certificate principal balances of the Class A Certificates
issued in respect of the Fixed Rate Group, in each case immediately prior to
such Payment Date, and (ii) the portion of the Class A Principal Distribution
Amount collected in respect of such Mortgage Loan Group.
"LIBOR" shall mean the London interbank offered rate for one-month United
States dollar deposits. LIBOR for each Accrual Period shall be determined on
the second business day preceding the first day of any Accrual Period (each,
a "LIBOR Determination Date"), on the basis of the offered rates of the
Reference Banks for one-month United States dollar deposits, as such rates
appear on the Reuters Screen LIBOR Page, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. As used in this paragraph, "business day"
means a day on which banks are open for dealing in foreign currency and
exchange in London and New York City; "Reuters Screen LIBOR Page" means the
display designated as page "LIBOR" on the Reuters Monitor Money Rates Service
(or such other page as may replace the LIBOR page on that service for the
purpose of displaying London interbank offered rates of major banks); and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
(i) with an established place of business in London, (ii) whose quotations
appear on the Reuters Screen LIBOR Page on the LIBOR Determination Date in
question, (iii) which have been designated as such by the Trustee and (iv)
not controlling, controlled by or under common control with the Sponsor or
any Originator.
On each LIBOR Determination Date, LIBOR will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR shall be the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of such
offered quotations.
(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR shall be the greater of (x) LIBOR as
determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded upwards
if necessary to the nearest whole multiple of 0.0625%) of the one-month U.S.
dollar lending rates that New York City banks selected by the Trustee are
S-59
<PAGE>
quoting on the relevant LIBOR Determination Date to the principal London
offices of leading banks in the London interbank market or, in the event
that the Trustee can determine no such arithmetic mean, (ii) the lowest
one-month U.S. dollar lending rate which New York City banks selected by the
Trustee are quoting on such LIBOR Determination Date to leading European
banks.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-5 Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding. Each such rate of interest may be obtained
by telephoning the Trustee at (410) 884-2000.
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
On the Closing Date, the Certificate Insurance Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Insurance Agreement, dated
as of the Cut-off Date, among the Sponsor, the Servicer and the Certificate
Insurer.
The Certificate Insurance Policy unconditionally guarantees the timely
payment of interest due (but not any amounts in respect of Available Funds Cap
Carry-Forward Amounts) and the ultimate payment of principal 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 cannot
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.
In addition, the Certificate Insurance Policy will provide for payment of
the amount (a "Preference Amount") of any distributions in respect of principal
or interest previously paid to an Owner of a Class A Certificate that are
subsequently recovered from such Owner prior to the expiration date of the
Certificate Insurance Policy pursuant to a final, nonappealable order (a "Final
Order") of a court of competent jurisdiction under the United States Bankruptcy
Code. Any such payments would be made under the Certificate Insurance Policy on
the second business day following receipt by the Certificate Insurer of a
certified copy of such Final Order, assignment to the Certificate Insurer of
such Owner's rights and claims with respect to such Preference Amount and
appointment of the Certificate Insurer as such Owner's agent in respect of such
Preference Amount. No such Owner shall be entitled to reimbursement for any
payment avoided as a preference as to which the Certificate Insurer previously
has made a payment under the Certificate Insurance Policy, nor is the
Certificate Insurer obligated to make any payment in respect of any Preference
Amount which represents a payment of the principal amount of the Class A
Certificates prior to the time the Certificate Insurer otherwise would have been
required to make a payment in respect of such principal.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Certificate Insurer, or the majority of Owners of the Class A Certificates with
the consent of the Certificate Insurer, may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee with respect
to the Certificates or exercising any trust or power conferred on the Trustee
with respect to the Certificates or the Trust Estate.
S-60
<PAGE>
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 Owners of Class A Certificates, whether or not such funds
are properly distributed by the Trustee. For purposes of the Certificate
Insurance Policy, the term "Owner" does not include the Trust, the Servicer or
the Sponsor. The Certificate Insurance Policy does not guarantee any specific
rate of prepayments of principal of the Mortgage Loans. The Certificate
Insurance Policy does not guarantee payment of any Available Funds Cap
Carry-Forward Amount (or any interest thereon). The Certificate Insurance Policy
is non-cancelable. The Certificate Insurance Policy expires and terminates
without any action on the part of the Certificate Insurer or any other person on
the date that is one year and one day following the date on which the Class A
Certificates have been paid in full.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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.
A copy of the Certificate Insurance Policy is available upon request to the
Trustee at its principal corporate trust office located at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota 55479-0070, Attention: Corporate Trust
Services. The telephone number for the Trustee's corporate trust office is (410)
884-2000.
THE CERTIFICATE INSURER
GENERAL
Financial Guaranty Insurance Company, the "Certificate Insurer," a New
York stock insurance corporation, is a monoline financial guaranty insurance
company which, since January 1984, has been a leading insurer of bonds issued
by municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations
and pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also
authorized to carry on general insurance business in the United Kingdom and
to write credit and guaranty insurance in France.
The Certificate Insurer is 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 the State of New York Insurance Department and 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.
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
S-61
<PAGE>
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 interest and principal when due on 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.
As of March 31, 1997, December 31, 1996 and December 31, 1995, the
Certificate Insurer had written directly or assumed through reinsurance,
guaranties of approximately $209.3 billion, $205.0 billion and $180.0 billion
par value of securities, respectively (of which approximately 85 percent, 82
percent and 88 percent constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.07 billion, $2.05 billion and
$1.95 billion, respectively. As of March 31, 1997, the Certificate Insurer had
reinsured approximately 31 percent of the risks it had written, 25 percent
through quota share reinsurance, 28 percent through excess of loss reinsurance
and 47 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth capitalization of the Certificate Insurer as
of December 31, 1995, December 31, 1996 and March 31, 1997, respectively, on the
basis of generally accepted accounting principles. No material adverse change in
the capitalization of the Certificate Insurer has occurred since March 31, 1997.
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1995 December 31, 1996 March 31, 1997
(in millions) (in millions) (in millions)
----------------- ----------------- ---------------
<S> <C> <C> <C>
Unearned Premiums.......................................... $ 728 $ 682 $ 674
Other Liabilities.......................................... 304 288 282
Stockholder's Equity
Common Stock............................................. 15 15 15
Additional Paid-in Capital............................... 334 334 334
Unrealized gains......................................... 64 39 16
Foreign currency translation adjustment.................. (2) (1) (1)
Retained Earnings........................................ 1,137 1,297 1,342
------ ------ ------
Total Stockholder's Equity................................. 1,548 1,684 1,706
------ ------ ------
Total Liabilities and Stockholder's Equity................. $ 2,580 $ 2,654 $ 2,662
------ ------ ------
------ ------ ------
</TABLE>
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, of this Prospectus
Supplement.
S-62
<PAGE>
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 Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement 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 of this Prospectus Supplement.
An indemnification agreement between the Certificate Insurer and Morgan
Stanley & Co. Incorporated and an insurance agreement among the Certificate
Insurer, the Sponsor and EquiVantage Inc. each provide that the parties to such
agreements 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 specified in the Pooling and
Servicing Agreement, 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
related insurance policies, (v) Net Liquidation Proceeds with respect to any
Liquidated Loan, (vi) rights under the Certificate Insurance Policy and (vii)
the Sponsor's rights under the Master Transfer Agreements as described below
(collectively, the "Trust Estate").
SALE OF MORTGAGE LOANS
EquiVantage 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 EquiVantage and the
Sponsor (collectively, the "Master Transfer Agreements"). In the Master Transfer
Agreements EquiVantage will make certain representations and warranties. The
Sponsor will assign its rights to enforce such representations and warranties to
the Trustee as part of the Trust Estate.
Pursuant to the Pooling and Servicing Agreement, on the Closing Date the
Sponsor 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. 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-63
<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, if any, showing
a complete chain of assignment from origination to the Originator, including
warehousing assignments, with evidence of recording (or transmission for
recordation) thereon, (iii) originals of all assumption and modification
agreements if any, (iv) any of: (a) the original Mortgage, with evidence of
recording thereon, (b) a true and accurate copy of the Mortgage where the
original Mortgage has been transmitted for recording, until such time as the
original Mortgage 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, (v) the original Mortgage
Insurance Policy, title commitment, binder or attorney's opinion of title and
abstract of title, and (vi) an assignment in blank, in recordable form, of
each Mortgage for which an assignment is not recorded, executed by the record
holder of such Mortgage. 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, or other
documentation acceptable to the Trustee or the Certificate Insurer,
concluding that such recordation is not necessary to protect the Trustee's
interests in the related Mortgage Loans), and that evidence of the recording
thereof be included in the related Mortgage Loan File upon receipt thereof.
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 the
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 that 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 thirty (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
S-64
<PAGE>
all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in
the Trust as of the date of such purchase plus one month's interest on such
amount at the weighted average of the Class A Pass-Through Rates.
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 Class A Certificate Principal Balances as of the date of such purchase plus
interest accrued on the Class A Certificates since the prior Payment Date at the
weighted average of the Class A Pass-Through Rates. 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 (30) days after receipt of such opinion.
MATERIAL 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 "Material 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 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 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. Andrews & Kurth L.L.P., 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. It is
possible that the Internal Revenue Service could treat a portion of the
additional interest that would become payable on the Class A-3 Certificates,
Class A-4 Certificates and Class A-5 Certificates after the Step-Up Payment Date
as "original issue discount." 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 120% PPM with
respect to the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates and Class A-4 Certificates and 25% CPR with respect to the Class
A-5 Certificates, as described under "Prepayment and Yield Considerations"
herein. No representation is made that any of the Mortgage Loans will prepay at
this rate or any other rate. See "Material Federal Income Tax Consequences --
Discount and Premium -- Original Issue Discount" in the Prospectus.
S-65
<PAGE>
CLASS A-5 CERTIFICATES
The Class A-5 Certificates, except to the extent of any Available Funds Cap
Carry-Forward Amounts, will be treated as regular interests in a REMIC under
section 860G of the Code (the "Class A-5 Regular Interests"). Accordingly, the
portion representing the Class A-5 Regular Interests will be treated as (i)
assets described in section 7701(a)(19)(C) of the Code, and (ii) "real estate
assets" within the meaning of section 856(c)(5) of the Code, in each case to the
extent described in the Prospectus. Interest on such portion of the Class A-5
Certificates 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 to the same
extent that such portion of the Class A-5 Certificates is treated as real estate
assets. See "Material Federal Income Tax Consequences " in the Prospectus.
Each holder of a Class A-5 Certificate is deemed to own an undivided
beneficial ownership interest in two assets (i) the Class A-5 Regular Interests
and (ii) an interest rate cap contract (a "Cap Agreement"). The Cap Agreement
with respect to the Class A-5 Certificates is not included in any REMIC related
to the Series 1997-2 REMIC. The treatment of amounts received by a Class A-5
Certificateholder under such Certificateholder's right to receive Available
Funds Cap Carry-Forward Amounts will depend on the portion of such
Certificateholder's purchase price allocable thereto. Under the REMIC
regulations, each Class A-5 Certificateholder must allocate its purchase price
for the Class A-5 Certificates between its undivided interest in the Class A-5
Regular Interests and its undivided interest in the Cap Agreement in accordance
with the relative fair market values of each property right. Payments made to
the Class A-5 Certificates under the Cap Agreement will be included in income
based on the regulations relating to notional principal contracts (the "Notional
Principal Contract Regulations"). The original issue discount regulations (as
described in the Prospectus), which technically do not apply to REMIC regular
interests, provide that the issuer's allocations of the issue price are binding
on all holders unless the holder explicitly discloses on its tax return that its
allocation is different from the issuer's allocation. Under the REMIC
regulations, the Trustee is required to account for the Class A-5 Regular
Interests and the Cap Agreement as discrete property rights. Ownership of the
Cap Agreement will entitle the owner to amortize the separate price paid for the
related Cap Agreement under the Notional Principal Contract Regulations. The
Internal Revenue Service issued regulations applicable to debt instruments
acquired after August 13, 1996 that provide for the integration of a qualifying
debt instrument with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
These regulations expressly exclude REMIC regular instruments from their
application.
ERISA CONSIDERATIONS
The Employment Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain restrictions on (a) employee benefit plans (as
defined in Section 3(3) of ERISA), plans described in section 4975(e)(1) of the
Code, including individual retirement accounts or Keogh plans, and any entities
whose underlying assets include plan assets by reason of a plan's investment in
such entities (each a "Plan") and (b) persons who have certain specified
relationships to such Plans ("Parties-in-Interest" under ERISA and "Disqualified
Persons" under the Code). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114
S. Ct. 517 (1993), an insurance company's general account may be deemed to
include assets of the Plans investing in the general account (e.g., through the
purchase of an annuity contract). ERISA also imposes certain duties on persons
who are fiduciaries of Plans subject to ERISA and prohibits certain transactions
between a Plan and Parties-in-Interest or Disqualified Persons with respect to
such Plans. See "ERISA Considerations" in the Prospectus.
The Department of Labor has issued to each of Morgan Stanley & Co.
Incorporated and Prudential Securities Incorporated an individual prohibited
transaction exemption, Prohibited Transaction Exemption 90-24 and Prohibited
Transaction Exemption 90-32, respectively (together, 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.
S-66
<PAGE>
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 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
1933 Act.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or D&P for
at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to the Plan's acquisition of certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons 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.
S-67
<PAGE>
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
each class of Class A Certificates 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
Group, 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
None of the Class A Certificates will constitute "mortgage related
securities" for purposes of SMMEA. 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 extents 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 Matters" in the Prospectus.
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 percentage interest of the Class A
Certificates set forth opposite its name below:
PERCENTAGE INTEREST OF
UNDERWRITER CLASS A CERTIFICATES
----------- ----------------------
Morgan Stanley & Co. Incorporated................. 50%
Prudential Securities Incorporated................ 50%
The Underwriters are collectively committed to purchase all of the Class A
Certificates if any Class A Certificates are purchased. The Underwriters have
advised the Sponsor that they propose to offer the Class A Certificates for sale
from time to time in one or more negotiated transactions, or otherwise, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices. The Underwriters may effect such transactions by
selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters or purchasers of the Class A Certificates for
whom they may act as agents. In addition to the profits on resale received by
the Underwriters in connection with such transactions, the Sponsor has agreed to
pay the Underwriters a fee of 0.30% of the aggregate original principal amount
of the Class A Certificates. In connection with the sale of the Class A
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the form of underwriting compensation. Any dealers that
participate with the Underwriters in the distribution of the Class A
Certificates
S-68
<PAGE>
purchased by the Underwriters may be deemed to be underwriters, and any
discounts or commissions received by them or the Underwriters and any profit
on the resale of the Class A Certificates by them or the Underwriters may be
deemed to be underwriting discounts or commissions under the 1933 Act.
The Sponsor has been advised by the Underwriters that the Underwriters
intend to make a market in the Class A Certificates, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Class A Certificates and such market-making may be discontinued at
any time at the sole discretion of the Underwriters. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Class A
Certificates.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Class A Certificates in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the Class A Certificates originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions syndicate covering
transactions and penalty bids may cause the price of the Class A Certificates to
be higher than it would otherwise be in the absence of such transactions.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the 1933 Act, or contribute to
payments which the Underwriters may be required to make in respect thereof.
EXPERTS
The financial statements of Financial Guaranty Insurance Company, included
in this Prospectus Supplement in Appendix A, as of December 31, 1996 and 1995
and for each of the years in the three year period ended December 31, 1996, have
been included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing in Appendix A, and upon the authority of
such firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
by Andrews & Kurth L.L.P., Washington, D.C. Hunton & Williams will act as
counsel for the Certificate Insurer.
S-69
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
----
1933 Act.................................................... S-1
Accrual Period.............................................. S-8
Actuarial Loans............................................. S-37
Adjustable Rate Group....................................... ii, S-4, S-21
Authorized Officer.......................................... S-48
Available Funds............................................. S-57, S-60
Available Funds Cap......................................... S-7
Available Funds Cap Carry-Forward Amount.................... S-7, S-15
Available Funds Shortfall................................... S-55
Base Servicing Fee.......................................... S-14
Beneficial Owner............................................ S-50
Beneficial Owners........................................... ii, S-14
Book-Entry Certificates..................................... S-51
Business Day................................................ S-8
Cap Agreement............................................... S-66
Cede........................................................ S-14
CEDEL....................................................... ii, S-14
CEDEL Participants.......................................... S-52
Certificate Insurance Policy................................ ii, S-13
Certificate Insurer......................................... ii, S-13, S-61
Certificate Insurer Default................................. S-59
Certificate Principal Balance............................... S-9
Certificateholder........................................... S-61
Certificates................................................ cover, S-3
Citibank.................................................... S-14
Class A Certificate Principal Balances...................... S-38
Class A Certificates........................................ cover, S-3
Class A Distribution Amount................................. S-11
Class A Interest Distribution Amount........................ S-8
Class A Principal Distribution Amount....................... S-9, S-54, S-56
Class A Required Distribution Amount........................ S-10
Class A-1 Certificate Principal Balance..................... S-38
Class A-1 Certificates...................................... cover, S-3
Class A-1 Pass-Through Rate................................. S-6
Class A-2 Certificate Principal Balance..................... S-38
Class A-2 Certificates...................................... cover, S-3
Class A-2 Pass-Through Rate................................. S-6
Class A-3 Certificate Principal Balance..................... S-38
Class A-3 Certificates...................................... cover, S-3
Class A-3 Pass-Through Rate................................. S-6
Class A-4 Certificate Principal Balance..................... S-38
Class A-4 Certificates...................................... cover, S-3
Class A-4 Lockout Distribution.............................. S-59
Class A-4 Lockout Percentage................................ S-11, S-59
Class A-4 Pass-Through Rate................................. S-6
Class A-4 Pro Rata Distribution Amount...................... S-11, S-59
Class A-5 Certificate Principal Balance..................... S-38
Class A-5 Certificates...................................... cover, S-3
Class A-5 Formula Pass-Through Rate......................... S-7
Class A-5 Pass-Through Rate................................. S-6
Class A-5 Regular Interests................................. S-66
Class B Certificates........................................ S-3
S-70
<PAGE>
Class R Certificates........................................ S-3
Clean-Up Call Date.......................................... S-15
Closing Date................................................ S-3
CLTV........................................................ S-17
Commission.................................................. S-1
Cooperative................................................. S-52
CPR......................................................... S-39
Cut-off Date................................................ S-3
D&P......................................................... S-67
Definitive Certificate...................................... S-51
Delinquency Advance......................................... S-49
DTC......................................................... ii, S-14
DTC Participants............................................ S-52
ERISA....................................................... S-66
Euroclear................................................... ii, S-14
Euroclear Operator.......................................... S-52
Euroclear Participants...................................... S-52
European Depositaries....................................... S-51
European Depositories....................................... S-14
Exchange Act................................................ S-1, S-69
Exemptions.................................................. S-66
FDIC........................................................ S-50
Final Determination......................................... S-64
Final Order................................................. S-60
Final Scheduled Payment Date................................ S-38
Final Scheduled Payment Dates............................... S-4
Financial Intermediary...................................... S-51
Fitch....................................................... S-62
Fixed Rate Group............................................ ii, S-4, S-21
GE Capital.................................................. S-61
Ginnie Mae.................................................. S-19
GNMA........................................................ S-19
Incentive Program........................................... S-6
Insured Distribution Amount................................. S-12
Insured Payment............................................. S-13
LIBOR....................................................... S-6, S-59
LIBOR Determination Date.................................... S-59
Liquidated Mortgage Loan.................................... S-57
Loan Balance................................................ S-56
Loan-to-Value Ratio......................................... S-17
LTV......................................................... S-17
Master Transfer Agreements.................................. S-63
Monthly Remittance Amount................................... S-50
Moody's..................................................... S-15
Morgan...................................................... S-14
Mortgage Loan File.......................................... S-64
Mortgage Loan Group......................................... ii, S-4, S-21
Mortgage Loans.............................................. cover
Mortgaged Properties........................................ ii
Mortgages................................................... ii
Mortgagor................................................... S-37
Net Liquidation Proceeds.................................... S-56
Net Monthly Excess Cashflow................................. S-55
Net Monthly Excess Spread................................... S-54
Notes....................................................... S-21
S-71
<PAGE>
Notional Principal Contract Regulations..................... S-66
Original Class A-1 Certificate Principal Balance............ S-6
Original Class A-2 Certificate Principal Balance............ S-6
Original Class A-3 Certificate Principal Balance............ S-6
Original Class A-4 Certificate Principal Balance............ S-6
Original Class A-5 Certificate Principal Balance............ S-6
original issue discount..................................... S-65
Originators................................................. S-3
Owner....................................................... S-50
Owners...................................................... ii, S-50
Owners of Record............................................ S-8
Participants................................................ S-51
Payment Date................................................ ii, S-8
Percentage Interest......................................... S-50
Plan........................................................ S-66
Pooling and Servicing Agreement............................. cover, S-3
PPM......................................................... S-39
Preference Amount........................................... S-60
Prepayment.................................................. S-37
Principal and Interest Account.............................. S-57
Program Loan................................................ S-6
Property Value.............................................. S-17
PUD......................................................... S-21
Purchase Option Period...................................... S-64
Realized Loss............................................... S-9
Reference Banks............................................. S-59
Reimbursement Amount........................................ S-55
Relevant Depositary......................................... S-51
REMIC....................................................... S-64
REMICs...................................................... ii
Remittance Date............................................. S-56
Remittance Period........................................... S-9
Reserve Interest Rate....................................... S-59
Restricted Group............................................ S-67
Reuters Screen LIBO Page.................................... S-59
RTC......................................................... S-48
RTC Lawsuit................................................. S-48
Rules....................................................... S-51
S&P......................................................... S-15
Schedule of Mortgage Loans.................................. S-63
Servicer.................................................... cover, S-3
Servicing Fee............................................... S-15
six-month LIBOR............................................. S-18
Specified Subordinated Amount............................... S-54
Sponsor..................................................... cover, S-3
Sponsor's Portfolio......................................... S-19
Statistic Calculation Date.................................. S-4
Step-Up Payment Date........................................ S-7
Structuring Assumptions..................................... S-39
Sub-Servicer................................................ S-3
Subordinate Certificate Owners.............................. S-13
Subordinate Certificates.................................... cover
Subordinated Amount......................................... S-54
Subordination Deficit....................................... S-10, S-57
Subordination Increase Amount............................... S-55
S-72
<PAGE>
Subordination Reduction Amount.............................. S-54
Substitution Amount......................................... S-57
Termination Notice.......................................... S-64
Terms and Conditions........................................ S-53
Third-Party Servicing Portfolio............................. S-19
Total Monthly Excess Cashflow............................... S-55
Total Monthly Excess Spread................................. S-55
Trust....................................................... cover
Trust Estate................................................ S-63
Trustee..................................................... S-3
Trustee Fee................................................. S-15
Underwriters................................................ ii
weighted average life....................................... S-39
S-73
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered EquiVantage
Home Equity Loan Trust 1997-2 Class A Certificates (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of DTC, Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts
as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global
security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading Between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
I-1
<PAGE>
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the Relevant Depository, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following
month. Payment will then be made by the Relevant Depository to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and
the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day
funds settlement. The most direct means of doing so is to preposition funds
for settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although the result
will depend on each Cedel Participant's or Euroclear Participant's particular
cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available
to the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depository, as appropriate,
to credit the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment to and excluding the settlement date on
the basis of the actual number of days in such accrual period and a year
assumed to consist to 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day
of the following month. The payment will then be reflected in the account of
Cedel Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). In the event that the Cedel
Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed
on the intended 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.
I-2
<PAGE>
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.
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, (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) a trust if (a) a court in the United States
I-3
<PAGE>
is able to exercise primary supervision over the administration of the trust,
and (b) one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. 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, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
A-1
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY
Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- -------------------------------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
December 31, 1996
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
Independent Auditor's Report
To 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, 1996 and 1995, and the related
statements of income, stockholder's equity, and cash flows for each of the
years in the three 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, 1996 and 1995 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.
/s/ KPMG Peat Marwick
-----------------------------
KPMG-Peat Marwick LLP
January 17, 1997
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
- -------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,190,303 in 1996 and $2,043,453 in 1995) $2,250,549 $2,141,584
Short-term investments, at cost, which approximates market 73,839 91,032
Cash 860 199
Accrued investment income 37,655 37,347
Reinsurance recoverable 7,015 7,672
Prepaid reinsurance premiums 167,683 162,087
Deferred policy acquisition costs 91,945 94,868
Property and equipment, net of accumulated depreciation
($15,333 in 1996 and $12,861 in 1995) 4,696 6,314
Receivable for securities sold 379 26,572
Prepaid expenses and other assets 19,520 12,627
---------- ----------
Total assets $2,654,141 $2,580,302
---------- ----------
---------- ----------
Liabilities And Stockholder's Equity
Liabilities:
Unearned premiums $ 681,816 $ 727,535
Loss and loss adjustment expenses 72,616 77,808
Ceded reinsurance balances payable 10,561 1,942
Accounts payable and accrued expenses 54,165 32,811
Payable to Parent 1,791 1,647
Current federal income taxes payable 52,016 51,296
Deferred federal income taxes 91,805 99,171
Payable for securities purchased 4,937 40,211
---------- ----------
Total liabilities $ 969,707 $1,032,421
---------- ----------
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains on fixed maturity securities available-
for-sale, net of tax 39,160 63,785
Foreign currency translation adjustment, net of tax (429) (1,499)
Retained earnings 1,296,692 1,136,584
---------- ----------
Total stockholder's equity 1,684,434 1,547,881
---------- ----------
Total liabilities and stockholder's equity $2,654,141 $2,580,302
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Financial Guaranty Insurance
Company Statements of Income
- --------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Revenues:
Gross premiums written............... $ 97,027 $ 97,288 $ 161,940
Ceded premiums....................... (29,376) (19,319) (46,477)
---------- ---------- ----------
Net premiums written.............. 67,651 77,969 115,463
Decrease in net unearned premiums.... 51,314 27,309 53,364
---------- ---------- ----------
Net premiums earned............... 118,965 105,278 168,827
Net investment income................ 124,635 120,398 109,828
Net realized gains................... 15,022 30,762 5,898
---------- ---------- ----------
Total revenues....................... 258,622 256,438 284,553
---------- ---------- ----------
Expenses:
Loss and loss adjustment expenses.... 2,389 (8,426) 3,646
Policy acquisition costs............. 16,327 13,072 15,060
Decrease (Increase) in Deferred
policy acquisition costs............. 2,923 (3,940) 3,709
Other underwriting expenses.......... 12,508 19,100 21,182
---------- ---------- ----------
Total expenses.................... 34,147 19,806 43,597
---------- ---------- ----------
Income before provision for
Federal income taxes................. 224,475 236,632 240,956
---------- ---------- ----------
Federal income tax expense:
Current........................... 41,548 28,913 43,484
Deferred.......................... 5,318 19,841 7,741
---------- ---------- ----------
Total Federal income tax expense.. 46,866 48,754 51,225
---------- ---------- ----------
Net income........................ $ 177,609 $ 187,878 $ 189,731
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Financial Guaranty Insurance
Company Statements of Stockholder's Equity
- -------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES) ON
FIXED MATURITY
SECURITIES
ADDITIONAL AVAILABLE- FOREIGN
COMMON PAID-IN FOR-SALE, NET OF CURRENCY RETAINED
STOCK CAPITAL TAX ADJUSTMENT EARNINGS
--------- ---------- ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994................... $ 15,000 $ 334,011 $ 90,708 $ (2,265) $ 783,975
Net income................................. -- -- -- -- 189,731
Change in 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)
Change in 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
--------- ---------- -------- ----------- ------------
Net Income................................. -- -- -- -- 177,609
Dividend paid.............................. -- -- -- -- (17,500)
Change in fixed maturity securities
available for sale, net of tax of
($13,260)................................ -- -- (24,625) -- --
Foreign currency translation adjustment.... -- -- -- 1,070 --
--------- ---------- -------- ----------- ------------
Balance at December 31, 1996............... $ 15,000 $ 334,011 $ 39,160 $ (429) $ 1,296,692
--------- ---------- -------- ----------- ------------
--------- ---------- -------- ----------- ------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Financial Guaranty Insurance Company Statements of Cash Flows
- -------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 177,609 $ 187,878 $ 189,731
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums (45,719) (29,890) (45,927)
Change in loss and loss adjustment expense reserves (5,192) (20,938) 2,648
Depreciation of property and equipment 2,472 2,348 2,689
Change in reinsurance receivable 657 6,800 (304)
Change in prepaid reinsurance premiums (5,596) 2,581 (7,437)
Change in foreign currency translation adjustment 1,646 (427) 1,607
Policy acquisition costs deferred (16,327) (16,219) (18,306)
Amortization of deferred policy acquisition costs 19,250 12,279 22,015
Change in accrued investment income, and prepaid
expenses and other assets (7,201) 2,906 (5,150)
Change in other liabilities 30,117 (12,946) 2,577
Change in deferred income taxes 5,318 19,841 7,741
Amortization of fixed maturity securities 792 1,922 5,112
Change in current income taxes payable 720 (30,827) 33,391
Net realized gains on investments (15,022) (30,762) (5,898)
----------- ----------- -----------
Net cash provided by operating activities 143,524 94,546 184,489
----------- ----------- -----------
Investing Activities:
Sales and maturities of fixed maturity securities 891,643 836,103 550,534
Purchases of fixed maturity securities (1,033,345) (891,108) (721,908)
Purchases, sales and maturities of short-term investments, net 17,193 (15,358) (11,486)
Purchases of property and equipment, net (854) (750) (1,290)
----------- ----------- -----------
Net cash used in investing activities (125,363) (71,113) (184,150)
----------- ----------- -----------
Financing Activities:
Dividends paid (17,500) (25,000) --
----------- ----------- -----------
Net cash provided by financing activities (17,500) (25,000) --
----------- ----------- -----------
Increase (Decrease) in cash 661 (1,567) 339
Cash at beginning or year 199 1,766 1,427
----------- ----------- -----------
Cash at end of year $ 860 $ 199 $ 1,766
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides
financial guaranty insurance on newly issued municipal bonds and
municipal bonds trading in the secondary market, the latter including
bonds held by unit investment trusts and mutual funds. The Company also
insures structured debt issues outside the municipal market.
Approximately 82% 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 1996 presentation. Significant
accounting policies are as follows:
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." The Statement defines
three categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's
equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining terms
of the securities. Realized gains or losses on the sale of investments
are determined on the basis of specific identification.
6
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
PREMIUM REVENUE RECOGNITION
Premiums for policies where premiums are collected in a single payment at
policy inception are earned over the period at risk, based on the total
exposure outstanding at any point in time. Financial guaranty insurance
policies exposure generally declines according to predetermined
schedules. For policies with premiums that are collected periodically,
premiums are reflected in income pro rata over the period covered by the
premium payment.
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 $72.6 million and $77.8 million at December 31, 1996
and 1995, respectively. As of December 31, 1996 and 1995, such reserves
included $28.9 million and $28.8 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 between 6.5 and 6.6 in
1996 and 5.5 % in 1995. The reserve for loss and loss adjustment expenses
is necessarily based upon estimates, however, in management's opinion the
reserves for loss and loss adjustment expenses is adequate. However,
actual results will likely differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred
compensation. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to
statutory contingency reserves (see Note 3). The amounts deducted
must be included in taxable income upon their release from the reserves
or upon earlier release of such amounts from such reserves to cover
excess losses as permitted by insurance regulators. The amounts deducted
are allowed as deductions from taxable income only to the extent that
U.S. government non-interest bearing tax and loss bonds are purchased and
held in an amount equal to the tax benefit attributable to such
deductions.
7
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and equipment
are depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the
lease, whichever is shorter. Computer equipment and software are
depreciated over three years. Maintenance and repairs are charged to
expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of
exchange existing at December 31, 1996 and 1995 and revenues and expenses
are translated at average monthly exchange rates. The cumulative
translation loss at December 31, 1996 and 1995 was $0.4 million and $1.5
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 directly in proportion to the scheduled
principal and interest payments rather than in proportion to the
total exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the financial
reporting and the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments;
and
(g) all fixed income investments are carried at amortized cost rather
than at fair value for securities classified as available-for-sale
under GAAP.
8
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
---------- ------------ ---------- ------------ ---------- ------------
GAAP basis amount.......................... $ 177,609 $1,684,434 $ 187,878 $1,547,881 $ 189,731 $1,279,723
Premium revenue recognition................ (9,358) (176,285) (22,555) (166,927) (4,970) (144,372)
Deferral of acquisition costs.............. 2,923 (91,945) (3,940) (94,868) 3,709 (90,928)
Contingency reserve........................ -- (460,973) -- (386,564) -- (328,073)
Non-admitted assets........................ -- (3,879) -- (5,731) -- (7,566)
Case basis loss reserves................... (3,197) (3,249) 4,048 (52) (3,340) (4,100)
Portfolio loss reserves.................... -- 24,000 (22,100) 24,000 (11,050) 46,100
Deferral of income taxes (benefits)........ 5,317 70,719 19,842 64,825 7,741 45,134
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of
tax...................................... -- (39,160) -- (63,785) -- 41,773
Recognition of profit commission........... (441) (6,185) 3,096 (5,744) (2,410) (8,840)
Provision for unauthorized reinsurance..... -- -- -- -- -- (266)
Contingency reserve tax deduction (see Note
2)....................................... -- 85,176 -- 78,196 -- 55,496
Allocation of tax benefits due to Parent's
net operating loss to the Company (see
Note 5).................................. 313 10,603 637 10,290 (63) 9,653
---------- ------------ ---------- ------------ ---------- ------------
Statutory-basis amount..................... $ 173,166 $1,093,256 $ 166,906 $1,001,521 $ 179,348 $ 893,734
---------- ------------ ---------- ------------ ---------- ------------
---------- ------------ ---------- ------------ ---------- ------------
</TABLE>
9
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.2 million as of December 31, 1996 and 1995, 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
1996 COST GAINS LOSSES VALUE
---- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies................. $ 57,987 $ 373 $ 1 $ 58,359
Obligations of states and political
subdivisions.............................. 2,098,486 65,254 4,854 2,158,886
Debt securities issued by foreign
governments............................... 33,830 -- 526 33,304
--------- ------ ----- ---------
Investments available-for-sale............. 2,190,303 65,627 5,381 2,250,549
Short-term investments..................... 73,839 -- -- 73,839
--------- ------ ----- ---------
Total...................................... $2,264,142 $65,627 $5,381 $2,324,388
---------- ------ ----- ---------
---------- ------ ----- ---------
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1996, 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
1996 COST VALUE
---- ---------- ----------
<S> <C> <C>
Due in one year or less...................... $ 110,783 $ 110,888
Due after one year through five years........ 92,279 92,951
Due after five years through ten years....... 337,495 349,524
Due after ten years through twenty years..... 1,650,945 1,696,623
Due after twenty years....................... 72,640 74,402
--------- ---------
Total........................................ $2,264,142 $2,324,388
--------- ---------
--------- ---------
</TABLE>
10
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------
<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>
In 1996, 1995 and 1994, proceeds from sales and maturities of investments in
fixed maturity securities available-for-sale carried at fair value were
$891.6 million, $836.1 million, and $550.5 million, respectively. For 1996,
1995 and 1994 gross gains of $19.8 million, $36.3 million and $18.2 million
respectively, and gross losses of $15.0 million, $5.5 million and $12.3
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,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Income from fixed maturity securities..................... 119,290 $ 112,684 $ 108,519
Income from short-term investments........................ 6,423 8,450 2,479
---------- ---------- ----------
Total investment income................................... 125,713 121,134 110,998
Investment expenses....................................... 1,078 736 1,170
---------- ---------- ----------
Net investment income..................................... $ 124,635 $ 120,398 $ 109,828
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As of December 31, 1996, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------
(5) INCOME TAXES
------------
The Company files a federal tax return as part of the consolidated return of
General Electric Capital Corporation ("GE Capital"). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the Parent
based upon their respective contributions to consolidated net income. The
Company's effective federal corporate tax rate (20.8 percent in 1996, 20.6
percent in 1995 and 21.3 percent in 1994) is less than the corporate tax rate
on ordinary income of 35 percent in 1996, 1995 and 1994.
Federal income tax expense relating to operations of the Company for 1996,
1995 and 1994 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Current tax expense........................................... $ 41,548 $ 28,913 $ 43,484
Deferred tax expense.......................................... 5,318 19,841 7,741
--------- --------- ---------
Federal income tax expense.................................... $ 46,866 $ 48,754 $ 51,225
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Income taxes computed on income before provision for federal
income taxes, at the
statutory rate................................................................. $ 78,566 $ 82,821 $ 84,334
Tax effect of:
Tax-exempt interest............................................................ (32,609) (30,630) (30,089)
Other, net..................................................................... 909 (3,437) (3,020)
--------- --------- ---------
Provision for income taxes....................................................... $ 46,866 $ 48,754 $ 51,225
--------- --------- ---------
--------- --------- ---------
</TABLE>
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31, 1996 and
1995 are presented below (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Loss reserves......................................................... $ 9,249 $ 8,382
Deferred compensation................................................. 2,531 5,735
Tax over book capital gains........................................... 2,144 1,069
Other................................................................. 2,601 3,248
--------- ---------
Total gross deferred tax assets......................................... 16,525 18,434
--------- ---------
Deferred tax liabilities:
Unrealized gains on fixed maturity securities, available-for-sale..... 21,086 34,346
Deferred acquisition costs............................................ 32,181 33,204
Premium revenue recognition........................................... 37,159 32,791
Rate differential on tax and loss bonds............................... 9,454 9,454
Other................................................................. 8,450 7,810
--------- ---------
Total gross deferred tax liabilities.................................... 108,330 117,605
--------- ---------
Net deferred tax liability.............................................. $ 91,805 $ 99,171
--------- ---------
--------- ---------
</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, 1996 and 1995. The Company anticipates
that the related deferred tax asset will be realized.
Total federal income tax payments during 1996, 1995 and 1994 were $33.9
million, $59.8 million, and $10.1 million, respectively.
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------
(6) REINSURANCE
-----------
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where warranted,
on a facultative basis. This process serves to limit the Company's
exposure on risks underwritten. In the event that any or all of the
reinsuring companies were unable to meet their obligations, the Company
would be liable for such defaulted amounts. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The Company holds collateral under reinsurance agreements
in the form of letters of credit and trust agreements in various amounts
with various reinsurers totaling $32.9 million that can be drawn on in
the event of default.
Net premiums earned are presented net of ceded earned premiums of $23.7
million, $21.9 million and $39.0 million for the years ended December
31, 1996, 1995 and 1994, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $(0.8) million, $1.1
million and $0.3 million for the years ended December 31, 1996, 1995 and
1994, respectively.
-14-
<PAGE>
Financial Guaranty Insurance
Company Notes To Financial Statements (Continued)
- ------------------------------------------------------------------------------
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1,.............................................. $ 77,808 $ 98,746 $ 96,098
Less reinsurance recoverable..................................... (7,672) 14,472 14,168
----------- ----------- -----------
Net balance at January 1,.......................................... 70,136 84,274 81,930
Incurred related to:
Current year....................................................... -- 26,681 15,133
Prior years........................................................ 2,389 (1,207) (437)
Portfolio reserves................................................. -- (33,900) (11,050)
----------- ----------- -----------
Total Incurred..................................................... 2,389 (8,426) 3,646
----------- ----------- -----------
Paid related to:
Current year....................................................... -- (197) (382)
Prior years........................................................ (6,924) (5,515) (920)
----------- ----------- -----------
Total Paid......................................................... (6,924) (5,712) (1,302)
----------- ----------- -----------
Net balance at December 31,........................................ 65,601 70,136 84,274
Plus reinsurance recoverable...................................... 7,015 7,672 14,472
----------- ----------- -----------
Balance at December 31,............................................ $ 72,616 $ 77,808 $ 98,746
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The changes in incurred portfolio and case reserves principally relates
to business written in prior years. The changes are based upon an
evaluation of the insured portfolio in light of current economic
conditions and other relevant factors.
15
<PAGE>
Financial Guaranty Insurance
Company Notes To Financial Statements (Continued)
- ------------------------------------------------------------------------------
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the
management of the Company's investment portfolio; and telecommunication
service charges. Approximately $8.1 million, $3.2 million and $3.2
million in expenses were incurred in 1996, 1995 and 1994, 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 $0.6 million in 1996, $1.3 million in 1995, and
$2.5 million in 1994.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1996, 1995 and 1994.
(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 $4.5 million, $7.5 million and $12.2 million in 1996,
1995 and 1994, 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 $66.4 million in 1996 and 1995, 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, 1996 and 1995, the
amount of the Company's surplus available for dividends was approximately
$91.8 million and $100.2 million, respectively.
During 1996 and 1995, the Company paid dividends of $17.5 milion and
$25.0 million, respectively. No dividends were paid during 1994.
16
<PAGE>
Financial Guaranty Insurance
Company Notes To Financial Statements (Continued)
- ------------------------------------------------------------------------------
(11) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities
is included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts......................... $ 860 $ 860 $ 199 $ 199
Short-term investments.................................... $ 73,839 $ 73,839 $ 91,032 $ 91,032
Fixed maturity securities................................. $ 2,250,549 $ 2,250,549 $ 2,141,584 $ 2,141,584
</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 $358.7million and $387.4 million compared to a carrying value of
$487.8 million as of December 31, 1996 and between $412.8 million and
$456.2 million compared to a carrying value of $540.6 million as of
December 31, 1995.
17
<PAGE>
Financial Guaranty Insurance
Company Notes To Financial Statements (Continued)
- ------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade quality.
The Company has established and maintains its own underwriting standards
that are based on those aspects of credit that the Company deems
important for the particular category of obligations considered for
insurance. Credit criteria include economic and social trends, debt
management, financial management and legal and administrative factors,
the adequacy of anticipated cash flows, including the historical and
expected performance of assets pledged for payment of securities under
varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be pledged
or, in some instances, that a third-party guarantee be provided for a
term of the obligation insured by a party of acceptable credit quality
obligated to make payment prior to any payment by the Company. The types
and extent of collateral pledged varies, but may include residential and
commercial mortgages, corporate debt, government debt and consumer
receivables.
As of December 31, 1996, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $104.4
billion, net of reinsurance of $30.8 billion. The Company's insured
portfolio as of December 31, 1996 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, 1996, 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............................................................. $ 50,213.1
Special revenue................................................................ 33,037.8
Industrial revenue............................................................. 366.5
Non-municipal.................................................................. 20,776.2
------------
Total........................................................................... $ 104,393.6
------------
------------
</TABLE>
The Company's net exposure outstanding is $188,646.00 million as of
December 31, 1996.
18
<PAGE>
Financial Guaranty Insurance
Company Notes To Financial Statements (Continued)
- ------------------------------------------------------------------------------
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1996 by state, net of reinsurance, was as
follows (in millions):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
California....................................................................... $ 11,251.7
Florida.......................................................................... 9,838.4
Pennsylvania..................................................................... 9,325.3
New York......................................................................... 8,184.5
Illinois......................................................................... 6,721.2
Texas............................................................................ 5,799.1
New Jersey....................................................................... 4,465.3
Michigan......................................................................... 4,166.6
Arizona.......................................................................... 2,808.9
Ohio............................................................................. 2,616.0
------------
Sub-total 65,177.0
Other states and International 39,216.6
------------
Total $ 104,393.6
------------
------------
</TABLE>
(12) COMMITMENTS
Total rent expense was $2.8 million, $2.2 million and $2.6 million in
1996, 1995 and 1994, respectively. For each of the next five years and in
the aggregate as of December 31, 1996, 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>
1997................................................................. $ 2,909
1998................................................................. 2,909
1999................................................................. 2,909
2000................................................................. 2,909
2001................................................................. 2,911
---------
Total minimum future rental payments................................. $ 14,547
---------
---------
</TABLE>
19
<PAGE>
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
THREE MONTHS ENDED MARCH 31, 1997
B-1
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- ------------------------------------------------------------------------------
UNAUDITED INTERIM FINANCIAL STATEMENTS
March 31, 1997
Balance Sheets..........................................................1
Statements of Income....................................................2
Statements of Cash Flows................................................3
Notes to Unaudited Interim Financial Statements.........................4
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEET
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS (UNAUDITED)
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,141,691 in 1997 and $2,190,303 in 1996)... $ 2,165,694 $ 2,250,549
Short-term investments, at cost, which approximates market........ 165,686 73,839
Cash.............................................................. 1,050 860
Accrued investment income......................................... 36,173 37,655
Reinsurance receivable............................................ 6,986 7,015
Deferred policy acquisition costs................................. 90,960 91,945
Property, plant and equipment net of accumulated depreciation of
$15,962 in 1997 and $15,333 in 1996............................. 4,343 4,696
Prepaid reinsurance premiums...................................... 167,643 167,683
Prepaid expenses and other assets................................. 23,773 19,899
------------ ------------
Total assets.................................................. $ 2,662,308 $ 2,654,141
------------ ------------
------------ ------------
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums................................................. $ 673,704 $ 681,816
Losses and loss adjustment expenses............................... 70,713 72,616
Ceded reinsurance payable......................................... 373 10,561
Accounts payable and accrued expenses............................. 57,144 54,165
Due to parent..................................................... -- 1,791
Current federal income taxes payable.............................. 65,679 52,016
Deferred federal income taxes payable............................. 80,354 91,805
Payable for securities purchased.................................. 8,026 4,937
------------ ------------
Total liabilities............................................. 955,993 969,707
------------ ------------
------------ ------------
Stockholder's Equity:
Common stock, par value $1,500 per share at March 31, 1997 and at
December 31, 1996: 10,000 shares authorized, issued and
outstanding..................................................... 15,000 15,000
Additional paid-in capital........................................ 334,011 334,011
Net unrealized gains on fixed maturity securities available for
sale, net of tax................................................ 15,602 39,160
Foreign currency translation adjustment........................... (423) (429)
Retained earnings................................................. 1,342,125 1,296,692
------------ ------------
Total stockholder's equity.................................... 1,706,315 1,684,434
------------ ------------
Total liabilities and stockholder's equity.................... $ 2,662,308 $ 2,654,141
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim financial statements.
1
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENT OF INCOME
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
Gross premiums written....................................... $ 28,518 $ 21,277
Ceded premiums............................................... (7,137) (3,300)
---------- ---------
Net premiums written......................................... 21,381 17,977
Decrease in net unearned premiums............................ 8,072 17,018
---------- ---------
Net premiums earned.......................................... 29,453 34,995
Net investment income........................................ 31,597 31,063
Net realized gains........................................... 6,069 5,074
---------- ---------
Total revenues............................................. 67,119 71,132
---------- ---------
Expenses:
Losses and loss adjustment expenses.......................... (249) (1,165)
Policy acquisition costs..................................... 3,851 6,790
Other underwriting expenses.................................. 3,851 4,207
---------- ---------
Total expenses............................................. 7,453 9,832
---------- ---------
Income before provision for federal income taxes........... 59,666 61,300
Provision for federal income taxes............................ 14,233 13,346
---------- ---------
Net income................................................. $ 45,433 $ 47,954
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to interim financial statements.
2
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENT OF CASH FLOW
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C>
1997 1996
----------- -----------
(UNAUDITED)
Operating activities:
Net income......................................................... $ 45,433 $ 47,954
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for deferred income taxes................................ 562 917
Amortization of fixed maturity securities.......................... 227 41
Policy acquisition costs deferred.................................. (2,866) (4,258)
Amortization of deferred policy acquisition costs.................. 3,851 6,790
Depreciation of fixed assets....................................... 629 612
Change in reinsurance receivable................................... 29 124
Change in prepaid reinsurance premiums............................. 40 1,398
Foreign currency translation adjustment............................ 9 (1,218)
Change in accrued investment income, prepaid expenses and other
assets........................................................... (2,392) 15,127
Change in unearned premiums........................................ (8,112) (18,416)
Change in losses and loss adjustment expense reserves.............. (1,903) (3,005)
Change in other liabilities........................................ (9,000) (552)
Change in current income taxes payable............................. 13,663 12,429
Net realized gains on investments.................................. (6,069) (5,074)
----------- -----------
Net cash provided by operating activities.......................... 34,101 52,869
----------- -----------
Investing activities:
Sales or maturities of fixed maturity securities................... 272,200 199,015
Purchases of fixed maturity securities............................. (213,987) (240,781)
Sales or maturities (purchases) of short-term investments, net..... (91,847) (10,101)
Purchases of property and equipment, net........................... (277) (381)
----------- -----------
Net cash used for investing activities............................. (33,911) (52,248)
Increase in cash................................................... 190 621
Cash at beginning of period........................................ 860 199
----------- -----------
Cash at end of period.............................................. $ 1,050 $ 820
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to interim financial statements.
3
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
MARCH 31, 1997 AND 1996
(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 three months ended March 31, 1997
and 1996, (b) the financial position at March 31, 1997 and December
31, 1996, and (c) cash flows for the three months ended March 31,
1997 and 1996.
These interim financial statements should be read in conjunction
with the financial statements and related notes included in the
1996 audited financial statements.
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) 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 directly in proportion to the scheduled
principal and interest payments rather than in proportion to the total
exposure outstanding at any point in time;
(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.
4
<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>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
1997 1996
----------------------- -----------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
GAAP basis amount............................................... 45,433 1,706,315 $ 47,954 $1,553,480
Premium revenue recognition..................................... (2,466) (178,751) (1,933) (168,861)
Deferral of acquisition costs................................... 985 (90,960) 2,532 (92,336)
Contingency reserve............................................. -- (474,460) -- (403,087)
Non-admitted assets............................................. -- (3,257) -- (5,283)
Case-basis losses incurred...................................... (661) (3,910) (1,750) (1,798)
Portfolio loss reserves......................................... -- 24,000 -- 24,000
Deferral of income tax.......................................... 570 71,274 917 65,315
Unrealized gains on fixed maturity securities held at fair
value, net of taxes........................................... -- (15,602) -- (22,222)
Profit commission............................................... (343) (6,528) 782 (4,965)
Contingency reserve tax deduction............................... -- 85,176 -- 78,196
Allocation of tax benefits due to Parent's net operating loss to
the Company................................................... 94 10,628 (55) 10,236
--------- ------------ --------- ------------
Statutory basis amount.......................................... 43,612 1,123,724 $ 48,447 $1,032,675
--------- ------------ --------- ------------
--------- ------------ --------- ------------
</TABLE>
5
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
MARCH 31, 1997 AND 1996
(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 1997
is approximately $112.4 million.
(4) INCOME TAXES
------------
The Company's effective Federal corporate tax rate (23.9 percent
and 21.8 percent for the three months ended March 31, 1997 and
1996, 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", 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 $7.2 million and $7.3 million, respectively, for
the three months ended March 31, 1997 and 1996.
6
<PAGE>
PROSPECTUS
Dated June 3, 1997
EquiVantage Acceptance Corp.
Sponsor
$500,000,000
Mortgage Loan Asset-Backed Securities
(Issuable in Series)
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 assets of each Trust will consist of a
segregated pool (a "Mortgage Pool") of mortgage loans secured by first and
junior liens on one- to four-family residential properties (the "Mortgage
Loans") to be acquired by such Trust from EquiVantage Acceptance Corp. (the
"Sponsor"), together with related accounts, insurance policies and any other
types of credit enhancement described herein and in the related Prospectus
Supplement. The Mortgage Loans were or will be acquired by the Sponsor from
affiliated or unaffiliated entities as described herein. See "The Mortgage
Pools" herein.
The Mortgage Loans in each Mortgage Pool and the other assets described
herein (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.
Each Mortgage Pool will consist of one or more of the various types of Mortgage
Loans described under "The Mortgage Pools" herein.
(continued on next page)
------------------------------
Prospective investors should review the information appearing herein under the
caption "Risk Factors" beginning on page 16 before purchasing any Securities.
------------------------------
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,
ANY ORIGINATOR OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of any series unless accompanied by a Prospectus Supplement.
<PAGE>
(continued from previous page)
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 that differ as to the timing, sequential order, priority of payment,
interest rate or amount of distributions of principal or interest or both. As
described more fully under "Summary of Prospectus--The Securities--General
Nature of the Securities as Investments" herein, only Fixed Income Securities
will be offered hereby; no Equity Securities will be offered hereby or by the
related Prospectus Supplement. 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.
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 or
over-collateralization. See "Description of Credit Enhancement" herein.
The only obligations of the Sponsor, the Servicer and the related
Originators 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 to the extent
additional obligations, if any, of the Sponsor, the Servicer or the related
Originators are described in the related Prospectus Supplement. EquiVantage
Inc., the parent of the Sponsor, will act as Servicer (the "Servicer"), directly
or through one or more sub-servicers (the "Sub-Servicer(s)"), of the Mortgage
Loans. The principal obligations of the Servicer will be 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" herein.
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"
herein. A Trust may be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
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 that
constitutes a collateral arrangement for the issuance of secured debt. See
"Material Federal Income Tax Consequences" herein.
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" herein and in the related Prospectus Supplement.
2
<PAGE>
There will be no secondary market for any series of Securities prior to the
offering thereof and the Securities will not be listed on any national
securities exchange. 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.
Reference is made to the Index of Principal Definitions at the end of
this Prospectus for the location in this Prospectus of the definitions of
certain capitalized terms used herein.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Securities to be offered
hereunder, among other things, will set forth with respect to such series of
Securities: (i) a description of the class or classes of such Securities; (ii)
the rate of interest, the Pass-Through Rate or other applicable rate (or the
manner of determining such rate) and authorized denominations of each class of
such Securities; (iii) certain information concerning the Mortgage Loans and
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other forms of credit enhancement,
if any, relating to one or more Mortgage Pools or all or part of the related
Securities; (iv) the specified interest of each class of Securities in, and
manner and priority of, the distributions on the Mortgage Loans; (v) information
as to the nature and extent of subordination with respect to such series of
Securities, if any; (vi) the Payment Dates; (vii) the amount, if any, deposited
in the Pre-Funding Account, the criteria for determining which additional
Mortgage Loans may become assets of the related Trust and the length of the
specified period during which any such transfers must occur; (viii) the
circumstances, if any, under which each Trust may be subject to early
termination; (ix) whether a REMIC election will be made and the designation of
the regular and residual interest therein; and (x) additional information with
respect to the plan of distribution of such Securities.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission (the "Commission")
with respect to the Securities. The Registration Statement and amendments
thereof and the exhibits thereto may be inspected at the Public Reference Room
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic filings made through the
Electronic Data Gathering, Analysis, and Retrieval System are publicly available
through the Commission's Web Site (http:/ /www.sec.gov).
No person has been authorized to give any information or to make any
representation regarding the series of Securities referred to in the
accompanying Prospectus Supplement other than those contained or incorporated by
reference in this Prospectus and such Prospectus Supplement with respect to such
series and, if given or made, such information or representations must not be
relied upon. This Prospectus and the accompanying Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Securities offered hereby and thereby nor an offer of the
Securities to any person in any state or other jurisdiction in which such offer
would be unlawful. The delivery of this Prospectus at any time does not imply
that information herein is correct as of any time subsequent to its date.
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 Securities Exchange Act of 1934, as amended (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
3
<PAGE>
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 that 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 301,
Houston, Texas 77040 (telephone number 713/ 895-1957).
No information that relates to any series of Securities other than the
series referred to in the accompanying Prospectus Supplement shall be deemed to
be incorporated by reference in this Prospectus.
REPORTS TO SECURITYHOLDERS
Monthly and annual reports concerning any Securities and the related
assets included in the Trust will be sent by the Trustee to all related
Securityholders. See "Description of the Securities--Reports to
Securityholders" herein. If the Securities of a series are to be issued in
book-entry form, such reports will be sent to the Securityholder of record,
and beneficial owners of such Securities will have to rely on the procedures
described herein under "Description of the Securities--Form of Securities" to
obtain such reports. The Trustee will file periodic reports with the
Commission concerning each series of Securities only for so long as such
reports are required to be so filed. The Trustee does not intend to file
periodic reports with the Commission concerning any series of Securities
after completion of the reporting period specified by Rule 15d-1 under the
Exchange Act.
4
<PAGE>
TABLE OF CONTENTS
Caption Page
- ------- ----
SUMMARY OF PROSPECTUS..........................................................6
RISK FACTORS..................................................................16
Limited Liquidity.........................................................16
Obligations Limited to Trust Estate.......................................16
Limitations, Reduction and Substitution of
Credit Enhancement......................................................16
Risks Related to the Mortgage Loans--Decline in Property Values and
Non-Standard Loan Terms.................................................17
Litigation................................................................19
Geographic Concentration of Mortgaged Properties..........................19
Applicability of State and Federal Lending Laws...........................19
Yield and Prepayment Considerations.......................................20
Book-Entry Registration--Limited Liquidity and Delays in Distribution.....20
The Status of the Mortgage Loans in the Event of
Bankruptcy of the Sponsor or an Originator--Payment Delays..............21
Limitations on Interest Payments and Foreclosures.........................21
Rating of Securities Dependent on Credit Enhancement......................21
Liability of Trust for Indemnification--Reduction of Trust Assets
and Credit Enhancement..................................................21
THE TRUSTS....................................................................22
The Mortgage Loans--General...............................................22
THE MORTGAGE POOLS............................................................25
General...................................................................25
The Mortgage Pools........................................................26
MORTGAGE LOAN PROGRAM.........................................................28
The Sponsor's Underwriting Process........................................28
Bulk Guidelines...........................................................29
Qualifications of Originators.............................................29
Representations by the Sponsor and Originators............................30
Sub-Servicing.............................................................31
DESCRIPTION OF THE SECURITIES.................................................33
General...................................................................33
General Payment Terms of Securities.......................................34
Form of Securities........................................................35
Assignment of Mortgage Loans..............................................37
Forward Commitments; Pre-Funding..........................................38
Payments on Mortgage Loans; Deposits to
Distribution Account...................................................39
Withdrawals from the Principal and Interest Account.......................41
Distributions.............................................................42
Principal and Interest on the Securities..................................42
Advances..................................................................43
Reports to Securityholders................................................44
Collection and Other Servicing Procedures.................................45
Realization upon Defaulted Mortgage Loans.................................46
SUBORDINATION.................................................................47
DESCRIPTION OF CREDIT ENHANCEMENT.............................................48
Letter of Credit..........................................................49
Mortgage Pool Insurance Policies..........................................49
Special Hazard Insurance Policies.........................................50
Bankruptcy Bonds..........................................................50
Reserve Funds.............................................................50
Financial Guaranty Insurance Policies.....................................51
Other Insurance, Guarantees and
Similar Instruments or Agreements.......................................51
Cross-Collateralization...................................................51
Overcollateralization.....................................................52
Maintenance of Credit Enhancement.........................................52
Reduction or Substitution of Credit Enhancement...........................53
HAZARD INSURANCE; CLAIMS THEREUNDER...........................................53
Hazard Insurance Policies.................................................53
Caption Page
- ------- ----
THE SPONSOR...................................................................54
THE SERVICER..................................................................54
THE POOLING AND SERVICING AGREEMENT...........................................54
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield................................55
Evidence as to Compliance.................................................55
Removal and Resignation of the Servicer...................................56
Rights upon Event of Default .............................................56
Amendment.................................................................57
Termination; Retirement of Securities.....................................57
The Trustee...............................................................58
YIELD CONSIDERATIONS..........................................................58
MATURITY AND PREPAYMENT CONSIDERATIONS........................................60
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND RELATED MATTERS...................................................62
General...................................................................62
Cooperative Loans.........................................................62
Foreclosure...............................................................63
Foreclosure on Shares of Cooperatives.....................................64
Rights of Redemption......................................................65
Anti-Deficiency Legislation and Other
Limitations on Lenders..................................................65
Environmental Considerations..............................................66
Enforceability of Certain Provisions......................................67
Applicability of Usury Laws...............................................68
Alternative Mortgage Instruments..........................................68
Soldiers' and Sailors' Civil Relief Act of 1940...........................68
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES................................................................69
General...................................................................69
Grantor Trust Securities..................................................69
REMIC Securities..........................................................71
Debt Securities...........................................................77
Discount and Premium......................................................77
Backup Withholding........................................................80
Foreign Investors.........................................................80
STATE TAX CONSIDERATIONS......................................................81
ERISA CONSIDERATIONS..........................................................81
Plan Asset Regulations....................................................82
Prohibited Transaction Class Exemption....................................82
Tax Exempt Investors......................................................84
Consultation with Counsel.................................................84
LEGAL INVESTMENT MATTERS......................................................84
SMMEA.....................................................................84
FFIEC Policy Statement....................................................84
General...................................................................85
USE OF PROCEEDS...............................................................85
METHODS OF DISTRIBUTION.......................................................85
LEGAL MATTERS.................................................................86
FINANCIAL INFORMATION.........................................................86
RATING........................................................................86
INDEX OF PRINCIPAL DEFINITIONS................................................88
5
<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 issuable
in series.
Sponsor of the Trusts.......... EquiVantage Acceptance Corp. See "The Sponsor"
herein.
Originators.................... The Sponsor will acquire 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....................... EquiVantage Inc. See "The Servicer" herein.
Sub-Servicers.................. If so specified in the related Prospectus
Supplement, Originators may act as Sub-
Servicers for Mortgage Loans acquired by the
Sponsor from such Originators. In addition,
third-party contract servicers may act as
Sub-Servicers. See "Mortgage Loan Program--
Sub-Servicing" herein.
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 assets of each Trust
will consist of a segregated pool (each a
"Mortgage Pool") of mortgage loans secured by
first and junior liens on one- to four- family
residential properties, including units in
condominiums, manufactured housing that
constitutes real property under applicable
state law and units in cooperative apartments
("Cooperative Loans") (collectively, the
"Mortgage Loans") acquired by such Trust from
the Sponsor, together with related accounts,
insurance policies and any other types of
credit enhancement described herein and in the
related Prospectus Supplement. 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 that
represent beneficial ownership interests in
the related Trust will be referred to as
"Certificates" in the related Prospectus
Supplement; Securities that represent debt
issued by the related Trust will be referred
to as "Notes" in the related Prospectus
Supplement.
6
<PAGE>
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 that 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 herein under
"Material Federal Income Tax Consequences"),
of the Sponsor, 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.
7
<PAGE>
Obligor Concentration. The Sponsor does not
expect that the assets of any Trust
(exclusive of any form of credit
enhancement, as described below) will
represent more than a de minimis 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 that 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 Securities and
Exchange Commission (the "Commission"). In
the event that any Trust includes a loan or
group of loans with the same obligor or
affiliated group of obligors that 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 that are also Strip
Securities) thereof on each Payment Date in
the manner described in the related
Prospectus Supplement.
8
<PAGE>
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
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 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.
9
<PAGE>
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 Securities will
possess an interest-only period, also
commonly referred to as a revolving period,
which will be followed by an amortization
period.
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 interest-only or revolving period may,
upon the occurrence of defaults or
certain other events by the Sponsor or
Servicer, all as more particularly described
herein under "Description of the Securities--
General Payment Terms of Securities" and
"Maturity and Prepayment Considerations" and
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.
Similarly, any feature for retention and
investment of collections applicable to any
Securities may terminate upon the occurrence
of such events, as more particularly described
herein under "Description of the Securities--
General Payment Terms of Securities" and
"Maturity and Prepayment Considerations" and
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.
10
<PAGE>
The Securities and the underlying Mortgage
Loans will not be guaranteed or insured by
any governmental agency or instrumentality
or the Sponsor, the Servicer, 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........ As more fully described in the related
Pooling and Servicing Agreement and the
related Prospectus Supplement, the primary
and, in some cases, the only source of
payment for Securities of each series will
be the assets of the related Trust Estate.
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 that may
be available for more than one series of
Securities, such as a master reserve account
or a master insurance policy.
Notwithstanding the foregoing, 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............. As described herein and in the related
Prospectus Supplement, each Mortgage Pool
will consist of Mortgage Loans secured by
first and junior 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,
pursuant to standard underwriting guidelines
described herein, as modified from time to
time; (ii) one or more Unaffiliated
Originators, pursuant to the Sponsor's
guidelines; and (iii) Originators of
Mortgage Loans, subsequently purchased in
whole or in part by the Sponsor or an
Affiliated Originator as bulk acquisitions
("Bulk Acquisitions"). See
"Mortgage Loan Program" herein. For a
description of the types of Mortgage Loans
that may be included in the Mortgage Pools,
see "The Mortgage Pools--The Mortgage
Pools" herein.
11
<PAGE>
Payments on the Mortgage Loans. The
Mortgage Loans will have interest payable
thereon at (i) fixed rates specified in the
related Prospectus Supplement, (ii)
adjustable rates computed as specified in
the related Prospectus Supplement or (iii)
graduated or other variable rates described
in the related Prospectus Supplement. Each
Mortgage Loan will require monthly or
bi-monthly payment of principal and
interest. Scheduled payments of principal
on any Mortgage Loan may be computed (i) on
a level debt service basis that will result
in full amortization over the stated term of
such Mortgage Loan or (ii) in the case of a
"balloon loan," on the basis of an assumed
amortization schedule that is significantly
longer than the original term to maturity of
such Mortgage Loan and will require payment
of a substantial amount of principal at the
stated maturity specified in the related
Mortgage Note.
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 Commission within 15 days after the
initial issuance of such series or, in the
case of a series including a Forward
Purchase Agreement, within 15 days of the
end of the related acquisition period. See
"Description of the Securities--Forward
Commitments; Pre-Funding" herein.
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, as described in
the related Prospectus Supplement, the
related Sponsor will be required to deposit
in a segregated account (each, a
"Pre-Funding Account") up to 100% of
the proceeds received 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. The related Prospectus Supplement
will specify the period for the acquisition by
a Trust of additional Mortgage Loans, which
period 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, 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.
Any mortgage pool insurance policy will
likely 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" herein.
12
<PAGE>
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.
If so specified in the related Prospectus
Supplement, the Servicer will be required to
advance Compensating Interest.
In addition, the related Prospectus
Supplement will specify whether the Servicer
will be required to pay "out of pocket"
costs and expenses incurred in the
performance of its servicing obligations,
and, if so, to what extent. See
"Description of the Securities--Advances"
herein.
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
on any Payment Date when the outstanding
aggregate loan balances of the Mortgage Loans
in the Trust Estate is less than or equal to
the percentage specified in the related
Prospectus Supplement (which in no event will
be greater than 25%) 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-Funding
Account, if any. See "The Pooling and
Servicing Agreement--Termination; Retirement
of Securities" herein and in the related
Prospectus Supplement.
13
<PAGE>
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 Matters" 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.
Material 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 REMICs)
under Sections 860A through 860G of the
Code, (iii) debt issued by a Trust ("Debt
Securities") or (iv) interests in a Trust
that is treated as a partnership
("Partnership Interests").
Andrews & Kurth L.L.P., tax counsel to the
Sponsor, will deliver its opinion to the
Sponsor with respect to the description of
material federal income tax consequences in
the related Prospectus Supplement for each
series of Securities. The Sponsor will file
each such opinion as an exhibit to the
Current Report on Form 8-K filed by the
Sponsor in connection with the issuance of
the related series of securities.
Investors are advised to consult their tax
advisors and to review "Material 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 circumstances described in the
related Prospectus Supplement. See
"Description of the Securities--Form of
Securities" herein.
14
<PAGE>
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. See
"Rating" herein.
The ratings expected to be received with
respect to any Securities will be set forth
in the related Prospectus Supplement.
Risk Factors................... For a discussion of certain factors that
should be considered by prospective
investors in the Securities, including
certain yield and prepayment risks, see
"Risk Factors" herein.
15
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity
Prior to issuance, there will have been no market for the Securities
of any series. There can be no assurance that a secondary market for the
Securities of any series or class will develop or, if a secondary market does
develop, that it will provide Securityholders with liquidity of investment or
that it will continue for the lives 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. The
Securities will not be listed on any securities exchange. Accordingly, there
can be no assurance that sufficient liquidity will exist at any particular time
for any series or class of Securities. Consequently, Securityholders may not be
able to dispose of their investment in the event of an emergency or for any
other reason and must be prepared to bear the economic risk of an investment in
the Securities for an indefinite period. Such factors may also adversely affect
the price that a Securityholder may be able to obtain for the Securities that
such investor is able to sell.
Obligations Limited to Trust Estate
The Securities will not represent an interest in or obligation,
either recourse or non-recourse (except for certain non-recourse debt
described herein under "Material Federal Income Tax Consequences"), of the
Sponsor, the Servicer, any Originator 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 under the related Pooling and Servicing Agreement (including the
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 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. The Securities and the underlying Mortgage Loans will not be
guaranteed or insured by any governmental agency or instrumentality, or by
the Sponsor, 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. Accordingly, investors in Securities
could experience delays in payment or losses to the extent such sources of
payment are insufficient to make required distributions on any series or
class of 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 "Description of Credit Enhancement" and
"Subordination" 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. Therefore, to the extent losses on Mortgage Loans
exceed the level of credit enhancement for a series or class of Securities,
or to the extent such losses are of a type not covered by such credit
enhancement, investors in such Securities could experience delays in payment
or losses. Such losses could occur in connection with scheduled distributions
on Securities or in connection with any optional termination of a Trust. See
"The Pooling and Servicing Agreement--Termination; Retirement of Securities"
herein. Moreover, credit enhancements do not directly or indirectly
16
<PAGE>
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" herein.
Risks Related to the Mortgage Loans--Decline in Property Values and
Non-Standard Loan Terms
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. Accordingly,
recoveries on junior lien loans will typically depend on the financial
resources of the borrower or the value of the Mortgaged Property being
sufficient to repay both the senior and junior liens, and a Trust could
suffer a loss in the event of a shortfall and distributions to
Securityholders could correspondingly be reduced, except to the extent such
losses are covered by credit enhancement. See "Certain Legal Aspects of
Mortgage Loans and Related Matters -- Foreclosure" herein.
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that 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 that are likely to
experience higher rates of delinquency, foreclosure and bankruptcy than have
historically been experienced by loans conforming to guidelines of the
Federal National Mortgage Association (also known as "Fannie Mae" or "FNMA")
or the Federal Home Loan Mortgage Corporation (also known as "Freddie Mac" or
"FHLMC"). 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
17
<PAGE>
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default and potential for loss
will increase. For a more detailed discussion, see "Mortgage Loan Program"
herein.
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.
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, with
possible losses to investors in the related Securities. None of the Sponsor,
the Originators, 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, and reducing correspondingly
the distributions to Securityholders, except to the extent such losses are
covered by credit enhancement. 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. Additionally, some
states require that for a specified period (the "Redemption Period") after
foreclosure of a Mortgaged Property, the related borrower can repay the
defaulted Mortgage Loan and regain title to such Mortgaged Property; in such
jurisdictions, the Originator's ability to liquidate the related foreclosed
property during the applicable Redemption Period is limited. 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
18
<PAGE>
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,
acquires a Mortgaged Property at a foreclosure sale or, prior to foreclosure,
has been involved in decisions or actions that may lead to contamination of a
property, may be liable for the costs of cleaning up any contamination found
at such property. These costs, which could be substantial, could be a
liability of a Trust, and any such liability may ultimately result in a loss
to investors in the related series of Securities. This potential exposure
will be reduced to some extent because under the terms of the related Pooling
and Servicing Agreement, the related Trustee and Servicer will not be
authorized to take any action that may be deemed participation in the
management of a contaminated Mortgaged Property. Imposition of any such
costs could reduce significantly the recoveries of the Trust following a
foreclosure. See "Certain Legal Aspects of Mortgage Loans and Related
Matters -- Environmental Considerations" herein.
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, 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.
Applicability of State and Federal Lending Laws
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" herein.
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
19
<PAGE>
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. With respect to Securities purchased at a
discount, a lower than expected rate of payments and prepayments will
adversely affect Securityholders' yield. Conversely, with respect to
Securities purchased a premium, a higher than expected rate of payments and
prepayments will adversely affect Securityholders' yield.
As more fully described 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 and 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, substitution adjustments required to be made under the
Pooling and Servicing Agreement, optional termination of a Trust or early
termination of a revolving or interest-only period with respect to one or
more classes of Securities will have the same effect on the Securityholders
as a prepayment of such Mortgage Loans. To the extent described in the
related Prospectus Supplement, the Mortgage Loans may 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 applicable law, in which case
the Servicer is authorized to permit the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. Any such principal prepayment may
adversely affect the yield to maturity of the related Securities. Because
prevailing interest rates are subject to fluctuation, there can be no
assurance that Securityholders will be able to reinvest such a prepayment at
yields equaling or exceeding the yields on the related Securities. It is
possible that the yield on any such reinvestment will be lower, and may be
significantly lower, than the yield on the related Securities.
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--Limited Liquidity and Delays in Distribution
Issuance of the Securities in book-entry form may reduce the liquidity
of such Securities in the secondary trading market because 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.
Because transactions in Securities will be able to be effected only
through DTC, direct or indirect participants in DTC's book-entry system
("Direct Participants" 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.
20
<PAGE>
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities because
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" herein.
The Status of the Mortgage Loans in the Event of Bankruptcy of the Sponsor or
an Originator--Payment Delays
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 or timely distributions
of interest on and principal of the Securities.
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.
Rating of Securities Dependent on Credit Enhancement
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. The rating of Securities credit enhanced through subordination
or reserve amounts will depend on the actual performance of the related
Mortgage Pool, and a reduction in such rating could occur if defaults and
losses on the related Mortgage Loans exceed the rate assumed in determining
the original level of credit enhancement. Reduction of a rating would
adversely affect the market value and possibly the liquidity of the related
Securities. See "Rating" herein and in the Prospectus Supplement.
Liability of Trust for Indemnification -- Reduction of Trust Assets and Credit
Enhancement
Each Pooling and Servicing Agreement will provide that neither the
Sponsor nor any of its directors, officers, employees or agents shall have
any liability to the Trust created thereunder or to any of the
Securityholders, except with respect to liabilities resulting from willful
malfeasance, bad faith or gross negligence or from the reckless disregard of
obligations or duties arising under the related Pooling and Servicing
Agreement (or, with respect to the Sponsor, the representations and
warranties described herein and in the related Prospectus Supplement). Each
such Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, the Sponsor and its directors, officers, employees
and agents are entitled to be indemnified and held harmless by the Trust
against any loss, liability or expense incurred in connection with legal
actions relating to the Pooling and Servicing Agreement or the Securities.
If a Trust is required to make payments in connection with indemnified losses
as described, the payments would reduce the assets of the Trust and may also
reduce any credit enhancement available to make distributions to
Securityholders.
21
<PAGE>
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of a Mortgage Pool comprised of
Mortgage Loans secured by first and junior liens on one- to four-family
residential properties, including units in condominiums, or cooperative
apartments, 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.
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 (the
"Detailed Description") will be set forth in a report on Form 8-K to be filed
with the Commission within 15 days after the initial issuance of such
Securities, or, in the case of a series including a Forward Purchase
Agreement, within 15 days of the end of the related acquisition period. See
"Description of the Securities--Forward Commitments; Pre-Funding" herein. 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 that 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. The
related Prospectus Supplement will specify the percentage of the Mortgage
Loans in any Mortgage Pool that are 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.
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 as more specifically 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
22
<PAGE>
(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 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 that 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) Other Mortgage Loans may be assumable by persons meeting the
Sponsor's 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") that 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
23
<PAGE>
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 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 Commission and will be made available
to holders of the related series of Securities within 15 days after the
initial issuance of such Securities or, in the case of a series of Securities
including a Forward Purchase Agreement, within 15 days of the end of the
related acquisition period. See "Description of the Securities--Forward
Commitments; Pre-Funding" herein.
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
that 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 that 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. See "Mortgage Loan Program" and "The
Pooling and Servicing Agreement" herein. 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.
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
24
<PAGE>
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, except to the extent additional obligations, if any, of the
Sponsor, the Servicer or related Originators are described in the related
Prospectus Supplement. See "The Pooling and Servicing Agreement" herein.
The obligations of the Servicer 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
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.
Single family loans will consist of mortgage loans or deeds of trust
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 Mortgaged 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 mortgage loans or
deeds of trust secured by first or junior liens on units in low-or high-rise
condominium developments together with such condominium units' appurtenant
interests in the common elements of such condominium developments or
cooperative apartments. Unless otherwise specified in the related Prospectus
Supplement, 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.
THE MORTGAGE POOLS
General
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
more fully described in the related Prospectus Supplement.
25
<PAGE>
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 that elects to be treated as a REMIC, any Mortgaged Properties that
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, the term "Mortgage Loans" includes Cooperative Loans, the term
"Mortgaged Properties" includes shares in the related cooperative and the
related proprietary leases or occupancy agreements securing Cooperative
Notes, the term "Mortgage Notes" includes Cooperative Notes and the term
"Mortgages" includes 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 the related Cut-Off
Date or similar date specified in the applicable Prospectus Supplement. 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).
The Mortgage Pools
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:
(a) 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;
(b) 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
26
<PAGE>
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;
(c) 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;
(d) 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"); or
(e) 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 that have been consolidated and/or have had various
terms changed, mortgage loans that have been converted from adjustable
rate mortgage loans to fixed rate mortgage loans, or construction loans
that have been converted to permanent mortgage loans.
As described in the related Prospectus Supplement, a Mortgage Pool may
contain (i) ARM Loans that 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 that 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,
that 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 Securities -- Payments on Mortgage Loans;
Deposits to Distribution Account" herein. 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 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" herein. The Servicer's
obligations with respect to the
27
<PAGE>
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 the Sponsor and Originators," "--
Sub-Servicing" 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 that the Servicer believes ultimately will be recoverable out of the
proceeds of liquidation of the Mortgage Loans. See "Description of the
Securities -- Advances" herein.
MORTGAGE LOAN PROGRAM
Mortgage Loans to be included in a Mortgage Pool will have been
originated by the Sponsor directly or through Unaffiliated Originators or
purchased from Unaffiliated Originators in Bulk Acquisitions. Key
characteristics of the Mortgage Loans included in each Mortgage Pool,
including, without limitation, maturities, outstanding principal balance,
Loan-to-Value Ratios, property type, lien status, occupancy, Interest Rate
and geographic concentration of the related Mortgaged Properties, will be
described in the related Prospectus Supplement.
The Sponsor's Underwriting Process
This section provides a description of the underwriting process of
the Sponsor only and not of the Unaffiliated Originators. All Mortgage Loans
originated by the Sponsor directly or through Unaffiliated Originators will
comply with the Sponsor's process and procedures described herein.
The Sponsor's underwriting process is 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. The
Sponsor analyzes the equity in the collateral, the property type and the
payment history, debt-to-income ratio and the employment history of the
applicant. Mortgage loan packages generally include employment history,
documentation of income and assets, credit history of mortgage or rent,
property appraisal and title commitment. Specific processing forms contained
in the loan package vary with the Originator. Limited income verification
may be used under certain Mortgage Loan programs.
The homes used for collateral to secure the loans may be owner occupied
second homes, 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.
The value of each property proposed as security for a loan generally is
determined by an appraisal from a licensed independent appraiser based, as
applicable, on the cost, sales comparison and income approaches to value,
with additional information provided when appropriate. On Mortgage Loans
that finance home improvements, both the "as is" value and the "subject to
completion" value are considered. The appraisal is analyzed by the Sponsor's
underwriters to determine the acceptability of the property as security for
the loan requested. Alternative methods of determining the value of a
Mortgaged Property, such as taxing authority valuations, real estate brokers'
valuation opinions and cost of improvements, may be accepted in lieu of or in
addition to appraisals in certain circumstances, such as Mortgage Loans with
Loan-to-Value Ratios of less than 50% or balances under $25,000 and some
Mortgage Loans that finance home improvements if the Sponsor's underwriters
determine such an alternative does not increase the risk of having inadequate
security for the Mortgage Loan.
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 90%.
The maximum Loan-to-Value Ratio for non-owner occupied homes is generally 85%.
The Sponsor's guidelines provide for verification of employment status
and current earnings for most applicants, as well as review of the
applicant's financial condition and employment history based on information
provided by the applicant. A Mortgage Loan may be made without full income
verification if after a review of the LTV and the applicant's credit history,
the Sponsor's underwriters determine such alternative does not materially
increase the risk of default on the Mortgage Loan. The percentage of
non-income verified Mortgage Loans will be specified in the related
Prospectus Supplement. The applicant's total monthly obligations
(including principal and interest on each mortgage, tax assessments, other
loans, charge accounts and all scheduled indebtedness) may not exceed 60% of
a borrower's gross monthly income.
28
<PAGE>
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 any outstanding 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.
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 Mortgage Loan.
The Sponsor's guidelines currently require title insurance coverage,
title search or an attorney's title opinion on each first lien Mortgage Loan
it originates with a principal amount in excess of $25,000. The Servicer or
the Originator of the Mortgage Loan is required to be named as the insured on
the title insurance policies and the addressee of the title opinion. In
addition, the Sponsor obtains a survey (or a locally customary substitute) 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 maximum insurable value of the property. The Servicer requires
that its name and address are properly added to the "mortgagee clause" of the
insurance policy. The borrower must obtain flood insurance in the same amount
if the primary 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 is subsequently subjected to a quality
control audit.
Bulk Guidelines
Bulk portfolios of Mortgage Loans may be originated by a variety of
Unaffiliated Originators under several different underwriting guidelines,
which guidelines may not be reviewed or verified by the Sponsor. As a
result, Mortgage Loans acquired in Bulk Acquisitions may not have been
originated pursuant to the requirements of the Sponsor's guidelines, as
described above. For example, the Sponsor may purchase Mortgage Loans in
bulk acquisitions with higher Loan-to-Value Ratios, without title insurance,
or with nonconforming appraisal methods such as tax assessments. With
respect to bulk portfolios of seasoned Mortgage Loans, the Sponsor's
underwriting review focuses primarily on payment histories and estimated
current values based on estimated property appreciation or depreciation and
loan amortization. Bulk Acquisition portfolios may be purchased servicing
released or retained. If servicing is retained, the Originator must (i)
demonstrate its ability to service the Mortgage Loans properly, and (ii)
qualify as a sub-servicer under the related Pooling and Servicing Agreements.
The Sponsor reunderwrites all or a statistically significant sample (never
less than 10%) of the Mortgage Loans acquired in a Bulk Acquisition for the
purpose of determining whether such Mortgage Loans meet the Sponsor's
guidelines. The extent of such reunderwriting will depend on factors such as
the Sponsor's prior experience with the Originator, the size of the pool of
loans acquired and the ability of the Originator to meet its obligations
concerning Mortgage Loan representations and warranties.
Qualifications of Originators
During 1996 the Sponsor originated or acquired mortgage loans through
564 Unaffiliated Originators located in 25 states. Originators in each of
Tennessee, Ohio and Michigan originated mortgage loans accounting for 10% or
more of the Sponsor's total mortgage loan origination volume for 1996. The
number and geographic distribution of Originators through whom the Sponsor
originated or acquired the Mortgage Loans included in the Mortgage Pool for a
series of Securities will be specified in the related Prospectus Supplement.
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
from a network of correspondents through the Servicer. The Sponsor has
produced procedural manuals containing detailed guidelines for processing,
underwriting and closing loans that are designed, in the Sponsor's opinion, to
produce quality loans and consistent procedures, and provides such manuals to
all Originators who regularly submit mortgage loans to the Sponsor. The
material provisions of the Sponsor's procedural manuals include (i) a summary
of the Sponsor's guidelines, as described above, (ii) a list of contact
persons at the Sponsor's offices and (iii) directions and forms for
submitting mortgage loans to the Sponsor. All Unaffiliated Originators are
subject to an approval process to determine financial status, experience and
compliance with state licensing requirements. The Sponsor has, however, no
minimum requirements for an Originator's net worth or length of experience.
Rather, the Sponsor's emphasis is on the evidence of the Originator's ability
to originate Mortgage Loans that are reasonably consistent with the Sponsor's
guidelines. Upon approval, all Unaffiliated Originators are required to
execute an agreement containing certain representations and warranties
regarding such Unaffiliated Originator and the related
29
<PAGE>
loans with the Servicer prior to any loan closing. Appraisers and closing
agents must also meet the Sponsor's guidelines, including verification of
certification or licensing, and evidence of financial responsibility.
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 that have been approved by the Servicer's legal counsel.
The Servicer will monitor the Originators and the 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. 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, the
Sponsor will be required to repurchase such Mortgage Loan.
Representations by the Sponsor and Originators
To the extent specified in the related Prospectus Supplement, the
Sponsor will make representations and warranties in respect of the Mortgage
Loans evidenced by a series of Securities. Such representations and
warranties include, at a minimum, that at the time of the sale by 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 in all
material respects as of the related Cut-Off Date; (ii) each Mortgage Loan
being transferred to the Trust that 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 classified as real estate
under applicable state law; (iv) except as to loans with balances under
$25,000, 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) the Sponsor held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan; 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.
In addition, an Originator may make representations and warranties
with respect to Mortgage Loans sold by it that are later included in a
Mortgage Pool. All of the representations and warranties of an Originator
conveying a Mortgage Loan to the Sponsor through the Servicer will be made as
of the date on which such Originator sells or assigns the Mortgage Loan to
the Servicer; thus the date as of which such representations and warranties
are made 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 of the Sponsor against the Originator will not arise if, after the
date of sale of a Mortgage Loan by the Originator to the Servicer, an event
occurs that would give rise to such remedy if the event had occurred prior to
sale of the affected Mortgage Loan.
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
30
<PAGE>
Agreement, 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
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 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, 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. Any Qualified Replacement Mortgage 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. 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, the Originator's purchase or
substitution obligation will become an obligation of the Sponsor even if no
breach of the Sponsor's representations has occurred. 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
31
<PAGE>
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."
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. 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 or the 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.
The related Prospectus Supplement may specify that with the approval of
the Servicer, a Sub-Servicer may delegate its servicing obligations to
third-party servicers, but in such event 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 herein 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.
The related Prospectus Supplement may specify that, with the prior approval
of the Servicer, a Sub-Servicer may transfer its servicing obligations to
another entity that has been approved for participation in the Sponsor's loan
purchase programs.
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. 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" herein.
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.
32
<PAGE>
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' notice to the Sub-Servicer without cause upon payment of an
amount equal to a specified termination fee calculated as a specified
percentage of the aggregate outstanding principal balance of all mortgage
loans, including the Mortgage Loans serviced by such Sub-Servicer pursuant to
a Sub-Servicing Agreement and certain transfer fees.
The Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may
act as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Servicer acts as servicer, it will not
assume liability for the representations and warranties of the Sub-Servicer
that it replaces. If the Servicer enters into a new Sub-Servicing Agreement,
each new Sub-Servicer either must be an Originator, meet the standards for
becoming an Originator or have such servicing experience that is otherwise
satisfactory to the Servicer. The Servicer may make reasonable efforts to
have the new Sub-Servicer assume liability for the representations and
warranties of the terminated Sub-Servicer, but no assurance can be given that
such an assumption will occur and, in any event, if the new Sub-Servicer is
an affiliate of the Servicer, the liability for such representations and
warranties will not be assumed by such new Sub-Servicer. In the event of
such an assumption, the Servicer may in the exercise of its business judgment
release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement
or to a new Sub-Servicing Agreement may contain provisions different from
those described above that are in effect in the original Sub-Servicing
Agreements. However, the Pooling and Servicing Agreement for each Trust
Estate will provide that any such amendment or new agreement may not be
inconsistent with such Pooling and Servicing Agreement to the extent that it
would materially and adversely affect the interests of the Securityholders.
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
33
<PAGE>
the principal balance (or nominal principal balance in the case of Accrual
Securities that are also Strip Securities) thereof on each Payment Date 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.
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 that 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
defaults by the Sponsor or Servicer, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities. Such defaults will generally include (i) the failure of
the Sponsor to repurchase Mortgage Loans that are the subject of breached
representations and warranties, (ii) the failure of the Servicer to perform
its obligations as Servicer in accordance with the related Pooling and
Servicing Agreement and (iii) losses on Mortgage Loans in the related
Mortgage Pool that exceed levels specified in the related Pooling and
Servicing Agreement, all as more particularly described in the related
Prospectus Supplement.
34
<PAGE>
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 described above and as more particularly 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.
The Securities and the underlying Mortgage Loans will not be guaranteed
or insured by any governmental agency or instrumentality or the Sponsor, the
Servicer, any Sub-Servicer, any Originator or any of their affiliates.
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) 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; 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 herein
under "Description of Credit Enhancement."
Form of Securities
The related Prospectus Supplement will specify whether the Securities of
each series will be issued as physical certificates ("Definitive Securities")
in fully registered form; if so specified, the Definitive Securities will be
issued 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.
The related Prospectus Supplement will also specify whether certain
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 Exchange Act. 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 ("Direct Participants" or "Indirect Participants").
35
<PAGE>
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
Definitive 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 Definitive Securities 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.
Because DTC can only act on behalf of Direct 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 as Definitive
Securities to Securityholders or their nominees, 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 Definitive
Securities. Upon surrender by DTC of the securities representing the
Securities and instruction for re-registration, the Trustee will issue the
Securities in the form of Definitive Securities, and thereafter the Trustee
will recognize the holders of such Definitive Securities 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 Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such
36
<PAGE>
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 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 (or certified copies) 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.
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, or other documentation
acceptable to the Trustee, 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 the Sponsor and Originators." Neither the 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. 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.
37
<PAGE>
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. Such Mortgage Loans will
conform to the same underwriting standards, and will be transferred subject
to the same Sponsor representations and warranties, as Mortgage Loans
transferred to the Trust as of the Closing Date If a Forward Purchase
Agreement is to be utilized, as more fully described in the related
Prospectus Supplement, the Sponsor will be required to deposit in a
segregated account (each, a "Pre-Funding Account") up to 100% of the proceeds
received 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 establish 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. The
related Prospectus Supplement will specify the period for the acquisition by
a Trust of additional Mortgage Loans, which period will not exceed three
months from the date such Trust is established.
The Sponsor's agreements with Originators establish non-exclusive
relationships that permit Originators to sell mortgage loans to, or originate
them for, other lenders. In addition, no agreement with any Originator
requires the Originator to offer a minimum number or dollar volume of
mortgage loans to the Sponsor in any given time frame, or requires the Sponsor
to purchase a minimum volume of mortgage loans from such Originator.
Accordingly, no agreement with any Originator provides any assurance that
eligible mortgage loans sufficient to meet the terms of any Forward Purchase
Agreement will be available for transfer to a Trust during the related
acquisition period. If a Pooling and Servicing Agreement provides for a
Pre-Funding Account and the principal balance of additional Mortgage Loans
delivered by the related Originator during the related acquisition period is
less than the amount on deposit in the Pre-Funding Account at the beginning of
such period, the Securityholders of the related series may receive a prepayment
of principal as and to the extent described in the related Prospectus
Supplement. In addition, if so specified in the Prospectus Supplement relating
to a series of Securities, an amortization period may result from the failure
of the Sponsor to assign additional Mortgage Loans to the related Trust during
the acquisition period, thereby resulting in a prepayment of the related
Securities. Any such principal prepayment may adversely affect the yield to
maturity of the related Securities. Because prevailing interest rates are
subject to fluctuation, there can be no assurance that investors will be able
to reinvest such a prepayment at yields equaling or exceeding the yields on the
related Securities. It is possible that the yield on any such reinvestment
will be lower, and may be significantly lower, than the yield on the related
Securities.
Each additional Mortgage Loan will be of a type specified herein, will
be underwritten in accordance with the Sponsor's guidelines and will
satisfy any additional eligibility criteria specified in the related
Prospectus Supplement. Such eligibility criteria will be determined in
consultation with each Rating Agency (and/or any credit enhancement provider
for the related series) prior to the issuance of such series to ensure that
such additional Mortgage Loans will not cause the aggregate characteristics
of the related Mortgage Pool to vary materially from those of the initial
Mortgage Pool, or that any such variation is within parameters that were
taken into account at the time the initial ratings were assigned to the
Securities of the related series. The Sponsor will be required to certify
that all conditions precedent to the transfer of such additional Mortgage
Loans, including the satisfaction of specific eligibility criteria, have been
satisfied. It will be a condition to the transfer of any additional Mortgage
Loans by the Sponsor for inclusion in the related Mortgage Pool that each
Rating Agency, after receiving prior notice of any such proposed transfer,
shall not have advised the Sponsor or the Trustee or any credit enhancement
provider for the series that the conveyance of such additional Mortgage Loans
will result in a qualification, modification or withdrawal of its then
current rating of the related Securities. The inclusion of additional
38
<PAGE>
Mortgage Loans in a Mortgage Pool for a series of Securities may affect, in
some instances adversely, the performance of the related Securities, even if
the aggregate characteristics of such Mortgage Pool do not vary as a result
of the inclusion of such additional Mortgage Loans. The Sponsor will provide
tabular information on additional Mortgage Loans similar to that included in
the related Prospectus Supplement in the Detailed Description filed under
cover of a Current Report on Form 8-K within 15 days of the end of the
acquisition period.
The ability of any Trust to invest in additional Mortgage Loans during
the related acquisition period and, in the case of a series of Securities,
any revolving period, will be dependent upon the ability of the Sponsor to
acquire Mortgage Loans that satisfy the prerequisites to transfer for
inclusion in the related Mortgage Pool specified in the related Prospectus
Supplement. The ability of the Sponsor to acquire such Mortgage Loans will
be affected by a variety of social and economic factors, including the
prevailing level of market interest rates, unemployment levels and consumer
perceptions of general economic conditions.
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 and applied 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") 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, 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 the Sponsor
and Originators" and "-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
39
<PAGE>
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 Federal Deposit
Insurance Corporation (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") as described in the related
Prospectus Supplement. 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.
The collateral that is eligible to secure amounts in an Eligible Account
described in (ii), (iii), (iv) or (v) above is limited to certain permitted
investments, which are generally limited to United States government
securities and other high-quality investments ("Permitted Investments"). No
Permitted Investments will be of a type such that the Trust will be required
to register as an investment company under the Investment Company Act.
Permitted Investments are defined as follows:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States fully and
unconditionally guaranteed, the timely payment or the guarantee of
which constitutes a full faith and credit obligation of the United
States.
(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar
amount upon maturity or call for redemption.
(c) FHLMC senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(d) FNMA senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption.
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more
than 365 days) of any domestic bank, the short-term debt obligations
of which have been rated at least the Minimum Required Rating.
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least
$50,000,000 which deposits are not in excess of the applicable limits
insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the FDIC, provided that the long-term deposits of
such bank or savings and loan association are rated at least the
Minimum Required Rating.
(g) Commercial paper (having original maturities of not more than 270
days) rated at least the Minimum Required Rating.
(h) Investments in money market or common trust funds rates at least the
Minimum Required Rating.
(i) Such other investments as have been approved in writing by the
appropriate Rating Agency or Rating Agencies and the Certificate
Insurer and would not require registration of the Trust as an
investment company under the Investment Company Act;
provided that no instrument described above is permitted to evidence
either the right to receive (a) only interest with respect to
obligations underlying such instrument or (b) both principal and
interest payments derived from obligations underlying such instrument
and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of
the yield to maturity at par of the underlying obligations; and
provided, further, that no instrument described above may be
purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to
stated maturity. Any Permitted Investment may be purchased by or
through the Trustee or any of its affiliates. "Minimum Required
Rating" shall mean the minimum rating for such investment type
required by the appropriate Rating Agency or Rating Agencies as
specified in the related Prospectus Supplement.
As more fully described 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 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 herein under "Hazard Insurance; Claims Thereunder" 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. 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") that 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" 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. 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 that, 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
40
<PAGE>
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 that 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, that 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 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
that 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" herein.
41
<PAGE>
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 Record Date in proportion
to their respective Percentage Interests. To the extent described 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 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. Interest on the
Securities generally will be calculated either on the basis of a 360-day year
consisting of twelve 30-day months or, in the case of certain Securities
bearing an adjustable Pass-Through Rate, on the basis of the actual number of
days elapsed in the period for which interest is being paid, divided by 360.
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 (to the extent 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 that 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, that will be followed by an amortization
period. Any such interest-only or revolving period may, upon the occurrence
of defaults or breaches of representations and warranties by the Sponsor or
Servicer, as more particularly described in the
42
<PAGE>
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 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 that will be passed through
to Securityholders on the immediately succeeding Payment Date. If the amount
in the Principal and Interest Account is insufficient to 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 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 that 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 considered delinquent if any payment due thereon is
not made by the close of business on the day such payment is scheduled to be
due. No Mortgage Loan would be reported as delinquent, however, until the
first reporting date after which the Mortgage Loan is at least 30 days
delinquent because delinquencies of less than 30 days are not reported.
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.
43
<PAGE>
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described herein under "The
Pooling and Servicing Agreement -Termination; Retirement of Securities," 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;
(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
is 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
44
<PAGE>
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 that 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.
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 that is a REMIC
to fail to qualify as a REMIC.
45
<PAGE>
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 that 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, subject to the
satisfaction of certain conditions specified in the related Pooling and
Servicing Agreement, 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 federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), 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 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 that 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 amount
so advanced shall constitute a "Servicing Advance." 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.
46
<PAGE>
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 that 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" that 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 CERCLA, 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 if the related Prospectus Supplement
provides. 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" herein.
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. Only the Senior Securities (and, if specified in the
related Prospectus Supplement, certain Subordinate Securities)
will be offered hereby. 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 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
47
<PAGE>
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" herein. 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 specified 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 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
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 (any
such loss, a "Special Hazard Loss"); (iii) attributable to
certain actions that 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,
48
<PAGE>
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 herein 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. 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" herein. 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 from the source designated in
the related Prospectus Supplement.
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
49
<PAGE>
forth herein 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), because 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"
herein. 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.
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" herein. 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
50
<PAGE>
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.
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.
As further described or qualified 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.
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 that requires that distributions with
respect to one class of security be made with excess amounts
available from asset groups within the same Trust that 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.
51
<PAGE>
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 that may be
available for more than one series of Securities, such as a
master reserve account or a master insurance policy.
Notwithstanding the foregoing, 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 that 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 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 that 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.
52
<PAGE>
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
such credit support with other credit enhancement instruments
issued by obligors whose credit ratings are equivalent to such
downgraded level and in lower amounts that 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
summary describes all material terms 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
53
<PAGE>
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 that 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.
THE SPONSOR
The Sponsor, EquiVantage Acceptance Corp., was incorporated
in the State of Delaware on June 6, 1990. It is a wholly owned
subsidiary of EquiVantage Inc. The Sponsor was organized for the
purpose of the purchase and securitization of first and junior
lien mortgage loans.
The Sponsor maintains its principal office at 13111
Northwest Freeway, Suite 301, Houston, Texas 77040. Its
telephone number is (713) 895-1957.
THE SERVICER
EquiVantage Inc. will act as the Servicer of the Mortgage
Loans for each series of Securities. EquiVantage Inc. was
incorporated in the State of Delaware on September 14, 1995 and
is primarily engaged in acquiring, owning, transferring and
servicing Mortgage Loans. EquiVantage Inc. maintains its
principal office at 13111 Northwest Freeway, Suite 600, Houston,
Texas 77040. Its telephone number is (713) 895-6700.
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.
54
<PAGE>
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 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 that 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"
herein. 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 that may
accrue as a result of the investment of funds in the Principal
and Interest Account or the applicable Distribution Account (if
so specified in the related Prospectus Supplement) or in a
Sub-Servicing Account, as the case may be. To the extent
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
Trustee, any custodian appointed by the Trustee, the Security
Registrar 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
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 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
55
<PAGE>
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
The related Prospectus Supplement may indicate that the
Servicer will not be permitted to resign from its obligations and
duties pursuant to the related Pooling and Servicing Agreement,
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
Financial Guaranty Insurer and the Trustee. No such resignation
will become effective until the Trustee or a successor Servicer
has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. The Trustee, 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, marshaling 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 in the related Pooling and Servicing Agreement after
notice by the Trustee 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 that 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 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 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.
Rights upon Event of Default
So long as an Event of Default remains unremedied, the
Trustee 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 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
56
<PAGE>
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
appointment of a successor Servicer, unless the Trustee is prohibited by law
from so acting, the Trustee is obligated to act in such capacity.
Amendment
Each Pooling and Servicing Agreement may be amended by the
Sponsor, the Servicer and the Trustee, with the prior approval of
a Financial Guaranty Insurer, if required, 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 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 that are required to
be distributed to any Securityholder without the consent of such
Securityholder or (ii) reduce the aforesaid percentages of
Percentage Interests that 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
As more specifically described 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 and (b) the disposition of all
property acquired in respect of any Mortgage Loan remaining in the Trust
Estate, (ii) if a REMIC election has been made with respect to the related
Trust Estate, 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 Sponsor, the Servicer or, if specified in the related
Prospectus Supplement, the holders of the related class of Equity Securities
or the credit enhancer after the outstanding aggregate loan balances of the
Mortgage Loans in the Trust Estate is less than or equal to the percentage
specified in the related Prospectus Supplement (which in no event will be
greater than 25%) 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-Funding Account, (iv) if
applicable, termination of the Trust upon loss of REMIC status or (v) other
comparable events with respect to the related Trust. 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. If a
REMIC election has been 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 option described in clause (iii) above generally protects the
exercising party against incurring ongoing expenses related to the Trust
(such as servicing expenses and fees of credit enhancers) when the Mortgage
Loans have amortized to such an extent that payment of such expenses is no
longer cost-effective. No independent valuation of any assets of a Trust
will be performed in connection with any optional termination. The price
payable to a Trust upon termination will not be less than the greater of (i)
the outstanding principal balance of, plus accrued and unpaid interest on,
each Mortgage Loan owned by such Trust (including such unamortized amounts in
respect of defaulted Mortgage Loans for which the related Mortgaged
Properties have been acquired by the Trust through foreclosure or otherwise,
and which have not yet become Liquidated Mortgage Loans) and (ii) the fair
market value of such Mortgage Loans and Mortgaged Properties owned by the
Trust, plus in either case the fair market value of all other assets of the
Trust. Accordingly, the proceeds received by the Trust upon any such
termination would be sufficient to pay the outstanding principal balance and
accrued and unpaid interest on the Securities, except to the extent of
Realized Losses that exceed the amount of any applicable credit enhancement.
In the event that Realized Losses have exceeded such amounts, Securityholders
may experience a loss on their investment upon a termination.
57
<PAGE>
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).
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
58
<PAGE>
prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as
applicable.
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 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, purchases in connection with any
optional termination of a Trust or repurchases due to conversions of ARM
Loans to a fixed interest rate. See "Mortgage Loan Program - Representations
by the Sponsor and Originators", "The Pooling and Servicing Agreement --
Termination; Retirement of Securities" 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. Any such principal prepayment may adversely affect the yield to
maturity of the related Securities. Because prevailing interest rates are
subject to fluctuation, there can be no assurance that Securityholders will
be able to reinvest such a prepayment at yields equaling or exceeding the
yields on the related Securities. It is possible that the yield on any such
reinvestment will be lower, and may be significantly lower, than the yield on
the related 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. 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, 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 - Payments on Mortgage Loans; Deposits to Distribution
Account"
59
<PAGE>
herein. Neither full nor partial principal prepayments
are passed through until the month following receipt. See
"Maturity and Prepayment Considerations" herein.
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 because 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 that is equal to one month's
interest (or, in the case of quarterly-pay Securities, three
months' interest or, in the case of semi-annually-pay Securities,
six months' 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. See "Description
of the Securities - Principal and Interest on the Securities"
herein.
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.
To the extent specified in the related Prospectus Supplement, 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.
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. All
60
<PAGE>
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. The
Servicer will generally enforce any due-on-sale clause to the extent it has
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 that 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 Mortgage Loans
and Related Matters - Enforceability of Certain Provisions" herein 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, as more fully
described 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 defaults by the Sponsor or Servicer, as more particularly
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.
61
<PAGE>
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" herein.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries that 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
that 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 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
62
<PAGE>
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 that 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. Some states require that for a
specified Redemption Period, the borrower can repay the defaulted mortgage
loan and regain title to the related mortgaged property. In such
63
<PAGE>
jurisdictions, the lender's ability to liquidate the foreclosed property
before the applicable Redemption Period has expired is limited.
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 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 canceled 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
64
<PAGE>
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 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 the 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
65
<PAGE>
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 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 Considerations
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the payment of the costs of clean-up. In several states such a lien has
priority over the lien of an existing mortgage against such property. In
addition, under CERCLA, the United States Environmental Protection Agency
(the "EPA") may impose a lien on property where the EPA has incurred cleanup
costs. However, a CERCLA lien is subordinate to pre-existing, perfected
security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a lender may be held liable, as an "owner" or "operator," for costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property, regardless of whether or not the environmental damage or
threat was caused by a prior owner or operator. CERCLA imposes liability on
any and all "responsible parties" (which term includes, among others, the
property owner and operator) for the cost of clean-up of releases of
hazardous substances. However, CERCLA excludes from the definition of "owner
or operator" secured creditors who hold indicia of ownership for the purpose
of protecting their security interest, but "without participating in the
management of the facility."
Court decisions, such as United States v. Fleet Factors Corp., 901 F.2d
1550 (11th Cir. 1990), cert. denied, 498 US 1049 (1991) (CERCLA liability may
be imposed on a secured lender if it has the ability to participate in
management), and Kelley v. EPA, 15 F.3d 1100 (D.C. Cir. 1994), cert. denied
sub nom, American Bankers Ass'n v. Kelley, 115 S. Ct. 900 (1995) (invalidated
the Lender Liability Rule issued by the EPA in 1992) created considerable
uncertainty about the scope and availability of the secured lender's
exemption from liability. In September 1996, however, Congress passed the
Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of
1996 to address this uncertainty in federal law. This statute codified EPA's
66
<PAGE>
Lender Liability Rule into law and, among other things, clarified the
exemption by defining more clearly the circumstances under which a lender
will be deemed to have participated in management. The following states have
adopted statutes or rules that specify the activities that do, or do not,
constitute participation in management for the purpose of qualifying for the
lender/fiduciary exemption from owner and operator liability for environmental
harms: California, Idaho, Maryland, Massachusetts, Michigan, New Hampshire,
New Jersey, Ohio, Oregon, Tennessee, Vermont and Wisconsin. In the
jurisdictions in which such enactments are in effect, the environmental
liability risks associated with protecting a security interest in property have
been reduced, although not completely eliminated.
The costs associated with an environmental clean-up may be substantial.
If the related Trustee or Servicer is deemed to have participated in
management of a contaminated property that is part of the Trust it is likely
that remedial costs would become a liability of that Trust and in certain
circumstances, of the Trustee. Such an occurrence could occasion a loss to
Securityholders. If a lender is or becomes liable, it can bring an action
for contribution against other "responsible parties," including a previous
owner or operator, who created the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof.
At the time the Mortgage Loans were originated, no environmental
assessment or a very limited environmental assessment of the Mortgaged
Properties was conducted.
Enforceability of Certain Provisions
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.
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.
67
<PAGE>
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 that 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 the
Sponsor and 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 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 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 Financial
Guaranty 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
68
<PAGE>
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 that 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and
disposition of the Securities of any series offered hereby, to the extent it
relates to matters of law or legal conclusions with respect thereto,
represents the opinion of Andrews & Kurth L.L.P., tax counsel to the Sponsor
with respect to material matters associated with such consequences, subject
to any qualifications set forth herein. The discussion below is based upon
laws, regulations, rulings and decisions now in effect, all of which are
subject to change, and 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 of a given series.
Andrews & Kurth L.L.P. will deliver its opinion to the Sponsor with respect to
the description of material federal income tax consequences in the related
Propectus Supplement for each series of Securities. The Sponsor will file each
such opinion as an exhibit to the Current Report on Form 8-K filed by the
Sponsor in connection with the issuance of the related series of 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" 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, Andrews & Kurth
L.L.P., tax counsel to the Sponsor, will deliver its opinion to the Sponsor
that 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
With respect to each series of Grantor Trust Securities, (a) Grantor
Trust Fractional Interest Securities will represent interests in (i) "loans
secured by an interest in real property" within the meaning of section
7701(a)(19)(C)(v) of the Code; and (ii) "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
69
<PAGE>
"obligations (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.
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 (1.00%) 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 interest and 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.
70
<PAGE>
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, Andrews & Kurth
L.L.P., tax counsel to the Sponsor, will deliver its opinion to the Sponsor
that, 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" herein. 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.
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, 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 or 586 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
71
<PAGE>
portion of the taxable income or net loss of the REMIC Trust for each day
during a calendar quarter that the Holder owned such Residual Security. For
this purpose, the daily portion shall be determined by allocating to each day
in the calendar quarter its ratable portion of the taxable income or net loss
of the REMIC Trust for such quarter and by allocating the amount so allocated
among the Residual Holders (on such day) in accordance with their percentage
interests on such day. Any amount included in the gross income or allowed as
a loss of any Residual Holder by virtue of this paragraph will be treated as
ordinary income or loss.
The requirement that each Holder of a Residual Security report its daily
portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the
Holder of the Residual Security may have received full payment of the stated
interest and principal on its Residual Security.
The Trustee will provide to Holders of Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it
holds and any reinvestment earnings less deductions allowed to the REMIC
Trust. Such taxable income or net loss for a given calendar quarter will be
determined in the same manner as for an individual having the calendar year
as the taxable year and using the accrual method of accounting, with certain
modifications. The first modification is that a deduction will be allowed
for accruals of interest (including any original issue discount, but without
regard to the investment interest limitation in section 163(d) of the Code)
on the Regular Securities (but not the Residual Securities), even though
Regular Securities are for non-tax purposes evidences of beneficial ownership
rather than indebtedness of a REMIC Trust. Second, market discount or
premium equal to the difference between the total stated principal balances
of the qualified mortgages and the basis to the REMIC Trust therein generally
will be included in income (in 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.
72
<PAGE>
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 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, 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.
As an exception to the general rule described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Security as excess inclusions if the Residual
Securities in the aggregate are considered not to have "significant value." The
Small Business Job Protection Act ("SBJPA") of 1996 has eliminated the special
rule permitting section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from Residual Securities that have "significant value" within the meaning
of the REMIC Regulations, effective for taxable years beginning after December
31, 1995, except with respect to Residual Securities continuously held by thrift
institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
holder of a Residual Security. First, alternative minimum taxable income for a
holder of a Residual Security is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Security holder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions. These rules are effective for
taxable years beginning after December 31, 1986, unless a holder of a Residual
Security elects to have such rules apply only to taxable years beginning after
August 20, 1996.
73
<PAGE>
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 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.
Mark to Market Rules. A Residual Security acquired after January 3, 1995
cannot be marked-to-market.
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
74
<PAGE>
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" herein. 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 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 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
75
<PAGE>
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" herein.
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.
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. 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.
76
<PAGE>
Debt Securities
General
With respect to each series of Debt Securities, Andrews & Kurth L.L.P.,
tax counsel to the Sponsor, will deliver its opinion to the Sponsor that 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.
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 except to the extent of accrued but
unrecognized interest and market discount.
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
77
<PAGE>
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 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. If so specified 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
78
<PAGE>
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).
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. A Holder may
elect to include market discount into income currently as it accrues, in
which case the interest deferral rule described above will not apply. It
must be noted, however, that this election to include market discount
currently will apply to market discount instruments acquired by the taxpayer
in the taxable year of the election and all subsequent years. 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
79
<PAGE>
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.
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 that is subject to U.S.
federal income tax regardless of the source of its income or a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States fiduciaries
having authority to control all substantial decisions of the trust. 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
80
<PAGE>
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" above.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described herein
under "Material Federal Income Tax Consequences," potential investors should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Securities. State and local income tax may differ
substantially from the corresponding federal law, and this discussion does
not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Securities.
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 ("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.
81
<PAGE>
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.
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". PTCE 83-1 permits, subject to
certain general and specific conditions, transactions that 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.
82
<PAGE>
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 that had
secured obligations and that 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 Andrews
& Kurth L.L.P. 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 that 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.
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 that 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.
83
<PAGE>
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
"Material Federal Income Tax Consequences - Taxation of Holders of
Residual Securities - Excess Inclusions" herein.
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
SMMEA
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans or deeds of trust
may not be legally authorized to invest in the Securities. No representation
is made herein as to whether the Securities will constitute legal investments
for any entity under any applicable statue, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the Securities as legal investments for such purchasers prior to
investing in any class of Securities.
FFIEC Policy Statement
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office
of Thrift Supervision have adopted the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on Certificates Activities
(the "Policy Statement"). Although the National Credit Union Administration
has not yet adopted the Policy Statement, it has adopted other regulations
affecting mortgage-backed securities and is expected to consider adoption of
the Policy Statement. The Policy Statement, among other things, places
responsibility on a depository institution to develop and monitor appropriate
policies and strategies regarding the investment, sale and trading of
securities and restricts an institution's ability to engage in certain types
of transactions.
The Policy Statement provides that a depository institution must
ascertain and document prior to purchase and no less frequently than annually
thereafter that a non-high-risk mortgage security held for investment remains
outside the high-risk category. If an institution is unable to make these
determinations through internal analysis, it must use information derived
from a source that is independent of the party from whom the product is being
purchased. The institution is responsible for ensuring that the assumptions
underlying the analysis and resulting calculations are reasonable. Reliance
on analyses and documentation from a securities dealer or other outside party
without internal analyses by the institution is unacceptable.
A "high-risk mortgage security" is not suitable as an investment
portfolio holding for a depository institution. A high-risk mortgage
security must be reported in the trading account at market value or as an
asset held for sale at the lower of cost or market value and generally may
only be acquired to reduce an institution's interest rate risk. However, an
institution with strong capital and earnings and adequate liquidity that has
a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
84
<PAGE>
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional
restrictions on the purchase of mortgage-backed or other securities.
Investors are urged to consult their own legal advisors prior to making any
determinations with respect to the Policy Statement or other regulatory
requirements.
General
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual
interests or stripped mortgage-backed securities. Investors should consult
their own legal advisors in determining whether and to what extent the
Securities constitute legal investments for such investors and comply with
any other applicable requirements.
USE OF PROCEEDS
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. 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:
(i) By negotiated firm commitment or best efforts
underwriting and public re-offering by
underwriters (which may include affiliates of the
Sponsor);
(ii) By placements by the Sponsor with institutional
investors through dealers; and
(iii) By direct placements by the Sponsor with
institutional investors.
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
85
<PAGE>
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 "Securities Act"). 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 or
will contribute to payments required to be made in respect thereof. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the underwriters
as specified above or otherwise, the Sponsor has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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 in
connection with re-offers and sales by them of Securities. Securityholders
should consult with their legal advisors in this regard prior to any such
re-offer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor and the
Servicer by Karen S. 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 Andrews & Kurth
L.L.P., Washington, D.C.
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, with a copy of the most recent financial statements of the Sponsor,
upon request directed to the Sponsor at:
EquiVantage Acceptance Corp.
13111 Northwest Freeway
Suite 312
Houston, Texas 77040
Attention: Chief Financial Officer
Telephone: (713) 895-1900
Telecopier: (713) 895-3837
A Prospectus Supplement and the related Form 8-K (which shall be
incorporated by reference to this Prospectus with respect to the series of
Securities referred to in such Prospectus Supplement) may contain the
financial statements of the related Credit Enhancer, if any.
RATING
It is a condition to the issuance of each class of Securities offered
hereby that they shall have been rated in one of the four highest rating
categories by the related Rating Agencies.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related
aspects associated with such certificates, the nature of the underlying
mortgage loans and the credit quality of the guarantor, if
86
<PAGE>
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by mortgagors or of the
degree by which such prepayments might differ from those originally
anticipated. As a result, Securityholders might suffer a lower than
anticipated yield and, in addition, holders of stripped pass-through
certificates in extreme cases might fail to recoup their underlying
investments.
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 rating organization. Each security rating should be evaluated
independently of any other security rating.
87
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
----
Accrual Securities............................................. 9, 33
Affiliated Originators......................................... 6
APR............................................................ 23
ARM Loans...................................................... 20
Balloon Amount................................................. 26
Balloon Loans.................................................. 18, 26
Bankruptcy Bond................................................ 50
Bankruptcy Loss................................................ 49
Bankruptcy Loss Amount......................................... 48
Book-Entry Securities.......................................... 5
Bulk Acquisitions.............................................. 11
Buydown Account................................................ 23
Buydown Agreement.............................................. 41
Buydown Funds.................................................. 23
Buydown Mortgage Loans......................................... 23
Buydown Period................................................. 23
Cede........................................................... 15
CERCLA......................................................... 46
Certificates................................................... 6
Closing Date................................................... 37
CLTV........................................................... 24
Code........................................................... 69
Combined Loan-to-Value Ratio................................... 24
Commission..................................................... 3, 8
Contract Sub-Servicers......................................... 31
Convertible Mortgage Loan...................................... 27
Cooperative Loans.............................................. 6
Cooperative Notes.............................................. 25
Credit Enhancer................................................ 21
Cut-Off Date................................................... 23
Debt Securities................................................ 14, 69
Defaulted Mortgage Loss........................................ 49
Deferred Interest.............................................. 17
Deficient Valuation............................................ 50
Definitive Securities.......................................... 35
Deleted Mortgage Loan.......................................... 30
Delinquency Advances........................................... 43
Delinquent..................................................... 44
Detailed Description........................................... 22
Determination Date............................................. 43
Direct Participants............................................ 21, 35
Disqualified Persons........................................... 81
Distribution Account........................................... 39
DOL............................................................ 82
DOL Regulations................................................ 82
DTC............................................................ 15
Due Date....................................................... 38
Due Period..................................................... 10, 34
Eligible Account............................................... 39
88
<PAGE>
EPA............................................................ 67
Equity Securities.............................................. 8, 33
ERISA.......................................................... 14, 81
ERISA Plans.................................................... 81
Exchange Act................................................... 3, 15
Extraordinary Losses........................................... 49
Fannie Mae..................................................... 18
FDIC........................................................... 39
FHLMC.......................................................... 18
Financial Guaranty Insurance Policy............................ 1
Financial Guaranty Insurer..................................... 1
Fixed-Income Securities........................................ 8, 33
FNMA........................................................... 18
Forward Purchase Agreement..................................... 12, 37
Fraud Loss..................................................... 49
Fraud Loss Amount.............................................. 48
Freddie Mac.................................................... 18
fully taxable bonds............................................ 80
Garn-St Germain Act............................................ 67
Grantor Trust Estate........................................... 69
Grantor Trust Fractional Interest Security..................... 70
Grantor Trust Securities....................................... 14, 69
Grantor Trust Strip Security................................... 70
Indenture...................................................... 7
Indenture Trustee.............................................. 7
Index.......................................................... 26
Indirect Participants.......................................... 21, 35
Insurance Paying Agent......................................... 51
Insurance Proceeds............................................. 39
Insured Payment................................................ 51
Interest Rate.................................................. 8, 33
Investment Company Act......................................... 11
IRAs........................................................... 81
IRS............................................................ 71
Junior Lien Loans.............................................. 17
Letter of Credit............................................... 49
Letter of Credit Bank.......................................... 49
Liquidated Mortgage Loan....................................... 18
Liquidation Proceeds........................................... 39
Loan Purchase Price............................................ 30
Loan-to-Value Ratio............................................ 28
lockout periods................................................ 23
LTV............................................................ 28
Minimum Required Rating........................................ 40
Modified Loans................................................. 26
monthly pay.................................................... 22
Mortgage Asset Schedule........................................ 22
Mortgage Assets................................................ 22
Mortgage Loans................................................. 1, 6, 25
Mortgage Notes................................................. 25
Mortgage Pool.................................................. 1, 6
Mortgage Pool Insurance Policy................................. 50
Mortgage Rate.................................................. 22
Mortgaged Properties........................................... 11 ,22, 25
Mortgages...................................................... 11, 25
Mortgagor...................................................... 18
Net Liquidation Proceeds....................................... 39
Net Mortgage Rate.............................................. 59
Note Margin.................................................... 26
89
<PAGE>
Notes.......................................................... 7
Originator's Retained Yield.................................... 25
Originators.................................................... 6
Participants................................................... 35
Parties in Interest............................................ 81
Partnership Interests.......................................... 14
Pass-Through Rate.............................................. 42
Paying Agent................................................... 42
Payment Dates.................................................. 9, 34
Percentage Interest............................................ 42
Permitted Investments.......................................... 39
Physical Certificates.......................................... 35
Plan........................................................... 14, 81
Policy Statement............................................... 84
Pool Factor.................................................... 45
Pool Insurer................................................... 41
Pooling and Servicing Agreement................................ 7
Pre-Funding Account............................................ 12, 37
Premium Security............................................... 80
Principal Prepayments.......................................... 38
PTCE 83-1...................................................... 82
Purchase Obligation............................................ 16
Qualified Replacement Mortgage................................. 30
Qualified Retirement Plans..................................... 81
Rating Agencies................................................ 15
Realized Loss.................................................. 48
Record Date.................................................... 10, 34, 42
Redemption Period.............................................. 18
Regular Security............................................... 71
Relief Act..................................................... 21, 69
REMIC.......................................................... 2, 69
REMIC Regular Securities....................................... 14
REMIC Regulations.............................................. 71
REMIC Residual Securities...................................... 14
REMIC Securities............................................... 69
REMIC Trust.................................................... 71
Remittance Date................................................ 40
Remittance Period.............................................. 10, 34
REO Property................................................... 46
Reserve Fund................................................... 51
Residual Security.............................................. 71
SBJPA.......................................................... 74
Securities..................................................... 1
Securities Act................................................. 85
Security Registrar............................................. 35
Securityholders................................................ 1
Senior Securities.............................................. 9, 31
Servicer....................................................... 2
Servicing Advance.............................................. 44, 47
Servicing Agreement............................................ 7
Settlement Date................................................ 72
SMMEA.......................................................... 14
Special Hazard Amount.......................................... 48
Special Hazard Insurance Policy................................ 50
Special Hazard Insurer......................................... 50
Special Hazard Loss............................................ 49
90
<PAGE>
Sponsor........................................................ 1
Statistic Calculation Date..................................... 23
Strip Securities............................................... 8, 33
Sub-Servicer(s)................................................ 2
Sub-Servicing Account.......................................... 41
Sub-Servicing Agreement........................................ 31
Subordinate Amount............................................. 48
Subordinate Securities......................................... 9, 33
Tax Exempt Investor............................................ 84
Tax-Favored Plans.............................................. 81
Thrift Institutions............................................ 74
Title V........................................................ 68
Title VIII..................................................... 68
Trust.......................................................... 1, 6
Trust Agreement................................................ 7
Trust Estate................................................... 1, 7
Trustee........................................................ 6
U.S. Person.................................................... 80
UCC............................................................ 65
Unaffiliated Originators....................................... 6
91
<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-1
Reports to the Certificate Holders.................................... S-1
Summary of Prospectus Supplement...................................... S-3
Risk Factors.......................................................... S-17
Sponsor's Mortgage Loan Program....................................... S-19
The Mortgage Loan Groups.............................................. S-21
Prepayment and Yield Considerations................................... S-37
Use of Proceeds....................................................... S-47
The Sponsor, The Servicer and The Sub-Servicer........................ S-49
The Originators....................................................... S-50
Description of the Certificates....................................... S-60
The Certificate Insurance Policy...................................... S-61
The Certificate Insurer............................................... S-63
The Pooling and Servicing Agreement................................... S-65
Material Federal Income Tax Consequences.............................. S-66
ERISA Considerations.................................................. S-68
Ratings............................................................... S-68
Legal Investment Considerations....................................... S-68
Underwriting.......................................................... S-68
Experts............................................................... S-69
Certain Legal Matters................................................. S-69
Index of Principal Terms.............................................. S-70
Annex 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
Prospectus Supplement................................................. 3
Available Information................................................. 3
Incorporation of Certain Documents by Reference....................... 3
Reports to Securityholders............................................ 4
Summary of Prospectus................................................. 6
Risk Factors.......................................................... 16
The Trusts............................................................ 22
The Mortgage Pools.................................................... 25
Mortgage Loan Program................................................. 27
Description of the Securities......................................... 33
Subordination......................................................... 47
Description of Credit Enhancement..................................... 49
Hazard Insurance; Claims Thereunder................................... 53
The Sponsor........................................................... 54
The Servicer.......................................................... 54
The Pooling and Servicing Agreement................................... 55
Yield Considerations.................................................. 58
Maturity and Prepayment Considerations................................ 61
Certain Legal Aspects of Mortgage Loans and Related Matters........... 62
Material Federal Income Tax Consequences.............................. 69
State Tax Considerations.............................................. 81
ERISA Considerations.................................................. 81
Legal Investment Matters.............................................. 84
Use of Proceeds....................................................... 85
Methods of Distribution............................................... 85
Legal Matters......................................................... 86
Financial Information................................................. 86
Rating................................................................ 86
Index of Principal Definitions........................................ 88
</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 1997-2
$23,800,000
CLASS A-1 FIXED RATE CERTIFICATES
6.575% PASS-THROUGH RATE
$15,600,000
CLASS A-2 FIXED RATE CERTIFICATES
6.800% PASS-THROUGH RATE
$11,683,000
CLASS A-3 FIXED RATE CERTIFICATES
7.275% PASS-THROUGH RATE
$5,675,000
CLASS A-4 FIXED RATE CERTIFICATES
7.000% PASS-THROUGH RATE
$43,242,000
CLASS A-5 ADJUSTABLE RATE CERTIFICATES
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE INC.
SERVICER
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[LOGO]
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
June 19, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
