<PAGE>
As filed with the Securities and Exchange Commission on March 12, 1997
Registration No. 333-
----------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM S-3
Registration Statement
Under the
Securities Act of 1933
-------------------
EQUIVANTAGE ACCEPTANCE CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0448074
- ------------------------ ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
13111 NORTHWEST FREEWAY, SUITE 301
HOUSTON, TEXAS 77040
(713) 895-1957
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
KAREN S. CRAWFORD, ESQ.
EQUIVANTAGE ACCEPTANCE CORP.
13111 NORTHWEST FREEWAY, SUITE 301
HOUSTON, TEXAS 77040
(713) 895-1957
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------------
Copies to:
JAMES A. BLALOCK III, ESQ.
ANDREWS & KURTH L.L.P.
1701 PENNSYLVANIA AVE., N.W., SUITE 200
WASHINGTON, DC 20006
(202) 662-2730
----------------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
----------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /_______________________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Amount to be Proposed Maximum Proposed Maximum Amount of
Title of Securities to be Registered Registered(1) Offering Price Per Unit(2) Aggregate Offering Price(2) Registration Fee(3)
<S> <C> <C> <C> <C>
Mortgage Loan Asset-Backed Securities $87,881,000.00 100% $87,881,000.00 $4,546.00
====================================================================================================================================
</TABLE>
(1) Includes $72,881,000 principal amount of EquiVantage Acceptance Corp.'s
Mortgage Loan Asset-Backed Securities previously registered under its
Registration Statement on Form S-3 (Registration No. 33-99364) that remain
unsold as of the date hereof. As permitted by Rule 429 under the Securities
Act of 1933, as amended, the Prospectus filed as part of this Registration
Statement on Form S-3 will be used in connection with the offering of such
previously registered and unsold securities and the securities covered hereby.
(2) Estimated solely for purposes of calculating the registration fee.
(3) The registration fee specified in the table has been computed on the
basis of the $15,000,000 principal amount of securities covered hereby, prior
to including the previously registered and unsold securities referred to in
footnote (1).
--------------------------------
This Registration Statement shall hereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933, as amended.
<PAGE>
The sole purpose of this Registration Statement on Form S-3 is to register an
amount of EquiVantage Acceptance Corp.'s Mortgage Loan Asset-Backed
Securities that, when taken together with Mortgage Loan Asset-Backed
Securities previously registered under EquiVantage Acceptance Corp.'s
Registration Statement on Form S-3 (Registration No. 33-99364) and remaining
unsold as of the date hereof, will facilitate the issuance and public
offering of Home Equity Loan Asset-Backed Certificates, Series 1997-1 by
EquiVantage Home Equity Loan Trust 1997-1 in an approximate initial
aggregate principal amount of up to $87,881,000.
<PAGE>
PROSPECTUS
DATED MARCH 12, 1997
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR
$87,881,000
MORTGAGE LOAN ASSET-BACKED SECURITIES
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the "Securities") that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (a "Mortgage Pool") of one- to four-family residential
mortgage loans, or certificates of interest or participation therein, to be
acquired by such Trust from EquiVantage Acceptance Corp. (the "Sponsor"). The
Mortgage Loans were or will be acquired by the Sponsor from affiliated or
unaffiliated entities as described herein. See "The Mortgage Pools" herein.
The Mortgage Loans in each Mortgage Pool and certain other assets described
herein and in the related Prospectus Supplement (collectively with respect to
each Trust, the "Trust Estate") will be held by the related Trust for the
benefit of the holders of the related series of Securities (the
"Securityholders") pursuant to a Pooling and Servicing Agreement to the extent
and as more fully described herein and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Pool will consist of one or more of the various types of Mortgage Loans
described under "The Mortgage Pools" 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,
EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
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.
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 (as defined herein)
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 as 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
"Certain 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. There will be
no secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
2
<PAGE>
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,
subsequent to the date of this Prospectus and prior to the termination of the
offering of the securities of such trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document 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.
3
<PAGE>
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).
Except as otherwise specified in the related Prospectus Supplement, 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.
4
<PAGE>
TABLE OF CONTENTS
CAPTION PAGE
SUMMARY OF PROSPECTUS..........................................................6
RISK FACTORS..................................................................16
Limited Liquidity.........................................................16
Limited Obligations.......................................................16
Limitations, Reduction and Substitution of Credit Enhancement.............16
Risks Related to the Mortgage Loans.......................................17
Litigation................................................................19
Geographic Concentration of Mortgaged Properties..........................19
Legal Considerations......................................................19
Yield and Prepayment Considerations.......................................19
Book-Entry Registration...................................................20
The Status of the Mortgage Loans in the Event of
Bankruptcy of the Sponsor or an Originator..............................20
Limitations on Interest Payments and Foreclosures.........................21
Security Rating...........................................................21
THE TRUSTS....................................................................21
The Mortgage Loans - General..............................................22
THE MORTGAGE POOLS............................................................25
General...................................................................25
The Mortgage Pools........................................................26
MORTGAGE LOAN PROGRAM.........................................................28
Underwriting Guidelines...................................................29
Qualifications of Originators.............................................30
Representations by Originators............................................31
Sub-Servicing.............................................................33
DESCRIPTION OF THE SECURITIES.................................................34
General...................................................................34
General Payment Terms of Securities.......................................35
Form of Securities........................................................36
Assignment of Mortgage Loans..............................................38
Forward Commitments; Pre-Funding..........................................39
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.................................47
SUBORDINATION.................................................................47
DESCRIPTION OF CREDIT ENHANCEMENT.............................................49
Letter of Credit..........................................................50
Mortgage Pool Insurance Policies..........................................50
Special Hazard Insurance Policies.........................................50
Bankruptcy Bonds..........................................................51
Reserve Funds.............................................................51
Financial Guaranty Insurance Policies.....................................51
Other Insurance, Guarantees and
Similar Instruments or Agreements.......................................52
Cross-Collateralization...................................................52
Overcollateralization.....................................................52
Maintenance of Credit Enhancement.........................................52
Reduction or Substitution of Credit Enhancement...........................53
HAZARD INSURANCE; CLAIMS THEREUNDER...........................................54
Hazard Insurance Policies.................................................54
THE SPONSOR...................................................................55
THE SERVICER..................................................................55
THE POOLING AND SERVICING AGREEMENT...........................................55
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield................................55
Evidence as to Compliance.................................................56
Removal and Resignation of the Servicer...................................56
Rights upon Event of Default .............................................57
Amendment.................................................................57
Termination; Retirement of Securities.....................................58
The Trustee...............................................................58
YIELD CONSIDERATIONS..........................................................59
MATURITY AND PREPAYMENT CONSIDERATIONS........................................60
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS AND RELATED MATTERS...................................................62
General...................................................................62
Cooperative Loans.........................................................63
Foreclosure...............................................................63
Foreclosure on Shares of Cooperatives.....................................64
Rights of Redemption......................................................65
Anti-deficiency Legislation and Other
Limitations on Lenders..................................................65
Environmental Legislation.................................................67
Enforceability of Certain Provisions......................................68
Applicability of Usury Laws...............................................68
Alternative Mortgage Instruments..........................................69
Soldiers' and Sailors' Civil Relief Act of 1940...........................69
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES..................................................................69
General...................................................................69
Grantor Trust .Securities.................................................70
REMIC Securities..........................................................71
Debt Securities...........................................................77
Discount and Premium......................................................78
Backup Withholding........................................................81
Foreign Investors.........................................................81
STATE TAX CONSIDERATIONS......................................................82
ERISA CONSIDERATIONS..........................................................82
Plan Asset Regulations....................................................82
Prohibited Transaction Class Exemption....................................83
Tax Exempt Investors......................................................84
Consultation with Counsel.................................................84
LEGAL INVESTMENT MATTERS......................................................85
SMMEA.....................................................................85
FFIEC Policy Statement....................................................85
General...................................................................85
USE OF PROCEEDS...............................................................86
METHODS OF DISTRIBUTION.......................................................86
LEGAL MATTERS.................................................................87
FINANCIAL INFORMATION.........................................................87
RATING........................................................................87
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 primary
assets of each Trust will consist of a
segregated pool (each a "Mortgage Pool")
of one-to-four family residential
mortgage loans, home improvement loans
that may be partially insured by the
FHA, home equity revolving lines of
credit, condominium mortgage loans
("Condominium Loans"), mortgage loans on
manufactured housing that constitute
real property under applicable state
law, mortgage loans on cooperative
apartments ("Cooperative Loans") and/or
other residential mortgage loans
described in the related Prospectus
Supplement (collectively, the "Mortgage
Loans") or certificates of interest or
participation therein, acquired by such
Trust from the Sponsor. The Sponsor
will acquire the Mortgage Loans from one
or more of the Originators. The
Securities issued by any Trust may
represent beneficial ownership interests
in the related Mortgage Loans held by
the related Trust, or may represent debt
secured by such Mortgage Loans, as
described herein and in the related
Prospectus
6
<PAGE>
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.
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
"Certain 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
7
<PAGE>
the ownership of such Trust Estate; with
respect to Securities that represent
debt issued by the related Trust, such
Securities will be secured by the
related Trust Estate. Notwithstanding
the foregoing, and as to be described in
the related Prospectus Supplement,
certain types of credit enhancement,
such as a financial guaranty insurance
policy or a letter of credit, may
constitute a full recourse obligation of
the issuer of such credit enhancement.
OBLIGOR CONCENTRATION. The Sponsor does
not expect that the assets of any Trust
(exclusive of any form of credit
enhancement, as 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
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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, as hereinafter defined and in the
manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Securities may
include one or more other classes of
Fixed-Income Securities (collectively,
the "Senior Securities") that are senior
to one or more other classes of
Fixed-Income Securities (collectively,
the "Subordinate Securities") in respect
of certain 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
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monthly, quarterly or semiannually, as
described in the related Prospectus
Supplement; Payment Dates with respect
to Equity Securities will occur as
described in the related Prospectus
Supplement.
The related Prospectus Supplement will
describe a date (the "Record Date")
preceding each Payment Date, as of which
the Trustee or its paying agent will fix
the identity of the Securityholders for
the purpose of receiving payments on the
next succeeding Payment Date.
Each Pooling and Servicing Agreement
will describe a period (a "Remittance
Period" or "Due Period") antecedent to
each Payment Date; collections received
on or with respect to the related
Mortgage Loans during the related
Remittance Period will be required to be
remitted by the Servicer to the related
Trustee prior to the related Payment
Date, and will be used to fund payments
to Securityholders on such Payment Date.
As may be described in the related
Prospectus Supplement, the related
Pooling and Servicing Agreement may
provide that all or a portion of the
principal collected on or with respect
to the related Mortgage Loans may be
applied by the related Trustee to the
acquisition of additional Mortgage Loans
during a specified period (rather than
be used to fund payments of principal to
Securityholders during such period) with
the result that the related Securities
will possess an interest-only period,
also commonly referred to as a revolving
period, which will be followed by an
amortization period. Any such
interest-only or revolving period may,
upon the occurrence of certain events to
be described in the related Prospectus
Supplement, terminate prior to the end
of the specified period and result in
the earlier than expected amortization
of the related Securities.
In addition, and as may be described in
the related Prospectus Supplement, the
related Pooling and Servicing Agreement
may provide that all or a portion of
such collected principal may be retained
by the Trustee (and held in certain
temporary investments, including
Mortgage Loans) for a specified period
prior to being used to fund payments of
principal to Securityholders.
The result of such retention and
temporary investment by the Trustee of
such principal would be to slow the
amortization rate of the related
Securities relative to the amortization
rate of the related Mortgage Loans, or
to attempt to match the amortization
rate of the related Securities to an
amortization schedule established at the
time such Securities are issued. Any
such feature applicable to any
Securities may terminate upon the
occurrence of events to be described in
the related Prospectus Supplement,
resulting in the current distribution of
principal payments to the specified
Securityholders and an acceleration of
the amortization of such Securities.
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Unless otherwise specified in the
related Prospectus Supplement, neither
the Securities nor the underlying
Mortgage Loans will be guaranteed or
insured by any governmental agency or
instrumentality or the Sponsor, the
Servicer, any Sub-Servicer, if
applicable, any Originator or any of
their affiliates.
No Investment Companies. . . Neither the Sponsor nor any Trust will
register as an "investment company" under the
Investment Company Act of 1940, as amended
(the "Investment Company Act").
Cross-Collateralization. . . Unless otherwise provided in the related
Pooling and Servicing Agreement and described
in the related Prospectus Supplement, the
source of payment for Securities of each
series will be the assets of the related
Trust Estate only. However, as may be
described in the related Prospectus
Supplement, a Trust Estate may include the
right to receive moneys from a common pool of
credit enhancement 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,
unless specifically described otherwise in
the related Prospectus Supplement, no
collections on any Mortgage Loans held by any
Trust may be applied to the payment of
Securities issued by any other Trust (except
to the limited extent that certain
collections in excess of amounts needed to
pay the related Securities may be deposited
in a common, master reserve account that
provides credit enhancement for more than one
series of Securities).
The Mortgage Pools . . . . . Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Pool
will consist primarily of Mortgage Loans
secured by liens on one-to four-family
residential properties ("Mortgages"), located
in any one of the fifty states, the District
of Columbia, Puerto Rico or any other
Territories of the United States (the
"Mortgaged Properties"). All Mortgage Loans
will have been acquired by the related Trust
from the Sponsor. All Mortgage Loans will
have been originated either by (i) the
Servicer or one or more Affiliated
Originators other than the Servicer,
generally pursuant to standard underwriting
guidelines described herein, as modified from
time to time ("Sponsor's Guidelines"); (ii)
one or more Unaffiliated Originators,
generally pursuant to the Sponsor's
Guidelines; (iii) certain Unaffiliated
Originators, generally pursuant to such
Unaffiliated Originators' underwriting
guidelines approved by the Sponsor ("Approved
Guidelines"); and (iv) Originators of
Mortgage Loans, subsequently purchased in
whole or in part by the Sponsor or an
Affiliated Originator as bulk acquisitions
("Bulk Acquisitions"), generally pursuant to
such Originators' underwriting guidelines.
See "Mortgage Loan Program" herein. For a
description of the types of Mortgage Loans
that may be included in the Mortgage Pools,
see "The Mortgage Pools - The Mortgage Loans"
herein.
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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
fifteen days after the initial issuance
of such series.
Forward Commitments;
Pre-Funding . . .. . . . . . A Trust may enter into an agreement (each, a
"Forward Purchase Agreement") with the
Sponsor whereby the Sponsor will agree to
transfer additional Mortgage Loans to such
Trust following the date on which such Trust
is established and the related Securities are
issued. Any Forward Purchase Agreement will
require that any Mortgage Loans so
transferred to a Trust conform to the
requirements specified in such Forward
Purchase Agreement. If a Forward Purchase
Agreement is to be utilized, and unless
otherwise specified in the related Prospectus
Supplement, the related Trustee will be
required to deposit in a segregated account
(each, a "Pre-Funding Account") all or a
portion of the proceeds received by the
Trustee in connection with the sale of one or
more classes of Securities of the related
series; subsequently, the additional Mortgage
Loans will be transferred to the related
Trust in exchange for money released to the
Sponsor from the related Pre-Funding Account
in one or more transfers. Each Forward
Purchase Agreement will set a specified
period during which any such transfers must
occur. The Forward Purchase Agreement or the
related Pooling and Servicing Agreement will
require that, if all moneys originally
deposited to such Pre-Funding Account are not
so used by the end of such specified period,
then any remaining moneys will be applied as
a mandatory prepayment of the related class
or classes of Securities as specified in the
related Prospectus Supplement. Unless
otherwise specified in the related Prospectus
Supplement, the specified period for the
acquisition by a Trust of additional Mortgage
Loans will not exceed three months from the
date such Trust is established.
Credit Enhancement . . . . . If so specified in the Prospectus Supplement,
the Trust Estate with respect to any series
of Securities may include any one or any
combination of a letter of credit, mortgage
pool insurance policy, special hazard
insurance policy, bankruptcy bond, financial
guaranty insurance policy, reserve fund or
other type of credit enhancement to provide
full or partial coverage for certain defaults
and losses relating to the Mortgage Loans.
Credit support also may be provided in the
form of the related class of Equity
Securities, and/or by subordination of one or
more classes of Fixed-Income Securities in a
series under which losses in excess of those
absorbed by any related class of Equity
Securities are first allocated to any
Subordinate Securities up to a specified
limit, cross-support among groups of Mortgage
Assets or overcollateralization. Unless
otherwise specified in the related Prospectus
Supplement, any mortgage pool insurance
policy will have certain exclusions from
coverage thereunder, which will be described
in the related Prospectus Supplement, which
may be accompanied by one or more separate
credit enhancements that
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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.
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 as defined under "Description
of the Securities - Advances" herein.
In addition, unless otherwise specified
in the related Prospectus Supplement,
the Servicer will be required to pay all
"out of pocket" costs and expenses
incurred in the performance of its
servicing obligations, but only to the
extent that the Servicer reasonably
believes that such amounts will
ultimately be recoverable. See
"Description of the Securities -
Advances" 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 under the
circumstances and in the manner set
forth herein under "The Pooling and
Servicing Agreement - Termination;
Retirement of Securities" and in the
related Prospectus Supplement.
Mandatory Termination. . . . The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a series of
Securities by soliciting competitive
bids for the purchase of the related
Trust Estate or otherwise, under other
circumstances and in the manner
specified herein in "The Pooling and
Servicing Agreement - Termination;
Retirement of Securities" and in the
related Prospectus Supplement.
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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.
Certain Federal Income Tax
Consequences. . .. . . . . . Securities of each series offered hereby
will, for federal income tax purposes,
constitute either (i) interests
("Grantor Trust Securities") in a Trust
treated as a grantor trust under
applicable provisions of the Code, (ii)
"regular interests" ("REMIC Regular
Securities") or "residual interests"
("REMIC Residual Securities") in a Trust
treated as a REMIC (or, in certain
instances, containing one or more
REMIC's) under Sections 860A through
860G of the Code, (iii) debt issued by a
Trust ("Debt Securities") or (iv)
interests in a Trust that is treated as
a partnership ("Partnership Interests").
Investors are advised to consult their
tax advisors and to review "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
Registration of Securities . Securities may be represented by global
securities registered in the name of
Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee. In such case,
Securityholders will not be entitled to
receive definitive securities
representing such holders' interests,
except in certain
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circumstances described in the related
Prospectus Supplement. See "Description
of the Securities - Form of Securities"
herein.
Ratings . . . . .. . . . . . Each class of Fixed-Income Securities
offered pursuant to the related
Prospectus Supplement will be rated in
one of the four highest rating
categories by one or more "national
statistical rating organizations," as
defined in the Securities Exchange Act
of 1934, as amended (the "Exchange
Act"), and commonly referred to as
"Rating Agencies." Such ratings will
address, in the opinion of such Rating
Agencies, the likelihood that the
related Trust will be able to make
timely payment of all amounts due on the
related Fixed-Income Securities in
accordance with the terms thereof. Such
ratings will neither address any
prepayment or yield considerations
applicable to any Securities nor
constitute a recommendation to buy, sell
or hold any Securities. See "Rating"
herein.
Equity Securities will not be rated.
The ratings expected to be received with
respect to any Securities will be set
forth in the related Prospectus
Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of any
series or class will develop or, if it does develop, that it will provide
Securityholders with liquidity of investment or that it will continue for the
life of the Securities of any series. The Prospectus Supplement for any series
of Securities may indicate that an underwriter specified therein intends to
establish a secondary market in such Securities; however, no underwriter will be
obligated to do so. Unless otherwise specified in the related Prospectus
Supplement, the Securities will not be listed on any securities exchange.
LIMITED OBLIGATIONS
The Securities will not represent an interest in or obligation, either
recourse or non-recourse (except for certain non-recourse debt described herein
under "Certain 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. Except as described in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Sponsor, the Servicer,
any Sub-Servicer or any of their affiliates. Proceeds of the assets included in
the related Trust Estate for each series of Securities (including the Mortgage
Loans and any form of credit enhancement) will be the sole source of payments on
the Securities, and there will be no recourse to the Sponsor or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each series of Securities, credit enhancement will be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Credit enhancement may be provided in one or more of the forms
referred to herein, including, but not limited to: a letter of credit; a
mortgage pool insurance policy; a special hazard insurance policy; a bankruptcy
bond; a reserve fund; a financial guaranty insurance policy or other type of
credit enhancement to provide partial coverage for certain defaults and losses
relating to the Mortgage Loans. Credit enhancement also may be provided in the
form of the related class of Equity Securities, subordination of one or more
classes of Fixed-Income Securities in a series under which losses in excess of
those absorbed by any related class of Equity Securities are first allocated to
any Subordinate Securities up to a specified limit, cross-support among Mortgage
Assets and/or overcollateralization. See "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. Generally, credit enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of
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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
RISK OF THE LOSSES ASSOCIATED WITH JUNIOR LIENS. Certain of the Mortgage
Loans will be secured by junior liens ("Junior Lien Loans") subordinate to the
rights of the mortgagee or beneficiary under each related senior mortgage or
deed of trust. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee or beneficiary are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee secured by a junior lien may not
foreclose on the related mortgaged property unless it forecloses subject to the
related senior mortgage or mortgages, in which case it must either pay the
entire amount of each senior mortgage to the applicable mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on each senior
mortgage in the event of default thereunder. In servicing junior lien loans in
its portfolio, it has been the practice of the Servicer to satisfy each such
senior mortgage at or prior to the foreclosure sale only to the extent that it
determines any amounts so paid will be recoverable from future payments and
collections on such junior lien loans, from liquidation of the property securing
the senior mortgage or otherwise. The Trusts will not have any source of funds
to satisfy any such senior mortgage or make payments due to any senior
mortgagee. See "Certain Legal Aspects of Mortgage Loans and Related Matters -
Foreclosure" herein.
RISK OF LOSSES ASSOCIATED WITH DECLINING REAL ESTATE VALUES. An investment
in securities such as the Securities that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans
may be affected by, among other things, a decline in real estate values and
changes in the borrowers' financial condition. No assurance can be given that
values of the Mortgaged Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of any senior liens, the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the nonconforming credit mortgage lending
industry. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Properties on which the Trust holds Junior Lien Loans before
having any effect on the interest of the related senior mortgagee. In addition,
in the case of Mortgage Loans that are subject to negative amortization, due to
the addition to principal balance of deferred interest ("Deferred Interest"),
the principal balances of such Mortgage Loans could be increased to an amount
equal to or in excess of the value of the underlying Mortgaged Properties,
thereby increasing the likelihood of default. To the extent that such losses
are not covered by the applicable credit enhancement, holders of Securities of
the series evidencing interests in the related Mortgage Pool will bear all risk
of loss resulting from default by Mortgagors and will have to look primarily to
the value of the Mortgaged Properties for recovery of the outstanding principal
and unpaid interest on the defaulted Mortgage Loans.
RISK OF LOSSES ASSOCIATED WITH CERTAIN NON-CONFORMING AND NON-TRADITIONAL
LOANS. The Sponsor's underwriting standards consider, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the value of the property. However, the Sponsor's Mortgage Loan
program generally provides for the origination of Mortgage Loans relating to
non-conforming credits that are likely to experience higher rates of
delinquency, foreclosure and bankruptcy than have historically been experienced
by loans conforming to Federal National Mortgage Association or Federal Home
Loan Mortgage Corporation guidelines. In addition, certain of the Mortgage
Loans may provide for escalating or variable payments by the borrower under the
Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is generally
qualified on the basis of the initial interest rate plus 1%. In some instances
the Mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of default
will increase. For a more detailed discussion, see "Mortgage Loan Program"
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
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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. 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. 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 mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party who takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property and who, prior to
foreclosure, has
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been involved in decisions or actions that may lead to contamination of a
property, may be liable for the costs of cleaning up the contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a holder of a mortgage note (such as a Trust) that, under the terms
of the Pooling and Servicing Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of Mortgage
Loans and Related Matters - Environmental Legislation" 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.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Originators, the
Servicer and Sub-Servicers. In addition, most states have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices that may apply to the origination,
servicing and collection of the Mortgage Loans. See "Certain Legal Aspects of
Mortgage Loans and Related Matters" 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 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
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paid by Securityholders. Such yield may be adversely affected by a higher or
lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Securities or Securities purchased at premiums to or
discounts from par will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield to maturity on certain other
types of classes of Securities, including Accrual Securities or certain other
classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
Mortgage Loan or Loans), sales of Mortgaged Properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain "due-on-sale" provisions, and the
Servicer will be required to enforce such provisions unless (i) such enforcement
would materially increase the risk of default or delinquency on, or materially
decrease the security for, such Mortgage Loan or (ii) such enforcement is not
permitted by applicable law, in which case the Servicer is authorized to permit
the purchaser of the related Mortgaged Property to assume the Mortgage Loan.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
BOOK-ENTRY REGISTRATION
Issuance of the Securities in book-entry form may reduce the liquidity of
such Securities in the secondary trading market 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 or
Indirect Participants") and certain banks, the ability of a Securityholder to
pledge a Security to persons or entities that do not participate in the DTC
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical security representing the Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities 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
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
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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.
SECURITY RATING
The rating of Securities credit enhanced through external credit
enhancement such as a letter of credit, financial guaranty insurance policy or
mortgage pool insurance will depend primarily on the creditworthiness of the
issuer of such external credit enhancement device (a "Credit Enhancer"). Any
reduction in the rating assigned to the claims-paying ability of the related
Credit Enhancer below the rating initially given to the related Securities would
likely result in a reduction in the rating of the Securities. See "Rating"
herein and in the Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Co-operative Loans, (iii) Home Improvement Loans or
(iv) other loans (each hereinafter defined) or (B) certificates of interest or
participation in the items described in clause (A) or in pools of such items, in
each case, as specified in the related Prospectus Supplement, together with
payments in respect of such primary Mortgage Assets and certain other accounts,
obligations or agreements, in each case as specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to be
included in the related Trusts. If specific information respecting the primary
Mortgage Assets is not known at the time the related series of Securities
initially is offered, information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Securities (the "Detailed Description"). A copy of the
Pooling and Servicing Agreement with respect to each series of Securities will
be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such series (the
"Mortgage Asset Schedule") will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
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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. Unless otherwise specified in
the related Prospectus Supplement, all of the Mortgage Loans will be covered by
standard hazard insurance policies (which may be in the form of a blanket or
forced placed hazard insurance policy). The existence, extent and duration of
any such coverage will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
("monthly pay") or bi-weekly. The payment terms of the Mortgage Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for period of time and under certain
circumstances is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate). The specified rate of interest on a
Mortgage Loan is its "Mortgage Rate." Changes to an Adjustable Rate
may be subject to periodic limitations, maximum rates, minimum rates
or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a Mortgage Loan for such
periods and under such circumstances as may be specified in the
related Prospectus Supplement. If provided for in the Prospectus
Supplement, certain Mortgage Loans may be subject to temporary buydown
plans ("Buydown Mortgage Loans") pursuant to which the monthly
payments made by the Mortgagor during the early years of the Mortgage
Loan (the "Buydown Period") will be less than the scheduled monthly
payments on the Mortgage Loan, and the amount of any difference may be
contributed from (i) an amount (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds")
funded by the originator of the Mortgage Loan or another source
(including the 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
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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) Certain Mortgage Loans may be home equity revolving lines of
credit that may have principal amortization schedules that reset when
additional amounts are drawn down thereunder.
(f) Other Mortgage Loans may be assumable by persons meeting
either the Underwriting Guidelines of the Sponsor, in some cases at
the time of origination of the Mortgage Loan, and in other cases, the
Sponsor's then-applicable Underwriting Guidelines.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool; such
information, insofar as it may relate to statistical information relating to
such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") 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 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 fifteen days after the
initial issuance of such Securities.
The "Combined Loan-to-Value Ratio" or "CLTV" of a Mortgage Loan at any
given time is, with respect to any first lien Mortgage Loans, the percentage
equal to the original balance of the related Mortgage Loan divided by the
appraised value of the related property. With respect to any Junior Lien Loans,
the Combined-Loan-to-Value Ratio is the percentage determined by dividing (x)
the sum of the original principal balance of such Mortgage Loan (less the
amount, if any, of the premium for any credit life insurance) plus the then
current principal balance of all mortgage loans secured by liens on the related
Mortgaged Property having priorities senior to that of the lien 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
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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.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Sponsor, the Servicer and the Originators with respect to a
series of Securities will be related to servicing and/or providing (or, where
the Sponsor or an Originator acquired a Mortgage Loan from another originator,
obtaining from such originator) certain representations and warranties
concerning the Mortgage Loans and to assign to the Trustee for such series of
Securities the Sponsor's or Originator's rights with respect to such
representations and warranties. See "The Pooling and Servicing Agreement"
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.
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust, home improvement loans or
participation or other beneficial interests therein, secured by first or junior
liens on one-to four-family residential properties. The Mortgaged Properties
relating to Single Family Loans will consist of detached or semi-detached
one-family dwelling units, two-to four-family dwelling units, townhouses,
rowhouses, manufactured housing permanently affixed to real estate under
applicable state law, individual condominium units in condominium developments,
individual units in planned unit developments, certain mixed use and other
dwelling units, and rural properties (generally defined as Mortgaged Properties
containing more than five acres of land). Such Mortgage Properties may include
owner-occupied (which includes vacation and second homes) and non-owner occupied
investment properties.
If so specified, the Single Family Loans may include Condominium Loans,
loans or participations therein secured by mortgages or deeds of trust on
condominium units in low-or high-rise condominium developments together with
such condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans
will be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
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Unless otherwise specified in the Prospectus Supplement, loans to make home
improvements may be secured by first or junior liens on conventional
one-to-four-family residential properties and multi-family residential
properties ("Home Improvement Loans"). Home Improvement Loans may be
conventional, or may be partially insured by the Federal Housing Administration
("FHA") or another federal or state agency, as specified in the related
Prospectus Supplement. The loan proceeds from such Home Improvement Loans are
typically disbursed to an escrow agent that, according to guidelines established
by the Originators, releases such proceeds to the contractor upon completion of
the improvements or in draws as the work on the improvements progresses. Costs
incurred by the Mortgagor for loan origination including origination points and
appraisal, legal and title fees, are often included in the amount financed.
THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any portion of the payments due under the related Mortgage Note that may have
been retained by any Originator ("Originator's Retained Yield"), or any other
interest retained by the Sponsor or any affiliate of the Sponsor, evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages or deeds of trust
or other similar security instruments creating a lien on single-family (i.e.,
one-to four-family) residential properties, or (ii) certificates of interest or
participations in such Mortgage Notes.
As used herein, the term "certificates of interest or participation" means
either individual loans, or pools of loans, that are partly owned by the related
Trust and partly owned by some other person or entity, which person or entity
will generally be the Originator of such loans or some other entity at a
preceding point in the chain of title of such loans. In general, the use of
certificates of interest or participation will be limited to facilitating
arrangements involving Unaffiliated Originators and/or Sub-Servicers; such
arrangements will not have a material affect on Securityholders' rights. By way
of illustration, the Sponsor may purchase a pool of mortgage loans from an
Unaffiliated Originator in a transaction in which such Unaffiliated Originator,
rather than being paid a premium on such sale, instead retains a portion of the
interest payments actually received on such mortgage loans. As another
illustration, an Unaffiliated Originator may subordinate a portion of the
principal amount of mortgage loans sold by such Unaffiliated Originator to
provide a level of first loss protection in the event of delinquencies and/or
defaults on such mortgage loans. In each illustration the portion of the
mortgage loans retained is the "Originator's Retained Yield", and the related
Trust will own a participation interest (which may, for convenience, be
certificated to assist in the cash-flow structuring of the related Securities,
and thus take the form of a "certificate of interest or participation") rather
than a direct ownership interest in the entire loan. Alternatively, to assist
in a sub-servicing arrangement, a specified sub-pool of mortgage loans that are
owned in their entirety by the related Trust may be designated and, again for
convenience, certificated, thus resulting in a 100% participation interest in
such mortgage loans being owned by such Trust.
The Mortgaged Properties will consist primarily of owner-occupied attached
or detached one-family dwelling units, two-to four-family dwelling units,
condominiums, townhouses, row houses, manufactured housing, individual units in
planned-unit developments and certain other dwelling units, and the fee,
leasehold or other interests in the underlying real property. For a Trust that
elects to be treated as a REMIC, any Mortgage 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
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Mortgage Loans will be described in the related Prospectus Supplement. Other
mortgage loans available for acquisition by a Trust may have characteristics
that would make them eligible for inclusion in a Mortgage Pool but may not be
selected by the Sponsor for inclusion in such Mortgage Pool.
Each series of Securities will evidence interests in one or more Mortgage
Pool(s) containing Mortgage Loans having an aggregate principal balance of not
less than approximately $5,000,000 as of, unless otherwise specified in the
applicable Prospectus Supplement, the related Cut-Off Date. Each Security will
evidence an interest in only the related Mortgage Pool and corresponding Trust
Estate, and not in any other Mortgage Pool or any other Trust Estate (except in
those limited situations whereby certain collections on any Mortgage Loans in a
related Mortgage Pool in excess of amounts needed to pay the related Securities
may be deposited in a master reserve account or otherwise applied in a manner
that provides credit enhancement for more than one series of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have payments that are due
monthly or bi-weekly, (ii) be secured by Mortgaged Properties located in any of
the fifty states, the District of Columbia, Puerto Rico or any other Territories
of the United States and (iii) consist of one or more of the following types of
mortgage loans:
(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
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");
(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
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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; or
(f) Certain of the Mortgage Loans may be what are commonly referred
to as "home equity revolving lines of credit" ("Home Equity Lines"). Home
Equity Lines are generally evidenced by a loan agreement ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from
time to time by the borrower writing a check against the account (the
amount of such draw down, an "Additional Balance"). A Home Equity Line
will establish a maximum credit limit with respect to the related borrower,
and will permit the borrower to draw down Additional Balances, and repay
the aggregate balance outstanding in each case from time to time in such a
manner so that the aggregate balance outstanding does not exceed the
maximum credit limit. A Home Equity Line will be secured by either a
senior or a junior lien Mortgage, and will bear interest at either fixed or
an adjustable rate.
In certain states the borrower must, on the opening of an
account, draw an initial advance of not less than a specified amount. Each
Home Equity Line is assigned an amortization basis when the account is
opened. The "amortization basis" is the length of time in which the
initial advance plus interest will be repaid in full. The amortization
bases of the Home Equity Lines generally range from 60 months (5 years) to
180 months (15 years) depending on the credit limit assigned. Generally,
the amortization basis will be longer the higher the credit limit. The
minimum monthly payment on a Home Equity Line will generally be equal to
the sum of the following: (i) an amount necessary to completely repay the
then-outstanding balance and the applicable finance charge in equal
installments over the assigned amortization basis ("Basic Monthly Amount");
(ii) any monthly escrow charges; (iii) any delinquency or other similar
charges; and (iv) any past due amounts, including past due finance charges.
The Basic Monthly Amount will be recomputed each time the related Coupon
Rate adjusts and whenever an Additional Balance is advanced; such
recomputation in the case of an Additional Advance may also reset the
amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term
to the date of the later advance. For example, a Home Equity Line made
originally with a 15-year maturity from date of origination changes at the
time of the next adjustment or advance to a Home Equity Line with a
maturity of 15 years from the date of such advance. For certain Home
Equity Lines, the same type of recomputation exists for adjustments of the
related Coupon Rate.
Prior to the expiration of a specified period, the reduction of
the account to a zero balance and the closing of a Home Equity Line account
may result in a prepayment penalty. A prepayment penalty also may be
assessed against the borrower if a Home Equity Line account is closed by
the Servicer due to a default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right
to require the borrower to pay the entire balance plus all other accrued
but unpaid charges immediately, and to cancel the borrower's credit
privileges under the Loan Agreement if, among other things, the borrower
fails to make any minimum payment when due under the Loan Agreement, if
there is a material change in the borrower's ability to repay the Home
Equity Line, or if the borrower sells any interest in the property securing
the Loan Agreement, thereby causing the "due-on-sale" clause in the trust
deed or mortgage to become effective.
(g) Another type of mortgage loan described in the related Prospectus
Supplement.
As described in the related Prospectus Supplement, a Mortgage Pool may
contain (i) ARM Loans 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
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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/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but the Sponsor's assignment of
the Mortgage Loans to the Trustee will be without recourse. See "Description
of the Securities - Assignment of Mortgage Loans" herein. The Servicer's
obligations with respect to the Mortgage Loans will consist principally of
its contractual servicing obligations under the related Pooling and Servicing
Agreement (including its obligation to enforce certain purchase and other
obligations of Sub-Servicers and of Originators, as more fully described
herein under "Mortgage Loan Program - Representations by Originators,"
"- Sub-Servicing" 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
UNDERWRITING GUIDELINES
As more fully described below and as may also be described in greater
detail in the related Prospectus Supplement, there are various types of
Originators that may participate in the Sponsor's Mortgage Loan Program.
Under the Sponsor's Mortgage Loan Program, the Sponsor purchases and
originates Mortgage Loans pursuant to three types of underwriting guidelines:
(1) standard underwriting guidelines according to the Sponsor's Originator
Guide, as modified from time to time, used by Affiliated Originators and
Unaffiliated Originators ("Sponsor's Guidelines"), (2) underwriting
guidelines utilized by Unaffiliated Originators and approved by the Sponsor
("Approved Guidelines"), and (3) underwriting guidelines used by Unaffiliated
Originators of Mortgage Loans subsequently purchased in whole or part by the
Sponsor as bulk acquisitions ("Bulk Acquisitions"). The respective
underwriting guidelines are described below.
SPONSOR'S GUIDELINES. The Sponsor's Guidelines intended to assess both the
prospective borrower's ability to repay the loan and the adequacy of the real
property security as collateral for the loan granted. The pricing and required
Loan-to-Value Ratios for a loan are established based on the borrower's
financial history; the loan type and the property type.
To manage credit risk on its loans, the Sponsor's Guidelines requires a
thorough underwriting of a loan. In general, 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 prepared by
correspondents generally
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include employment history, documentation of income and assets, credit history
of mortgage or rent, property appraisal and title commitment. Limited income
verification may be used if compensating factors are present.
Loans acquired by the Sponsor fully amortize over a period not to exceed
360 months. The loan amount generally ranges from $5,000 to $350,000 unless a
higher amount is specifically approved by the Underwriting Manager of the
Servicer, on behalf of the Sponsor and is generally within the underwriting
guidelines.
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. With
respect to rural properties, the Sponsor's underwriting guidelines generally
require that no more than 20 acres of land be taken into account determining the
value of the property.
The value of each property proposed as security for a loan generally is
determined by an appraisal from an independent appraiser which meets the
following standards: the appraiser must remain free of any outside influence in
the valuation process and must provide a complete and accurate report; the final
estimate of market value of the property must represent the appraiser's
professional conclusion, based on market data, logical analysis and judgment; an
adequately supported estimate of value should be based, as applicable, on the
cost, sales comparison and income approaches to value, with additional
information provided when appropriate; and the appraisal must be analyzed by the
underwriters to determine the acceptability of the property as security for the
loan requested.
The total amount of a loan generally includes origination fees, credit life
insurance premium, if any, prepaid interest and other closing costs.
"Loan-to-Value Ratio" or "LTV" is the percentage equal to the note amount
divided by the lesser of appraised value or the purchase price of the real
estate. The maximum Loan-to-Value Ratio for Sponsor loans is generally 90%.
The maximum Loan-to-Value Ratio for non-owner occupied homes is generally 85%.
The Sponsor's Guidelines generally provide for verification of employment
status and current earnings for most applicants, as well as review of the
applicant's financial condition based on information provided by the applicant.
The applicant's total monthly obligations (including principal and interest on
each mortgage, tax assessments, other loans, charge accounts and all scheduled
indebtedness) generally should not exceed 55% of a borrower's gross monthly
income. Generally, the debt ratio calculation for adjustable rate loans is
based upon the principal and interest payment amount utilizing the initial rate
plus one percent. An applicant's employment history for the preceding two years
generally is reviewed. In certain cases the Sponsor's Guidelines may not
require any verification of an applicant's employment status or current
earnings.
The Sponsor requires a credit report by an independent, nationally
recognized credit reporting agency reflecting the applicant's credit history.
The credit report must reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required of the first mortgage balance, its status and
whether local taxes, interest, insurance and assessments are included in the
applicant's monthly payment. All taxes and assessments not included in the
payment are required to be verified as current. Credit analysis is subjective
and subject to interpretation in the underwriting process.
Certain laws protect loan applicants by permitting them to cancel the loan
after loan documents are signed but before the loan is funded, the so-called
"rescission period." The rescission period must have expired prior to the
funding of the loan.
The Sponsor's Guidelines generally require title insurance coverage or an
attorney's title opinion on each first lien home equity loan it originates with
a principal amount in excess of $20,000. The Servicer or the related Originator
generally is named as the insured on the title insurance policies and the
addressee of the title opinion. In addition, the Sponsor's Guidelines generally
require a survey of the property on purchase money loans.
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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 are subsequently subjected to a quality control audit.
APPROVED GUIDELINES. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines. Certain of the Mortgage Loans will be acquired in
negotiated transactions, and such negotiated transactions may be governed by
agreements ("Master Commitments") relating to ongoing acquisitions of Mortgage
Loans by the Sponsor from Originators who will represent that the Mortgage Loans
have been originated in accordance with underwriting guidelines agreed to by the
Sponsor; the Sponsor will generally review or cause to be reviewed only a
limited portion of the Mortgage Loans in any delivery of Mortgage Loans from the
related Originator for conformity with the Approved Guidelines.
The underwriting standards utilized in negotiated transactions and Master
Commitments may vary substantially from the Sponsor's Guidelines. The Approved
Guidelines are designed to provide an underwriter with information to evaluate
either the security for the related Mortgage Loan, which security consists
primarily of the borrower's repayment ability, or the adequacy of the Mortgaged
Property as collateral, or a combination of both. Due to the variety of
Approved Guidelines and review procedures that may be applicable to the Mortgage
Loans included in any Mortgage Pool, the related Prospectus Supplement will not
distinguish among the various Approved Guidelines applicable to the Mortgage
Loans nor describe any review for compliance with applicable Approved Guidelines
performed by the Sponsor. Moreover, there can be no assurance that every
Mortgage Loan was originated in conformity with the applicable Approved
Guidelines in all material respects, or that the quality or performance of
Mortgage Loans underwritten pursuant to varying guidelines as described above
will be equivalent under all circumstances.
BULK GUIDELINES. Bulk portfolios of Mortgage Loans may be originated by a
variety of Originators under several different underwriting guidelines. Because
bulk portfolios are generally seasoned for a period of time, the Sponsor's
underwriting review of bulk portfolios of Mortgage Loans focuses primarily on
payment histories and estimated current values based on estimated property
appreciation or depreciation and loan amortization. As a result, Mortgage Loans
acquired in Bulk Acquisitions may not conform to the requirements of the
Sponsor's Guidelines, or any Approved Guidelines. For example, the Sponsor may
purchase Mortgage Loans in bulk acquisitions with Loan-to-Value Ratios in excess
of 80%, without title insurance, or with nonconforming appraisal methods such as
tax assessments. Bulk Acquisition portfolios may be purchased servicing
released or retained. If servicing is retained, the Originator must meet
certain minimum requirements, as modified from time to time, by the Sponsor.
The Sponsor generally will cause the Mortgage Loans acquired in a Bulk
Acquisition to be reunderwritten for the purpose of determining whether such
Mortgage Loans were originated in accordance with the guidelines represented to
have been used by the related Originators in originating such Mortgage Loans.
Such underwriting may consist of a review of all such Mortgage Loans or may be
performed on a sample basis. In addition, such reunderwriting may be performed
by the Sponsor or by a third party acting at the direction of the Sponsor.
QUALIFICATIONS OF ORIGINATORS
Except in the case of Mortgage Loans acquired from an Originator in
connection with a Bulk Acquisition, each Originator from which a Mortgage Loan
is acquired will have been accepted by the Sponsor for participation in the
Sponsor's mortgage loan program. The Sponsor acquires loans nationwide from a
network of correspondents through the Servicer. The Servicer's procedural
manuals and guidelines for processing, underwriting and closing loans are
intended to produce quality loans and consistent procedures. All Unaffiliated
Originators are subject to an approval process to determine financial strength,
experience and compliance with state licensing requirements. Upon approval, all
Unaffiliated Originators are required to execute an agreement containing certain
representations and warranties
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regarding such Unaffiliated Originator and the related loans with the Servicer
prior to any loan closing. Appraisers and closing agents are also subjected to
an approval process, including verification of certification and licensing,
financial responsibility and quality of work product. Mortgage loans (other
than Mortgage Loans acquired in Bulk Acquisitions) will be closed using the
Servicer's loan closing documents or on the Originator's loan documents that
have been approved by the Servicer's legal counsel. All Mortgage Loans (other
than Mortgage Loans acquired on Bulk Acquisitions) will be underwritten by the
Servicer's personnel prior to approval and/or purchase. All Unaffiliated
Originators are required to originate mortgage loans in accordance with the
applicable underwriting standards. However, with respect to any Originator,
some of the generally applicable underwriting standards described herein and in
the Sponsor's Guidelines may be modified or waived with respect to certain
Mortgage Loans originated by such Originators.
The 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, to the extent that neither the
Sponsor, the Servicer, nor any other entity has assumed the representations and
warranties or made representations and warranties, neither the Sponsor, the
Servicer nor that other entity will be required to repurchase such Mortgage Loan
and, consequently such Mortgage Loan will remain in the related Mortgage Pool
and any related losses will be borne by the Securityholders or by the related
credit enhancement, if any. Any such arrangement will be described in the
related Prospectus Supplement.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust 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 permanently affixed to
real estate under applicable state law; (iv) each Mortgage Loan had, at the time
of origination, either an attorney's title opinion or a title search or title
policy; (v) as of the related Cut-Off Date each Mortgage Loan conveyed is
secured by a valid and subsisting lien of record on the Mortgaged Property
having the priority indicated on the related Schedule of Mortgage Loans subject
in all cases to exceptions to title set forth in the title insurance policy, if
any, with respect to the related Mortgage Loan; (vi) each Originator held good
and indefeasible title to, and was the sole owner of, each Mortgage Loan
conveyed by such Originator; and (vii) each Mortgage Loan was originated in
accordance in all material respects with applicable law and is the valid, legal
and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement all of the
representations and warranties of an Originator conveying a Mortgage Loan 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 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.
Unless otherwise described in the related Prospectus Supplement, the
Sponsor will guarantee compliance with, and assume, any representations and
warranties made by any Unaffiliated Originator with respect to the Mortgage
Loans originated or purchased by it and acquired by a Trust.
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The Sponsor will assign to the Trustee for the benefit of the holders of
the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach
of any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the "Loan
Purchase Price") set forth in the related Pooling and Servicing Agreement, which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or sub-servicing compensation, as applicable, and the Originator's
Retained Yield, if any, and certain miscellaneous administrative amounts,
together with, without duplication, the aggregate amount of all delinquent
interest, if any.
In addition to the repurchase obligation, the related Originator and/or the
Sponsor may remove a defective Mortgage Loan (a "Deleted Mortgage Loan") from
the related Trust and substitute in its place another Mortgage Loan of like kind
(a "Qualified Replacement Mortgage" as such term is defined in the related
Pooling and Servicing Agreement); however, such substitution must be effected
within 90 days of the date of the initial issuance of the Securities with
respect to a Trust for which no REMIC election is to be made. With respect to a
Trust for which a REMIC election is to be made, except as otherwise provided in
the Prospectus Supplement relating to a series of Securities, such substitution
of a defective Mortgage Loan must be effected within two years of the date of
the initial issuance of the Securities, and may not be made if such substitution
would cause the Trust to not qualify as a REMIC or result in a prohibited
transaction tax under the Code. Except as otherwise provided in the related
Prospectus Supplement, any Qualified Replacement Mortgage generally will, on the
date of substitution, (i) have an outstanding principal balance, after deduction
of all scheduled payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Mortgage Loan (the amount of any
shortfall to be paid to the related Trust in the month of substitution for
distribution to the Securityholders), (ii) have a Mortgage Rate neither more
than one percentage point less than nor one percentage point more than the
Mortgage Rate of the Deleted Mortgage Loan as of the date of substitution, (iii)
have a remaining term to maturity neither more than one year less than nor one
year more than that of the Deleted Mortgage Loan, and (iv) comply with all of
the representations and warranties set forth in the related Pooling and
Servicing Agreement as of the date of substitution. The related Pooling and
Servicing Agreement may include additional requirements relating to ARM Loans or
other specific types of Mortgage Loans or additional provisions relating to
meeting the foregoing requirements on an aggregate basis where a number of
substitutions occur contemporaneously. Unless otherwise specified in the
related Prospectus Supplement or Pooling and Servicing Agreement, an Originator
will also have the option to substitute a replacement Mortgage Loan for a
Mortgage Loan that it is obligated to repurchase in connection with a breach of
a representation and warranty.
The Servicer will be required under the applicable Pooling and Servicing
Agreement to enforce such purchase or substitution obligations for the benefit
of the Trustee and the Securityholders, following the practices it would employ
in its good faith business judgment if it were the owner of such Mortgage Loan;
provided, however, that this purchase or substitution obligation will in no
event become an obligation of the Servicer in the event the Originator fails to
honor such obligation (unless, with respect to a particular Mortgage Loan the
Servicer is the Originator). If the Originator fails to repurchase or
substitute a loan, 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.
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SUB-SERVICING
An Originator (other than the Servicer) of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. The Servicer may employ Sub-Servicers
that neither originate mortgage loans nor originated the Mortgage Loans with
respect to all or a portion of the servicing duties with respect to a particular
Mortgage Pool, or with respect to particular Mortgage Loans; such Sub-Servicers
shall be referred to as "Contract Sub-Servicers."
Each Unaffiliated Originator is expected to release servicing of the
related Mortgage Loans to the Servicer, however in certain cases, Unaffiliated
Originators may act as Sub-Servicers for the related Mortgage Loans pursuant to
an agreement between the related Unaffiliated Originator and the Servicer (a
"Sub-Servicing Agreement"). An Unaffiliated Originator acting as a Sub-Servicer
for the Mortgage Loans will be required to meet certain standards specified in
the Prospectus Supplement with respect to its conventional Mortgage Loan
servicing portfolio, GAAP tangible net worth, cash/warehouse line availability,
mortgage servicing licensing status and other specified qualifications.
Contract Sub-Servicers shall be required to satisfy standards similar to those
for Unaffiliated Originators; however, the Servicer will be directly responsible
to the Trusts for Servicing Mortgage Loans in compliance with the standards set
forth in the Pooling and Servicing Agreement. Unless otherwise specified in the
related Prospectus Supplement, the Servicer will be responsible for the
compensation of any Contract Sub-Servicer and such compensation shall be
inclusive in the Servicer's fees.
While such a Sub-Servicing Agreement will be a contract solely between the
Servicer and the Sub-Servicer, the Pooling and Servicing Agreement pursuant to
which a series of Securities is issued will provide that the Trustee 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.
Unless otherwise specified in the related Prospectus Supplement, with the
approval of the Servicer, a Sub-Servicer may delegate its servicing obligations
to third-party servicers, but such Sub-Servicer will remain obligated under the
related Sub-Servicing Agreement. Each Sub-Servicer will be required to perform
the customary functions of a servicer, including collection of payments from
Mortgagors and remittance of such collections to the Servicer; maintenance of
hazard insurance and filing and settlement of claims thereunder, subject in
certain cases to the right of the Servicer to approve in advance any such
settlement; maintenance of escrow or impound accounts of Mortgagors for payment
of taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the Mortgage Loan; processing of assumptions or substitutions;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing of Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Mortgage Loans. A Sub-Servicer also may be
obligated to make advances to the Servicer in respect of delinquent installments
of principal and/or interest (net of any sub-servicing or other compensation) on
Mortgage Loans, as described more fully 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. Unless otherwise specified in the related Prospectus Supplement, a
Sub-Servicer may transfer its servicing obligations to another entity that has
been approved for participation in the Sponsor's loan purchase programs, but
only with the approval of the Servicer.
As compensation for its servicing duties, the Sub-Servicer may be entitled
to a monthly servicing fee in a minimum amount set forth in the related
Prospectus Supplement. The Sub-Servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties provided in the Mortgage Note or related instruments. The
Sub-Servicer will be reimbursed by the Servicer for certain expenditures that it
makes, generally to the same extent that the Servicer would be reimbursed under
the applicable Pooling and Servicing Agreement from the loan proceeds. Unless
specified in the related Prospectus Supplement and Pooling and Servicing
Agreement, compensation for the services of the Sub-Servicer shall be paid by
the Servicer as a general corporate
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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.
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.
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A series may include one or more classes of Fixed-Income Securities ("Strip
Securities") entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance in
the case of Accrual Securities that are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities
may include one or more classes of Fixed-Income Securities (collectively, the
"Senior Securities") that are senior to one or more classes of Fixed-Income
Securities (collectively, the "Subordinate Securities") in respect of certain
distributions of principal and interest and allocations of losses on Mortgage
Loans. In addition, certain classes of Senior (or Subordinate) Securities may
be senior to other classes of Senior (or Subordinate) Securities in respect of
such distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus
or any Prospectus Supplement related hereto. Equity Securities may be offered
on a private placement basis or pursuant to a separate Registration Statement to
be filed by the Sponsor. In addition, the Sponsor and its affiliates may
initially or permanently hold any Equity Securities issued by any Trust.
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
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Trustee to the acquisition of additional Mortgage Loans during a specified
period (rather than used to distribute payments of principal to Securityholders
during such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the related
Prospectus Supplement, terminate prior to the end of the specified period and
result in the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality or the Sponsor, the Servicer, any
Sub-Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to a
series, Securities of each series covered by a particular Pooling and Servicing
Agreement will evidence specified beneficial ownership interest in a separate
Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust
Estate will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) a pool of Mortgage Loans (and the related mortgage documents) or
certificates of interest or participations therein underlying a particular
series of Securities as from time to time are subject to the Pooling and
Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation, all
payments due on the Mortgage Loans after the related Cut-Off Date, as from time
to time are identified as deposited in respect thereof in the Principal and
Interest Account and in the related Distribution Account; (iii) property
acquired by foreclosure of the Mortgage Loans or deed in lieu of foreclosure;
(iv) hazard insurance policies and primary insurance policies, if any, and
certain proceeds thereof; 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." To
the extent that any Trust Estate includes certificates of interest or
participations in Mortgage Loans, the related Prospectus Supplement will
describe the material terms and conditions of such certificates or
participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ("Physical
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar of the Securities (the "Security
Registrar") named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related Prospectus Supplement, specified classes of
a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
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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 ("Indirect
Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to their Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Securityholders. Accordingly, although Securityholders will not possess
Securities, the rules provide a mechanism by which Securityholders will receive
distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Securities"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and
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the Prospectus Supplement, DTC will be required to notify all Participants of
the availability through DTC of Physical Certificates. Upon surrender by DTC of
the securities representing the Securities and instruction for re-registration,
the Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will cause
the Mortgage Loans being included in the related Trust Estate to be assigned to
the Trustee together with, unless otherwise specified in the related Prospectus
Supplement, all principal and interest due on or after the Cut-Off Date with
respect to such Mortgage Loan, other than principal and interest due before the
Cut-Off Date. If specified in the related Prospectus Supplement, the Sponsor or
any of its affiliates may retain the Originator's Retained Yield, if any, for
itself or transfer the same to others. The Trustee will, concurrently with such
assignment, deliver a series of Securities to the Sponsor in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing
as an exhibit to the related Pooling and Servicing Agreement. Such schedule
will include, among other things, information as to the principal balance of
each Mortgage Loan as of the Cut-Off Date, as well as information regarding the
Mortgage Rate, the currently scheduled monthly payment of principal and interest
and the maturity of the Mortgage Note.
In connection with the issuance of a series of Securities, the Originators
will be required to deliver to the Sponsor, who in turn will deliver to the
Trustee or other permitted document custodian, which may include the Servicer, a
file consisting of (i) the original Notes or certified copies thereof, endorsed
by the Originator thereof in blank or to the order of the holder, (ii) originals
(or certified copies) of all intervening assignments, showing a complete chain
of title from origination to the applicable Originators, if any, including
warehousing assignments, with evidence of recording or certification of filing
for recordation thereon, (iii) originals (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 Originators."
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Unless otherwise specified in the related Prospectus Supplement, 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. Unless otherwise specified in the related Prospectus Supplement,
such purchase obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized at any time to appoint a custodian pursuant
to a custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Mortgage Loans as the agent of the Trustee. The
identity of any such custodian to be appointed on the date of initial issuance
of the Securities will be set forth in the related Prospectus Supplement.
Pursuant to each Pooling and Servicing Agreement, the Servicer, either
directly or through Sub-Servicers, will service and administer the Mortgage
Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a "Forward Purchase Agreement")
with the Sponsor whereby the Sponsor will agree to transfer additional Mortgage
Loans to such Trust following the date on which such Trust is established and
the related Securities are issued. The Trust may enter into Forward Purchase
Agreements to permit the acquisition of additional Mortgage Loans that could not
be delivered by the Sponsor or have not formally completed the origination
process, in each case prior to the date on which the Securities are delivered to
the Securityholders (the "Closing Date"). Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to a Trust conform to the
requirements specified in such Forward Purchase Agreement. If a Forward
Purchase Agreement is to be utilized, and unless otherwise specified in the
related Prospectus Supplement, the related Trustee will be required to deposit
in a segregated account (each, a "Pre-Funding Account") all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Securities of the related series; the additional Mortgage Loans will
be transferred to the related Trust in exchange for money released to the
Sponsor from the related Pre-Funding Account. Each Forward Purchase Agreement
will set a specified period during which any such transfers must occur. The
Forward Purchase Agreement or the related Pooling and Servicing Agreement will
require that, if all moneys originally deposited to such Pre-Funding Account are
not so used by the end of such specified period, then any remaining moneys will
be applied as a mandatory prepayment of the related class or classes of
Securities as specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, the specified period for the
acquisition by a Trust of additional Mortgage Loans will not exceed three months
from the date such Trust is established.
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
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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 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 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"). The
collateral that is eligible to secure amounts in an Eligible Account is limited
to certain permitted investments, which are generally limited to United States
government securities and other high-quality investments ("Permitted
Investments"). A Distribution Account may be maintained as an interest-bearing
or a non-interest-bearing account, or funds therein may be invested in Permitted
Investments as described below. The Principal and Interest Account may contain
funds relating to more than one series of Securities as well as payments
received on other mortgage loans serviced or master serviced by the Servicer
that have been deposited into the Principal and Interest Account. The Servicer
will be entitled to any interest or other income or gain realized with respect
to the funds on deposit in the Principal and Interest Accounts.
Unless otherwise specified in the related Prospectus Supplement and Pooling
and Servicing Agreement, not later than a specified day preceding each Payment
Date (the "Remittance Date"), the Servicer will withdraw 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. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from
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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 by
Originators" that are received by it in respect of the Mortgage Loans, less its
servicing fee or other compensation.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will deposit
the related Buydown Funds provided to it in a Buydown Account that will comply
with the requirements set forth herein with respect to a Sub-Servicing Account.
Unless otherwise specified in the related Prospectus Supplement, the terms of
all Buydown Mortgage Loans provide for the contribution of Buydown Funds in an
amount equal to or exceeding either (i) the total payments to be made from such
funds pursuant to the related buydown plan or (ii) if such Buydown Funds are to
be deposited on a discounted basis, that amount of Buydown Funds 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 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:
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(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.
DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in the
case of quarterly-pay Securities, the third month following such month and each
third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as the Securityholders of such Securities at the close of
business as of the last day of the preceding month (the "Record Date") in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided
percentage interest (the "Percentage Interest") represented by a Security of a
particular class will be equal to the percentage obtained by dividing the
initial principal balance or notional amount of such Security by the aggregate
initial amount or notional balance of all the Securities of such class.
Distributions will be made in immediately available funds (by wire transfer or
otherwise) to the account of a Securityholder at a bank or other entity having
appropriate facilities therefor, if such Securityholder has so notified the
Trustee or the Paying Agent, as the case may be, and the applicable Pooling and
Servicing Agreement provides for such form of payment, or by check mailed to the
address of the person entitled thereto as it appears on the Security Register;
provided, however, that the final distribution in retirement of the Securities
(other than any Book-Entry Securities) will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee specified in
the notice to Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related Prospectus
Supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different interest rate (the "Pass-Through
Rate"), which may be a fixed or adjustable Pass-Through Rate. The related
Prospectus Supplement will specify the Pass-Through Rate for each class, or in
the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and
the method for determining the Pass-Through Rate. Unless otherwise specified in
the related Prospectus Supplement, interest on the Securities will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
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On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
Principal Distribution Amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date, allocable to Securityholders
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 certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes of
Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the 15th day (or if such day is not a business day,
the next succeeding business day or such other date specified in the Pooling and
Servicing Agreement) of the month of distribution (the "Determination Date"),
the Servicer will provide the Trustee, (and the 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
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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 "delinquent" if any payment due thereon is not made by
the close of business on the day such payment is scheduled to be due.
The Servicer will be required to pay all "out of pocket" costs and expenses
incurred in the performance of its servicing obligations, but only to the extent
that the Servicer reasonably believes that such amounts are recoverable and will
be reimbursable out of the proceeds of liquidation of the related Mortgage Loan
and will increase Net Liquidation Proceeds on the related Mortgage Loan. Each
such amount so paid will constitute a "Servicing Advance." The Servicer may
recover Servicing Advances to the extent permitted by the Mortgage Loans or, if
not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from liquidation proceeds realized upon the liquidation of the
related Mortgage Loan. In no case may the Servicer recover Servicing Advances
from the principal and interest payments on any specific Mortgage Loan.
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described 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;
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(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
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.
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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.
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.
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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." Unless otherwise provided in the related
Prospectus Supplement, the Servicer shall sell any REO Property within 23 months
of its acquisition by the Trust, unless the Servicer obtains for the Trustee an
opinion of counsel experienced in federal income tax matters, addressed to the
Trustee, a Financial Guaranty Insurer, if applicable, and the Servicer, to the
effect that the holding by the Trust of such REO Property for any greater period
will not result in the imposition of taxes on "Prohibited Transactions" of the
Trust as defined in Section 860F of the Code or, if a REMIC election has been
made, cause the Trust to fail to qualify as a REMIC under the REMIC Provisions
at any time that any Securities are outstanding, in which case the Servicer
shall sell any REO Property by the end of any extended period specified in any
such opinion.
Notwithstanding the generality of the foregoing provisions, the Servicer
shall manage, conserve, protect and operate each REO Property for the
Securityholders solely for the purpose of its prompt disposition and sale in a
manner 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 unless the related Prospectus
Supplement provides otherwise. For a description of the Servicer's obligations
to maintain and make claims under applicable forms of credit enhancement and
insurance relating to the Mortgage Loans, see "Description of Credit
Enhancement" and "Hazard Insurance; Claims Thereunder - Hazard Insurance
Policies" 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. Unless otherwise specified
in the related Prospectus Supplement, only the Senior 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
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Prospectus Supplement. The following discussion (together with the summaries
under "Description of Credit Enhancement" below) describes all material terms
and provisions related to a Senior/Subordinate series of Securities. The
following discussion is subject to, and is qualified in its entirety by
reference to, the related Prospectus Supplement with respect to the particular
priorities and other rights as among the various classes of Senior Securities or
Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for distribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage Loans
not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that
becomes a Liquidated Mortgage Loan, the amount of loss realized, if any (as more
fully described in the related Pooling and Servicing Agreement, a "Realized
Loss"), will equal the portion of the stated principal balance remaining, after
application of all amounts recovered (net of amounts reimbursable to the
Servicer for related advances and expenses) towards interest and principal owing
on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties that are generally of the same type as are covered under a
special hazard insurance policy, the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
"Special Hazard Amount") specified in the related Prospectus Supplement. See
"Description of Credit Enhancement - Special Hazard Insurance Policies" 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 otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to a
Security in a Senior/Subordinate series will be made by reducing the Principal
Balance thereof as of the Payment Date following the calendar month in which
such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of
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reduction as such Prospectus Supplement may specify. If so specified in the
related Prospectus Supplement, additional credit support for this form of
subordination may be provided by the establishment of a reserve fund for the
benefit of the holders of the Senior Securities (which may, if such Prospectus
Supplement so provides, initially be funded by a cash deposit by the Sponsor or
the related Originator) into which certain distributions otherwise allocable to
the holders of the Subordinate Securities may be placed; such funds would
thereafter be available to cure shortfalls in distributions to holders of the
Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
comprised of one or more of the following components. Each component will have
a monetary limit and will provide coverage with respect to Realized Losses that
are (i) attributable to the Mortgagor's failure to make any payment of principal
or interest as required under the Mortgage Note, but not including Special
Hazard Losses, Extraordinary Losses or other losses resulting from damage to a
Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such loss, a
"Defaulted Mortgage Loss"); (ii) of a type generally covered by a special hazard
insurance policy (as defined below) (any such loss, a "Special Hazard Loss");
(iii) attributable to certain actions 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, 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. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur that exceed the amount covered by credit enhancement
or are not covered by the credit enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of credit
enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to other classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by credit enhancement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in
the applicable Prospectus Supplement and the Pooling and Servicing Agreement,
the credit enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Reduction or Substitution of Credit
Enhancement" 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.
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LETTER OF CREDIT
If any component of credit enhancement as to any series of Securities is to
be provided by a letter of credit (the "Letter of Credit"), a bank (the "Letter
of Credit Bank") will deliver to the Trustee an irrevocable Letter of Credit.
The Letter of Credit may provide direct coverage with respect to the related
Securities or, if specified in the related Prospectus Supplement, support the
Sponsor's or any other person's obligation pursuant to a Purchase Obligation to
make certain payments to the Trustee with respect to one or more components of
credit enhancement. The Letter of Credit Bank, as well as the amount available
under the Letter of Credit with respect to each component of credit enhancement,
will be specified in the applicable Prospectus Supplement and in the related
Form 8-K. The Letter of Credit will expire on the expiration date set forth in
the related Prospectus Supplement, unless earlier terminated or extended in
accordance with its terms. On or before each Payment Date, either the Letter of
Credit Bank or the Sponsor (or other obligor under a Purchase Obligation) will
be required to make the payments specified in the related Prospectus Supplement
after notification from the Trustee, to be deposited in the related Distribution
Account, if and to the extent covered, under the applicable Letter of Credit.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy ("Mortgage Pool Insurance Policy")
obtained by the Sponsor for each related Trust Estate will be issued by the Pool
Insurer named in the related Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to limitations specified in the related
Prospectus Supplement described below, cover Defaulted Mortgage Losses in an
amount equal to a percentage specified in the related Prospectus Supplement (or
in a Current Report on Form 8-K) of the aggregate principal balance of the
Mortgage Loans on the Cut-Off Date. As set forth 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.
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BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible that
the bankruptcy court may establish the value of the Mortgaged Property of such
Mortgagor at an amount less than the then outstanding, principal balance of the
Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation"). The
amount of the secured debt then could be reduced to such value, and, thus, the
holder of such Mortgage Loan would become an unsecured creditor to the extent
the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including a reduction in the amount of the monthly
payment on the related Mortgage Loan or a reduction in the mortgage interest
rate. SEE "Certain Legal Aspects of Mortgage Loans and Related Matters -
Anti-Deficiency Legislation and Other Limitations on Lenders" 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 applied and maintained in the manner and under the conditions specified in
such Prospectus Supplement. In the alternate or in addition to such deposit to
the extent described in the related Prospectus Supplement, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
credit enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Estate.
FINANCIAL GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy or surety bond ("Financial Guaranty Insurance Policy") may be
obtained and maintained for each class or series of Securities. The issuer of
any Financial Guaranty Insurance Policy (a "Financial Guaranty Insurer") will be
described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders of one or more
classes are entitled under the related Pooling and Servicing Agreement plus any
other amounts specified therein or in the related Prospectus Supplement (the
"Insured Payment").
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies generally will not guarantee any specified rate of prepayments or
provide funds to redeem Securities on any specified date.
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Subject to the terms of the related Pooling and Servicing Agreement, the
Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto third party
guarantees, and other arrangements for maintaining timely payments or providing
additional protection against losses on the assets included in such Trust,
paying administrative expenses, or accomplishing such other purpose as may be
described in the Prospectus Supplement. The Trust may include a guaranteed
investment contract or reinvestment agreement pursuant to which funds held in
one or more accounts will be invested at a specified rate. If any class of
Securities has a floating interest rate, or if any of the Mortgage Assets has a
floating interest rate, the Trust may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS-COLLATERALIZATION
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced by separate
classes of the related series of Securities. In such case, credit support may
be provided by a cross-support feature 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.
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, unless specifically described otherwise in the related Prospectus
Supplement, no collections on any Mortgage Loans held by any Trust may be
applied to the payment of Securities issued by any other Trust (except to the
limited extent that certain collections in excess of amounts needed to pay the
related Securities may be deposited in a common, master reserve account that
provides credit enhancement for more than one series of Securities).
OVERCOLLATERALIZATION
If specified in the Prospectus Supplement, subordination provisions of a
Trust may be used to accelerate to a limited extent the amortization of one or
more classes of Securities relative to the amortization of the related Mortgage
Loans. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, with respect to the Mortgage
Loans or groups thereof, overcollateralization 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."
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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.
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
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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 is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Servicer upon request.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for the Mortgage Loan. Additionally, the Pooling and Servicing
Agreement will require the Servicer to cause to be maintained with respect to
each Mortgage Loan a hazard insurance policy with a generally acceptable carrier
that provides for fire and extended coverage relating to such Mortgage Loan in
an amount not less than the least of (i) the outstanding principal balance of
the Mortgage Loan, (ii) the minimum amount required to compensate for damage or
loss to the improvements on a replacement cost basis or (iii) the full insurable
value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property with improvements in an area identified in the Federal Register by the
Federal Emergency Management Agency as having special flood hazards, the
Servicer will be required to maintain with respect thereto a flood insurance
policy in a form meeting the requirements of the then-current guidelines of the
Federal Insurance Administration with a generally acceptable carrier in an
amount representing coverage, and 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.
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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.
It's 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.
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 (unless otherwise specified in the related Prospectus
Supplement) or in a Sub-Servicing Account, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will
pay or cause to be paid certain ongoing expenses associated with each Trust
Estate and incurred by it in connection with its responsibilities under the
Pooling and Servicing Agreement, including, without limitation, payment of
any fee or other amount payable in respect of any alternative credit
enhancement arrangements, payment of the fees and disbursements of the
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
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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 compliance testing procedures
as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees or (ii) examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and in
either case stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF THE SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or subject to the consent of the 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
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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 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,
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the Sponsor or the Trustee in accordance with such amendment will not result in
the imposition of a tax on the related Trust Estate or cause such Trust Estate
to fail to qualify as a REMIC.
TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, a
Financial Guaranty Insurance Policy of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate (b) the disposition of all property acquired in respect of
any Mortgage Loan remaining in the Trust Estate, (ii) any time when a Qualified
Liquidation (as defined in the Code) of the Trust Estate is effected (iii)
termination of the Trust upon the option of the Servicer after the outstanding
aggregate loan balances of the Mortgage Loans in the Trust Estate is less than
or equal to ten percent of the sum of the aggregate loan balances of all
Mortgage Loans in the Trust Estate as of the original creation date of the
Mortgage Pool and the original amount deposited in the Pre-Funded Account, or
such percentage as is designated in the related Pooling and Servicing Agreement
or (iv) termination of the Trust upon loss of REMIC status. In no event,
however, will the trust created by the related Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in such Pooling and Servicing Agreement. Written notice
of termination of the Pooling and Servicing Agreement will be given to each
Securityholder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency appointed by the Trustee
that will be specified in the notice of termination. If the Trust Estate is
liquidated under the applicable Pooling and Servicing Agreement, a penalty may
be imposed upon the Securityholders based upon the fee that would be foregone by
the Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of Mortgage
Loans evidenced by a series of Securities shall be made at the option of the
Servicer, the Sponsor or, if applicable, the holder of the REMIC Residual
Securities at the price specified in the related Prospectus Supplement. The
exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Servicer, the Sponsor or, if
applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series.
The Prospectus Supplement or Form 8-K for each series of Securities will set
forth the amounts that the holders of such Securities will be entitled to
receive upon such earlier than expected retirement. If a REMIC election has
been made, the termination of the related Trust Estate will be effected in a
manner consistent with applicable federal income tax regulations and its status
as a REMIC.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Sponsor and/or its
affiliates.
The Trustee may resign at any time so long as the Trustee provides written
notice to the Sponsor, the Servicer, the Credit Enhancer and the
Securityholders, and complies with the other conditions specified in the
applicable Pooling and Servicing Agreement, in which event the Sponsor will be
obligated to appoint a successor Trustee. The Sponsor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Sponsor will be obligated to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders
of Securities evidencing a majority of the aggregate undivided interests (or, if
so specified in the related Prospectus Supplement, voting rights) in the related
Trust Estate or if the related Pooling and Servicing Agreement so provides by
the related Financial Guaranty Insurer or Credit Enhancer, if any. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee and payment by the Trustee of all costs associated with the assumption
by the Successor Trustee of the Trustee's obligations under the related Pooling
and Servicing Agreement.
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YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
holder for such Security, the Pass-Through Rate on any such Security entitled to
payments of interest (which Pass-Through Rate may vary if so specified in the
related Prospectus Supplement) and the rate of payment of principal on such
Security (or the rate at which the notional amount thereof is reduced if such
Security is not entitled to payments of principal) and other factors.
Each month the interest payable on an actuarial type of Mortgage Loan will
be calculated as one-twelfth of the applicable Mortgage Rate multiplied by the
principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
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, or repurchases due to
conversions of ARM Loans to a fixed interest rate. See "Mortgage Loan Program -
Representations by Originators" and "Descriptions of the Securities - Assignment
of Mortgage Loans" above. In general, if a class of Securities is purchased at
initial issuance at a premium and payments of principal on the related Mortgage
Loans occur at a rate faster than anticipated at the time of purchase, the
purchaser's actual yield to maturity will be lower than that assumed at the time
of purchase. In addition, if a class of Securities is purchased at initial
issuance at a discount and payments of principal on the related Mortgage Loans
occur at a rate slower than that assumed at the time of purchase, the
purchaser's actual yield to maturity will be lower than that originally
anticipated. The effect of principal prepayments, liquidations and purchases on
yield will be particularly significant in the case of a series of Securities
having a class entitled to payments of interest only or to payments of interest
that are disproportionately high relative to the principal payments to which
such class is entitled. Such a class will likely be sold at a substantial
premium to its principal balance, if any, and any faster than anticipated rate
of prepayments will adversely affect the yield to holders thereof. In certain
circumstances, rapid prepayments may result in the failure of such holders to
recoup their original investment. In addition, the yield to maturity on certain
other types of classes of Securities, including Accrual Securities or certain
other classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
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The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's
actual yield to maturity, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the underlying Mortgage
Loans or a repurchase thereof, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield
of principal payments and repurchases occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of a series of Securities would not be fully offset by
a subsequent like reduction (or increase) in the rate of principal payments.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid for the number
of days in the month actually elapsed up to the date of the prepayment, at a
daily rate determined by dividing the Mortgage Rate by 365. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the next succeeding month
to holders of Securities entitled to payments of interest because interest on
the principal amount of any Mortgage Loan so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan as of the first day of the month in which such partial
prepayment is received. As a result, unless otherwise specified in the related
Prospectus Supplement, the effect of a partial prepayment on a Mortgage Loan
will be to reduce the amount of interest passed through to holders of Securities
on the Payment Date following the receipt of such partial prepayment by an
amount equal to one month's interest at the applicable Pass-Through Rate or Net
Mortgage Rate, as the case may be, on the prepaid amount. With respect to
amounts due the Servicer from Sub-Servicers in respect of partial principal
prepayments, see "Description of the Securities - Payment on Mortgage Loans;
Deposits to Distribution Account" 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.
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MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the maturity, average life and yield of the related series of
Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Servicer, nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, generally all Mortgage Loans
will contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the Mortgage Loan upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Servicer will generally enforce any due-on-sale clause
to the extent it has 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 the 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, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate mortgage loans. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on ARM Loans that the rate of
prepayment may increase as a result of refinancings. There can be no certainty
as to the rate of prepayments on the Mortgage Loans during any period or over
the life of any series of Securities.
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As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such
interest-only or revolving period may, upon the occurrence of certain events to
be described in the related Prospectus Supplement, terminate prior to the end of
the specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Servicer, the Sponsor or, if specified in
the related Prospectus Supplement, the holders of the REMIC Residual Securities
or the Credit Enhancer may have the option to purchase the Mortgage Loans in a
Trust Estate. See "The Pooling and Servicing Agreement - Termination;
Retirement of Securities" 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.
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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 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
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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 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
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proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement usually will constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the 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
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trust where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable law, may be of little value to the mortgagee
or beneficiary if there are no trust assets against which such deficiency
judgment may be executed. Other statutes require the beneficiary or mortgagee
to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states the lender, following
judgment on such personal action, may be deemed to have elected a remedy and may
be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, in those states
permitting such election, is that lenders will usually proceed against the
security first rather than bringing a personal action against the borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the former borrower following a foreclosure to the excess of
the outstanding debt over the fair value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and, on certain types of loans such as
those secured by second liens and investor-owned 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.
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ENVIRONMENTAL LEGISLATION
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." That exclusion was
substantially narrowed by a May 1990 decision of the United States Court of
Appeals for the Eleventh Circuit in UNITED STATES V. FLEET FACTORS CORP., which
held that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste management
in order to be liable; rather, liability may attach to the lender if its
involvement with the management of the facility is broad enough to support the
inference that the lender could affect hazardous waste management practices if
it so chose. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the facility's
financial management. In response to FLEET FACTORS, the EPA promulgated
regulations designed to clarify the range of activities a lender may engage in
without losing the benefit of the statutory exclusion. SEE "Final Rule on
Lender Liability under CERCLA," 57 F.R. 18,344 (Apr. 29, 1992). The
regulations, which took effect in April 1992, permit a lender to monitor the
borrower's environmental practices in order to determine if the facility is in
compliance with applicable law, and to require the borrower to take measures
necessary to achieve or maintain compliance or conduct necessary cleanups, but
the lender may not, however, exercise control over or assume responsibility for
the borrower's environmental practices. Such actions would be considered
"participation in the management of the facility." Also, if the lender took
title to or possession of the property, it might be deemed to have obviated the
security interest exclusion and to be liable for clean-up costs pursuant to
CERCLA. The EPA regulations would allow lenders to take certain actions with
respect to foreclosure, without losing the benefit of the statutory exclusion.
Essentially, the regulations would allow the lender to take actions consistent
with protecting its security interest, but not actions which demonstrate an
intent to exercise a long-term ownership interest in the property. It must be
noted that such protection may not be available under applicable state law.
Furthermore, the regulations are binding only on the EPA with respect to the
EPA's enforcement powers and cost-recovery rights. It has not yet been
definitively determined whether the federal courts will apply the regulations in
cost-recovery actions brought against lenders by other responsible parties,
although the regulations may well be considered persuasive by the courts. In
February 1994, a three judge panel of the U.S. Court of Appeals for the District
of Columbia, in the case of KELLEY V. EPA, held that the regulations are
inconsistent with the statutory requirements of CERCLA and are, therefore,
invalid. KELLEY V. EPA, 15 F.3d 1100 (D.C. Cir. 1994), CERT. DENIED, AMERICAN
BANKERS ASS'N V. KELLEY, 115 S. Ct. 900 (1995). The EPA's response to the
KELLEY decision has been to follow the provisions of the "Lender Liability Rule"
as an enforcement policy. On October 6, 1995, the EPA issued a policy statement
whereby the EPA and the Department of Justice intend to apply as guidance the
provisions of the "Lender Liability Rule" promulgated in 1992. The EPA and the
Department of Justice endorsed the policy and will use it to exercise the
enforcement discretion in determining whether particular lenders that acquire
property involuntarily may be subject to CERCLA enforcement action. This EPA
enforcement policy does not govern the actions of third parties. If a lender is
or becomes liable, it can bring an action for contribution against any 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. The costs associated with environmental clean-up may be
substantial. It is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust and occasion
a loss to Securityholders.
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Unless otherwise specified in the related Prospectus Supplement, at the
time the Mortgage Loans were originated, no environmental assessment or a very
limited environmental assessment of the Mortgage Properties was conducted.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of the
Mortgage Loans contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states including California, and in some cases
the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles generally are designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision 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.
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As indicated above under "Mortgage Loan Program - Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early ownership
mortgage loans, originated by non-federally chartered lenders have historically
been subjected to a variety of restrictions. Such restrictions differed from
state to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender was in
compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alterative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies
to Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
Mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be effected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation or
regulations, which would not be recoverable from the related Mortgage Loans,
would result in a reduction of the amounts distributable to the holders of the
related Securities, and would not be covered by advances, any Letter of Credit
or any other form of credit enhancement (other than a 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 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Securities offered hereby. The discussion is based upon laws,
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regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities.
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust Estate
(a "Grantor Trust Estate"), which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit ("REMIC"); (ii) securities
("REMIC Securities") representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment
of partnership interests. Such a discussion will be set forth in the applicable
Prospectus Supplement for any Trust issuing Securities characterized as
partnership interests. The Prospectus Supplement for each series of Securities
will indicate whether a REMIC election (or elections) will be made for the
related Trust Estate and, if a REMIC election is to be made, will identify all
"regular interests" and "residual interests" 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
(unless otherwise limited in the applicable Prospectus Supplement) the related
Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each
Holder of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage Loans included in the Grantor Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
SPECIAL TAX ATTRIBUTES
Unless otherwise disclosed in an applicable Prospectus Supplement, Andrews
& Kurth L.L.P., tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "qualifying real property loans" within the meaning of section
593(d) of the Code; (ii) "loans secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii) "obligation[s]
(including any participation or certificate of beneficial ownership therein)
which are principally secured by an interest in real property" within the
meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust
Fractional Interest Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust
Strip Securities will be "obligation s (including any participation or
certificate of beneficial ownership therein) principally secured by an interest
in real property" within the meaning of section 860G(a)(3)(A) of the Code.
TAXATION OF HOLDERS OF GRANTOR TRUST SECURITIES
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
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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 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.
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 (unless
otherwise limited in the applicable Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC
election is made will be referred to herein as a "REMIC Trust." The Securities
of each class will be designated as "regular interests" in the REMIC Trust
except that a separate class will be designated as the "residual interest" in
the REMIC Trust. The Prospectus Supplement for each series of Securities will
state whether Securities of each class will constitute a regular interest (a
"Regular Security") or a residual interest (a "Residual Security").
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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, "qualifying
real property loans" within the meaning of section 593(d) of the Code and "real
estate assets" within the meaning of section 856(c)(5)(A) of the Code. If at
any time during a calendar year less than 95 percent of the assets of a REMIC
Trust consist of "qualified mortgages" (within the meaning of section 860G(a)(3)
of the Code) then the portion of the Regular and Residual Securities that are
qualifying assets under those sections during such calendar year may be limited
to the portion of the assets of such REMIC Trust that are qualified mortgages.
Similarly, income on the Regular and Residual Securities will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of section 856(c)(3)(B) of the Code, subject to the same limitation as
set forth in the preceding sentence. For purposes of applying this limitation,
a REMIC Trust should be treated as owning the assets represented by the
qualified mortgages. The assets of the Trust Estate will include, in addition
to the Mortgage Loans, payments on the Mortgage Loans held pending distribution
on the Regular and Residual Securities and any reinvestment income thereon.
Regular and Residual Securities held by a financial institution to which section
585, 586 or 593 of the Code applies will be treated as evidences of indebtedness
for purposes of section 582(c)(1) of the Code. Regular Securities will also be
qualified mortgages with respect to other REMICs.
TAXATION OF HOLDERS OF REGULAR SECURITIES
Except as indicated below in this federal income tax discussion, the
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. Holders of Regular Securities that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Securities under an accrual method. For additional tax
consequences relating to Regular Securities purchased at a discount or with
premium, see "Discount and Premium" below.
TAXATION OF HOLDERS OF RESIDUAL SECURITIES
DAILY PORTIONS. Except as indicated below, a Holder of a Residual Security
for a REMIC Trust generally will be required to report its daily portion of the
taxable income or net loss of the REMIC Trust for each day during a calendar
quarter that the Holder owned such Residual Security. For this purpose, the
daily portion shall be determined by allocating to each day in the calendar
quarter its ratable portion of the taxable income or net loss of the REMIC Trust
for such quarter and by allocating the amount so allocated among the Residual
Holders (on such day) in accordance with their percentage interests on such day.
Any amount included in the gross income or allowed as a loss of any Residual
Holder by virtue of this paragraph will be treated as ordinary income or loss.
The requirement that each Holder of a Residual Security report its daily
portion of the taxable income or net loss of the REMIC Trust will continue until
there are no Securities of any class outstanding, even though the Holder of the
Residual Security may have received full payment of the stated interest and
principal on its Residual Security.
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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.
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
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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 that are thrift institutions described
in section 593 of the Code, income from a Residual Security generally may be
offset by losses from other activities. Under the REMIC Regulations, such an
organization is treated as having applied its allowable deductions for the year
first to offset income that is not an excess inclusion and then to offset that
portion of its income that is an excess inclusion. For other Holders of
Residual Securities, any excess inclusions cannot be offset by losses from other
activities. For Holders that are subject to tax only on unrelated business
taxable income (as defined in section 511 of the Code), an excess inclusion of
such Holder is treated as unrelated business taxable income. With respect to
variable contracts (within the meaning of section 817 of the Code), a life
insurance company cannot adjust its reserve to the extent of any excess
inclusion, except as provided in regulations. The REMIC Regulations indicate
that if a Holder of a Residual Security is a member of an affiliated group
filing a consolidated income tax return, the taxable income of the affiliated
group cannot be less than the sum of the excess inclusions attributable to all
residual interests in REMICs held by members of the affiliated group. For a
discussion of the effect of excess inclusions on certain foreign investors that
own Residual Securities, see "Foreign Investors" below.
The REMIC Regulations provide that an organization to which section 593 of
the Code applies and that is the Holder of a Residual Security may not use its
allowable deductions to offset any excess inclusions with respect to such
Security if such Security does not have "significant value." For this purpose,
a Residual Security has significant value under the REMIC Regulations if (i) its
issue price is at least 2% of the aggregate of the issue prices of all the
Regular and Residual Securities in that REMIC Trust and (ii) its "anticipated
weighted average life" is at least 20% of the "anticipated weighted average
life" of such REMIC Trust.
In determining whether a Residual Security has significant value, the
anticipated weighted average life of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless of their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions should be calculated as
discussed above.
In the case of any Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such Residual
Securities reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain) will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
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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.
TAXES ON A REMIC TRUST
PROHIBITED TRANSACTIONS. The Code imposes a tax on a REMIC equal to 100
percent of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
CONTRIBUTIONS TO A REMIC AFTER THE STARTUP DAY. The Code imposes a tax on
a REMIC equal to 100 percent of the value of any property contributed to the
REMIC after the "startup day" (generally the same as the Settlement Date).
Exceptions are provided for cash contributions to a REMIC (i) during the three
month period beginning on the startup day, (ii) made to a qualified reserve fund
by a Holder of a residual interest, (iii) in the nature of a guarantee, (iv)
made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by Treasury regulations.
NET INCOME FROM FORECLOSURE PROPERTY. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
SALES OF REMIC SECURITIES
GENERAL. Except as provided below, if a Regular or Residual Security is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Security. The
adjusted basis of a Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security.
See "Discount and Premium" 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
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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 (as defined below in "Foreign Investors - Grantor
Trust Securities and Regular Securities") will be disregarded for all federal
tax purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A Residual Security would be treated as
constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a Residual Security, determined as of the date such
Security is transferred and based on events that have occurred as of that date
and on the Prepayment Assumption. See "Discount and Premium" and "Taxation of
Holders of Residual Securities - Excess Inclusions" herein.
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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. Unless otherwise specified in the
applicable Prospectus Supplement, the Trustee does not intend to register any
REMIC Trust as a tax shelter pursuant to section 6111 of the Code.
TERMINATION
In general, no special tax consequences will apply to a Holder of a Regular
Security upon the termination of a REMIC Trust by virtue of the final payment or
liquidation of the last Mortgage Loan remaining in the Trust Estate. If a
Holder of a Residual Security's adjusted basis in its Residual Security at the
time such termination occurs exceeds the amount of cash distributed to such
Holder in liquidation of its interest, although the matter is not entirely free
from doubt, it would appear that the Holder of the Residual Security is entitled
to a loss equal to the amount of such excess.
DEBT SECURITIES
GENERAL
With respect to each series of Debt Securities, Andrews & Kurth L.L.P., tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the applicable Prospectus Supplement) the Securities will
be classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "Discount and Premium"
below.
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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 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
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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. Unless otherwise disclosed in the
applicable Prospectus Supplement, the Trustee will report original issue
discount based on accrual periods of one month, each beginning on a payment date
(or, in the case of the first such period, the Settlement Date) and ending on
the day before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated based on (i) the yield to maturity of the Security,
calculated as of the Settlement Date, giving effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, (iii) the Prepayment Assumption, and (iv) in
the case of a Security calling for a variable rate of interest, an assumption
that the value of the index upon which such variable rate is based remains the
same as its value on the Settlement Date over the entire life of such Security.
The adjusted issue price of a Security at any time will equal the issue price of
such Security, increased by the aggregate amount of previously accrued original
issue discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing
during any accrual period will then be allocated ratably to each day during the
period to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive
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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 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.
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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
have 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
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
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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
"Certain 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.
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
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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" (as defined below). 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.
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
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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.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a
REMIC Residual Security held by a Tax Exempt Investor will be considered UBTI
and thus will be subject to federal income tax. See "Certain Federal Income Tax
Consequences - Taxation of Owners of REMIC Residual Securities - Excess
Inclusions" 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
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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.
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.
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USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Securities will be applied by the Sponsor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage
Loans underlying the Securities or will be used by the Sponsor for general
corporate purposes. The Sponsor expects that it will make additional sales
of securities similar to the Securities from time to time, but the timing and
amount of any such additional offerings will be dependent upon a number of
factors, including the volume of mortgage loans purchased by the Sponsor,
prevailing interest rates, availability of funds and general market
conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
(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.
In addition, if specified in the related Prospectus Supplement, a series of
Securities may be offered in whole or in part in exchange for the Mortgage Loans
(and other assets, if applicable) that would comprise the Mortgage Pool in
respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Sponsor whose identities and relationships to
the Sponsor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
underwriters in connection with such Securities, and any discounts or
commissions received by them from the Sponsor and any profit on the resale of
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "1933 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 1933 Act or will contribute to payments required
to be made in respect thereof.
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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 1933 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, upon
request of the Sponsor, with a copy of the most recent financial statements of
the Sponsor.
A Prospectus Supplement and the related Form 8-K (which shall be
incorporated by reference to this 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
Unless otherwise specified in the related Prospectus Supplement, 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 certificateholders 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 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, certificateholders
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.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
1933 Act......................................................................86
Accrual Securities.........................................................9, 35
Additional Balance............................................................27
Affiliated Originators.........................................................6
Approved Guidelines.......................................................11, 28
APR...........................................................................23
ARM Loans.....................................................................19
Balloon Amount................................................................26
Balloon Loans.............................................................17, 26
Bankruptcy Bond...............................................................51
Bankruptcy Loss...............................................................49
Bankruptcy Loss Amount........................................................48
Basic Monthly Amount..........................................................27
Book-Entry Securities.........................................................36
Bulk Acquisitions.........................................................11, 28
Buydown Account...............................................................22
Buydown Agreement.............................................................41
Buydown Funds.................................................................22
Buydown Mortgage Loans........................................................22
Buydown Period................................................................22
Cede..........................................................................14
Certificates...................................................................7
Closing Date..................................................................39
CLTV..........................................................................23
Code..........................................................................70
Combined Loan-to-Value Ratio..................................................23
Commission..................................................................3, 8
Condominium Loans..............................................................6
Contract Sub-Servicers........................................................33
Convertible Mortgage Loan.....................................................27
Cooperative Loans..............................................................6
Cooperative Notes.............................................................25
Credit Enhancer...............................................................21
Cut-Off Date..................................................................23
Debt Securities...........................................................14, 70
Defaulted Mortgage Loss.......................................................49
Deferred Interest.............................................................17
Deficient Valuation...........................................................51
Deleted Mortgage Loan.........................................................32
Delinquency Advances..........................................................43
Delinquent....................................................................44
Detailed Description..........................................................21
Determination Date............................................................43
Direct Participants...........................................................20
Disqualified Persons..........................................................82
Distribution Account..........................................................40
DOL...........................................................................82
DOL Regulations...............................................................82
DTC...........................................................................14
88
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Due Date......................................................................39
Due Period................................................................10, 35
Eligible Account..............................................................40
EPA...........................................................................67
Equity Securities..........................................................8, 34
ERISA.....................................................................14, 82
ERISA Plans...................................................................82
Exchange Act..................................................................15
Extraordinary Losses..........................................................49
FDIC..........................................................................40
FHA...........................................................................25
Financial Guaranty Insurance Policy...........................................51
Financial Guaranty Insurer....................................................51
Fixed-Income Securities....................................................8, 34
Forward Purchase Agreement................................................12, 39
Fraud Loss....................................................................49
Fully taxable bonds...........................................................80
Garn-St. Germain Act.........................................................68
Grantor Trust Estate..........................................................70
Grantor Trust Fractional Interest Security....................................70
Grantor Trust Securities..................................................14, 70
Grantor Trust Strip Security..................................................70
Home Equity Lines.............................................................27
Home Improvement Loans........................................................25
Indenture......................................................................7
Indenture Trustee..............................................................7
Index.........................................................................26
Indirect Participant(s)...................................................20, 37
Insurance Paying Agent........................................................51
Insurance Proceeds............................................................40
Insured Payment...............................................................51
Interest Rate..............................................................8, 34
Investment Company Act........................................................11
IRAs..........................................................................82
IRS...........................................................................71
Junior Lien Loans.............................................................17
Letter of Credit..............................................................50
Letter of Credit Bank.........................................................50
Liquidated Mortgage Loan......................................................18
Liquidation Proceeds..........................................................40
Loan Agreement................................................................27
Loan Purchase Price...........................................................32
Loan-to-Value Ratio...........................................................29
Lockout periods...............................................................22
LTV...........................................................................29
Master Commitments............................................................30
Modified Loans................................................................26
Monthly pay...................................................................22
Mortgage Asset Schedule.......................................................21
Mortgage Assets...............................................................21
Mortgage Loans.................................................................6
Mortgage Notes................................................................25
Mortgage Pool...............................................................1, 6
<PAGE>
Mortgage Pool Insurance Policy................................................50
Mortgage Rate.................................................................22
Mortgaged Properties......................................................11, 22
Mortgages.....................................................................11
Mortgagor.....................................................................17
Net Liquidation Proceeds......................................................40
Net Mortgage Rate.............................................................59
Note Margin...................................................................26
Notes..........................................................................7
Originator's Retained Yield...................................................25
Originators....................................................................6
Participants..................................................................37
Parties in Interest...........................................................82
Partnership Interests.........................................................14
Pass-Through Rate.............................................................42
Paying Agent..................................................................42
Payment Dates..............................................................9, 35
Percentage Interest...........................................................42
Permitted Investments.........................................................40
Physical Certificates.........................................................36
Physical Securities...........................................................37
Plan......................................................................14, 82
Policy Statement..............................................................85
Pool Factor...................................................................45
Pool Insurer..................................................................41
Pooling and Servicing Agreement................................................7
Pre-Funding Account.......................................................12, 39
Premium Security..............................................................80
Principal Prepayments.........................................................39
PTCE 83-1.....................................................................83
Purchase Obligation...........................................................16
Qualified Replacement Mortgage................................................32
Qualified Retirement Plans....................................................82
Rating Agencies...............................................................15
Realized Loss.................................................................48
Record Date...........................................................10, 35, 42
Redemption Period.............................................................18
Regular Security..............................................................71
Relief Act................................................................21, 69
REMIC......................................................................2, 70
REMIC Regular Securities......................................................14
REMIC Regulations.............................................................72
REMIC Residual Securities.....................................................14
REMIC Securities..............................................................70
REMIC Trust...................................................................71
Remittance Date...............................................................40
Remittance Period.........................................................10, 35
REO Property..................................................................47
Reserve Fund..................................................................51
Residual Security.............................................................71
Securities.....................................................................1
Security Registrar............................................................36
Securityholders................................................................1
<PAGE>
Senior Securities..........................................................9, 35
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
Sponsor........................................................................1
Sponsor's Guidelines......................................................11, 28
Statistic Calculation Date....................................................23
Strip Securities...........................................................8, 35
Sub-Servicer(s)................................................................2
Sub-Servicing Account.........................................................41
Sub-Servicing Agreement.......................................................33
Subordinate Amount............................................................48
Subordinate Securities.....................................................9, 35
Tax Exempt Investor...........................................................84
Tax-Favored Plans.............................................................82
Title V.......................................................................68
Title VIII....................................................................69
Trust.......................................................................1, 6
Trust Agreement................................................................7
Trust Estate................................................................1, 7
Trustee........................................................................6
U.S. Person...................................................................81
UCC...........................................................................65
Unaffiliated Originators.......................................................6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee..............................................$ 4,546.00
Trustee's Fees and Expenses (including counsel fees).............. 38,000.00
Printing and Engraving Costs...................................... 25,000.00
Legal Fees and Expenses........................................... 75,000.00
Blue Sky and Legal Investment Fees and Expenses................... 18,000.00
Accounting Fees and Expenses...................................... 63,000.00
Rating Agency Fees................................................ 69,000.00
Miscellaneous..................................................... 13,000.00
------------
TOTAL.........................................................$305,546.00
============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and the Bylaws of the Registrant provide
for indemnification of directors, officers and other corporate agents to the
full extent permitted by Delaware law. The Bylaws also provide that the
Registrant may, to the full extent of the law, purchase and maintain insurance
on behalf of any corporate agent against any liability that may be asserted
against him or her.
Each Pooling and Servicing Agreement will provide that neither the
Registrant 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. Each such Pooling
and Servicing Agreement will further provide that, with the exceptions stated
above, the Registrant and its directors, officers, employees and agents are
entitled to be indemnified and held harmless by said Trust against any loss,
liability or expense incurred in connection with legal actions relating to such
Pooling and Servicing Agreement or the Securities.
The form of Underwriting Agreement incorporated by reference as Exhibit
1.1 to this Registration Statement provides, under certain circumstances, for
indemnification of the Registrant and other persons.
ITEM 16. EXHIBITS.
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement*
4.1 Form of Pooling and Servicing Agreement**
5.1 Opinion of Andrews & Kurth L.L.P. as to legality***
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters***
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1
and 8.1)
24.1 Powers of Attorney (included on page II-3 of this
Registration Statement)
99.1 Form of Prospectus Supplement 1****
99.2 Form of Prospectus Supplement 2****
___________________________
* Incorporated by reference to the corresponding exhibit to EquiVantage
Acceptance Corp.'s Registration Statement on Form S-3 (File No. 333-22343)
filed on February 25, 1997.
** Incorporated by reference to the corresponding exhibit to EquiVantage
Acceptance Corp.'s Registration Statement on Form S-3 (File No. 33-87040)
filed on December 2, 1994.
*** Filed herewith.
**** Incorporated by reference to the corresponding exhibit to Amendment No. 2
to EquiVantage Acceptance Corp.'s Registration Statement (File No.
33-87040) filed on February 13, 1995.
II-1
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ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) above do not apply if this
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment to those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. The undersigned Registrant undertakes that, for purposes of determining any
liability under the Act, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
C. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant as
specified in Item 15 above or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-2
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 (notwithstanding the
fact that a security rating pursuant to Transaction Requirement B.5. has not
yet been obtained, which security rating requirement, in the reasonable
belief of the Registrant, will be met by the time of any sale) and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on March 12, 1997.
EQUIVANTAGE ACCEPTANCE CORP.
By: /s/ John E. Smith
------------------------------
John E. Smith
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below constitutes and appoints John E. Smith, Karen S. Crawford and Elizabeth
Folk and each of them, his or her true and lawful attorney-in-fact and agent,
acting together or alone, with full powers of substitution and resubstitution,
for them and in their name, place and stead, to sign any or all amendments to
this Registration Statement (including any pre-effective or post-effective
amendment), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, acting together or alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
they might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, acting together or alone, or other substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ John E. Smith President (Principal Executive March 12, 1997
- --------------------- Officer) and Director
John E. Smith
/s/ Karen S. Crawford Senior Vice President, March 12, 1997
- --------------------- General Counsel, Secretary
Karen S. Crawford and Director
/s/ Elizabeth Folk Senior Vice President and March 12, 1997
- --------------------- Chief Financial Officer
Elizabeth Folk (Principal Financial Officer
and Principal Accounting
Officer)
/s/ James Tang Director March 12, 1997
- ---------------------
James Tang
Director
- ---------------------
Don R. Ivey
Director
- ---------------------
Jerry Swank
II-3
<PAGE>
EXHIBIT INDEX
-------------
Exhibits
- --------
1.1 Form of Underwriting Agreement*
4.1 Form of Pooling and Servicing Agreement**
5.1 Opinion of Andrews & Kurth L.L.P. as to legality***
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters***
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits
5.1 and 8.1)
24.1 Powers of Attorney (included on page II-3 of this
Registration Statement)
99.1 Form of Prospectus Supplement 1****
99.2 Form of Prospectus Supplement 2****
______________________
* Incorporated by reference to the corresponding exhibit to EquiVantage
Acceptance Corp.'s Registration Statement on Form S-3 (File No. 333-22343)
filed on February 25, 1997.
** Incorporated by reference to the corresponding exhibit to EquiVantage
Acceptance Corp.'s Registration Statement on Form S-3 (File No. 33-87040)
filed on December 2, 1994.
*** Filed herewith.
**** Incorporated by reference to the corresponding exhibit to Amendment No. 2
to EquiVantage Acceptance Corp.'s Registration Statement (File No.
33-87040) filed on February 13, 1995.
<PAGE>
EXHIBIT 5.1
[ANDREWS & KURTH L.L.P. LETTERHEAD]
March 12, 1997
EquiVantage Acceptance Corp.
13111 Northwest Freeway, Suite 301
Houston, Texas 77040
Re: EquiVantage Acceptance Corp.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to EquiVantage Acceptance Corp., a Delaware
corporation (the "Sponsor"), in connection with the authorization and proposed
issuance from time to time after the date hereof in one or more series (each, a
"Series") of up to $87,881,000 aggregate principal amount of mortgage loan
asset-backed securities (the "Securities") to be offered pursuant to a
registration statement on Form S-3 (such registration statement, the
"Registration Statement") relating to the Securities. The Registration
Statement has been filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder. As set forth in the Registration Statement,
each Series of Securities will be issued under and pursuant to the conditions of
a separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") among the Sponsor, EquiVantage Inc., as servicer (the "Servicer"),
and a trustee to be identified in the prospectus supplement for such Series of
Securities (the "Trustee" for such Series).
We have examined copies of the Sponsor's Certificate of Incorporation, the
Sponsor's By-laws, the form of Pooling and Servicing Agreement incorporated by
reference as an exhibit to the Registration Statement, the prospectus (the
"Prospectus") and each form of prospectus supplement (the "Prospectus
Supplement") incorporated by reference as an exhibit to the Registration
Statement, and such other records, documents and statutes as we have deemed
necessary for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Securities
has been duly and validly authorized by all necessary action on the part of
the Sponsor and has been duly executed and delivered by the Sponsor, the
Servicer, the Trustee and any other party thereto for such Series, such
Pooling and Servicing Agreement will constitute a legal, valid and binding
agreement of the Sponsor, enforceable against the Sponsor in accordance with
its terms, except as enforcement thereof may be limited by (a) bankruptcy,
insolvency, reorganization, liquidation, receivership, moratorium or other
similar laws relating to or affecting creditors' rights generally or (b)
general principles of equity or public policy, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
<PAGE>
EquiVantage Acceptance Corp.
March 12, 1997
Page 2
2. When a Series of Securities has been duly authorized by all necessary
action on the part of the Sponsor (subject to the terms thereof being otherwise
in compliance with applicable law at such time), duly executed and authenticated
by the Trustee for such Series in accordance with the terms of the related
Pooling and Servicing Agreement, and issued and delivered against payment
therefor as contemplated in the Registration Statement, the Securities of such
Series will be legally and validly issued, fully paid and nonassessable, and the
holders thereof will be entitled to the benefits of the related Pooling and
Servicing Agreement.
In rendering the foregoing opinions, we express no opinion as to the laws
of any jurisdiction other than the General Corporate Law of the State of
Delaware (excluding choice of law principles therein) and the federal laws of
the United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus, without admitting that we are "experts"
within the meaning of the 1933 Act or the rules and regulations promulgated
thereunder with respect to any part of the Registration Statement, including
this exhibit.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
<PAGE>
EXHIBIT 8.1
[ANDREWS & KURTH L.L.P. LETTERHEAD]
March 12, 1997
EquiVantage Acceptance Corp.
13111 Northwest Freeway
Suite 301
Houston, Texas 77040
Re: EquiVantage Acceptance Corp.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to EquiVantage Acceptance Corp., a Delaware
corporation (the "Sponsor"), in connection with the authorization and proposed
issuance from time to time after the date hereof in one or more series (each, a
"Series") of up to $87,881,000 aggregate principal amount of mortgage loan
asset-backed securities (the "Securities") to be offered pursuant to a
registration statement on Form S-3 (such registration statement, the
"Registration Statement") relating to the Securities. The Registration
Statement has been filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder. As set forth in the Registration Statement,
each Series of Securities will be issued under and pursuant to the conditions of
a separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") among the Sponsor, EquiVantage Inc., as servicer (the "Servicer"),
and a trustee to be identified in the prospectus supplement for such Series of
Securities (the "Trustee" for such Series).
We have advised the Registrant with respect to certain federal income tax
consequences of the proposed issuance of the Securities. This advice is
summarized under the headings "Summary of Prospectus - Certain Federal Income
Tax Consequences" and "Certain Federal Income Tax Consequences" in the
Prospectus relating to the Securities in respect of which we participated as
your counsel, all as part of the Registration Statement.
We have examined the prospectus contained in the Registration Statement
(the "Prospectus") and originals or copies, certified or otherwise identified to
our satisfaction, of the Registrant's organizational documents and such other
documents, records, certificates of the Registrant and public officials and
other instruments as we have deemed necessary for the purposes of rendering this
opinion. In addition, we have assumed that the Pooling and Servicing Agreement
as completed for each Series will be duly executed and delivered; that the
Securities as completed for each Series will be duly executed and delivered
substantially in the forms contemplated by the Pooling and Servicing Agreement;
and that the Securities for each Series will be sold as described in the
Registration Statement.
Based upon such examination and the qualifications set forth herein and in
reliance thereon, we are of the opinion that the description of federal income
tax consequences set forth under the headings "Summary of Prospectus - Certain
Federal Income Tax Consequences" and "Certain Federal Income
<PAGE>
EquiVantage Acceptance Corp.
March 12, 1997
Page 2
Tax Consequences" in the Prospectus, to the extent it constitutes matters of law
or legal conclusions, is correct in all material respects.
The opinion herein is based upon our interpretations of current law,
including court authority and existing Final and Temporary Regulations, which
are subject to change both prospectively and retroactively, and upon the facts
and assumptions discussed herein. This opinion letter is limited to the matters
set forth herein, and no opinions are intended to be implied or may be inferred
beyond those expressly stated herein. Our opinion is rendered as of the date
hereof and we assume no obligation to update or supplement this opinion or any
matter related to this opinion to reflect any change of fact, circumstances, or
law after the date hereof. In addition, our opinion is based on the assumption
that the matter will be properly presented to the applicable court.
Furthermore, our opinion is not binding on the Internal Revenue Service or a
court. Our opinion represents merely our best legal judgment on the matters
presented; others may disagree with our conclusion. There can be no assurance
that the Internal Revenue Service will not take a contrary position or that a
court would agree with our opinion if litigated. In the event any one of the
statements, representations or assumptions we have relied upon to issue this
opinion is incorrect, our opinion might be adversely affected and may not be
relied upon.
We hereby consent to the filing of this letter as an Exhibit 8.1 to the
Registration Statement and to the reference to this firm under the caption
"Certain Federal Income Tax Consequences" in the Prospectus, without implying or
admitting that we are "experts" within the meaning of the 1933 Act or the rules
and regulations of the Commission issued thereunder, with respect to any part of
the Registration Statement, including this Exhibit 8.1.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
