<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 12, 1997)
- --------------------------------------------------------------------------------
[LOGO]
$85,000,000
EQUIVANTAGE HOME EQUITY LOAN TRUST 1997-1
$29,400,000 6.650% CLASS A-1 FIXED RATE CERTIFICATES
$19,900,000 6.975% CLASS A-2 FIXED RATE CERTIFICATES
$13,700,000 7.550% CLASS A-3 FIXED RATE CERTIFICATES
$7,000,000 7.275% CLASS A-4 FIXED RATE CERTIFICATES
$15,000,000 CLASS A-5 ADJUSTABLE RATE CERTIFICATES
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-1
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE INC.
SERVICER
--------------------------
The Home Equity Loan Asset-Backed Certificates, Series 1997-1 (the
"Certificates") will consist of the Class A-1 Fixed Rate Certificates (the
"Class A-1 Certificates"),the Class A-2 Fixed Rate Certificates (the "Class A-2
Certificates"), the Class A-3 Fixed Rate Certificates (the "Class A-3
Certificates"), the Class A-4 Fixed Rate Certificates (the "Class A-4
Certificates")and the Class A-5 Adjustable Rate Certificates (the "Class A-5
Certificates," and together with the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the Class A-4 Certificates, the
"Class A Certificates") and one or more classes of subordinate certificates
(collectively, the "Subordinate Certificates"). Only the Class A Certificates
are offered hereby.
The Certificates will represent undivided ownership interests in one of two
groups of closed-end mortgage loans (the "Mortgage Loans") held by the
EquiVantage Home Equity Loan Trust 1997-1 (the "Trust"). The Trust will be
created pursuant to a Pooling and Servicing Agreement ("the Pooling and
Servicing Agreement") among EquiVantage Acceptance Corp., in its capacity as the
sponsor (the "Sponsor") of the Trust, EquiVantage Inc., in its capacity as
servicer (the "Servicer") of the Mortgage Loans, and Norwest Bank Minnesota,
National Association, as Trustee.
FOR A DISCUSSION OF CERTAIN RISK FACTORS REGARDING AN INVESTMENT IN THE CLASS A
CERTIFICATES OFFERED HEREBY, SEE "RISK FACTORS" STARTING ON PAGE 18 HEREOF AND
ON PAGE 16 OF THE ACCOMPANYING PROSPECTUS.
[LOGO]
------------------------
The Underwriters have agreed to purchase the Class A-1 Certificates from the
Sponsor at 99.9375% of the principal amount thereof, the Class A-2 Certificates
from the Sponsor at 99.953125% of the principal amount thereof, the Class A-3
Certificates from the Sponsor at 100.00% of the principal amount thereof, the
Class A-4 Certificates from the Sponsor at 99.984375% of the principal amount
thereof and the Class A-5 Certficates from the Sponsor at 100.00% of the
principal amount thereof (representing $84,971,203 aggregate proceeds to the
Sponsor, before deducting expenses payable by the Sponsor estimated at
$500,000), plus accrued interest, if any, from March 1, 1997, for the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates and the
Class A-4 Certificates and from March 27, 1997 for the Class A-5 Certificates,
subject to the terms and conditions set forth in the Underwriting Agreement. See
"Underwriting" in this Prospectus Supplement.
The Underwriters propose to offer the Class A Certificates from time to time for
sale in negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. For further information with respect to the plan of
distribution and any discounts, commissions or profits on resale that may be
deemed underwriting discounts or commissions, see "Underwriting" in this
Prospectus Supplement.
--------------------------
THE CLASS A CERTIFICATES WILL REPRESENT BENEFICIAL OWNERSHIP INTEREST ONLY IN
THE TRUST AND WILL NOT REPRESENT ANY INTEREST IN OR OBLIGATION OF THE SPONSOR,
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE, THE CERTIFICATE INSURER OR ANY OF
THEIR RESPECTIVE AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE
UNDERLYIING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The Class A Certificates are offered by the Underwriters when, as and if issued
by the Trust, delivered to and accepted by the Underwriters and subject to its
right to reject orders in whole or in part. It is expected that the delivery of
the Class A Certificates in book-entry form will be made through the facilities
of The Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear
System on or about March 27, 1997 against payment in immediately available
funds.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON BROTHERS INC
- ------------------------------------------------------------
The date of this Prospectus Supplement is March 14, 1997
<PAGE>
(continued from cover)
On or prior to the Closing Date the Sponsor will acquire the Mortgage Loans
from the Originators, as described herein. The obligations of the Sponsor
and of the Servicer with respect to the Certificates will be limited to their
respective contractual obligations under the Pooling and Servicing Agreement.
The Mortgage Loans will consist of fixed-rate and adjustable-rate closed-end
mortgage loans secured by first or junior mortgages or deeds of trust (the
"Mortgages") on one-to-four family residential properties (the "Mortgaged
Properties") to be conveyed to the Trust on the Closing Date. The pool of
Mortgage Loans will be divided into two groups (each, a "Mortgage Loan
Group"). Distributions on the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates and Class A-4 Certificates will be
derived primarily from amounts received, collected or recovered in respect of
the Mortgage Loan Group comprised entirely of Mortgage Loans bearing fixed
interest rates (the "Fixed Rate Group"). Distributions on the Class A-5
Certificates will be derived primarily from amounts received, collected or
recovered in respect of the Mortgage Loan Group comprised entirely of
Mortgage Loans bearing interest at rates that are subject to periodic
adjustment (the "Adjustable Rate Group").
The Class A Certificates initially will be issued in book-entry form.
Persons acquiring beneficial ownership interests in such Class A Certificates
("Beneficial Owners") may elect to hold their interests through The
Depository Trust Company ("DTC") in the United States, or Cedel Bank, soci t
anonyme ("Cedel") or the Euroclear System ("Euroclear") in Europe. The Class
A Certificates will be offered in Europe and the United States.
The Sponsor has obtained a financial guaranty insurance policy (the
"Certificate Insurance Policy") from Financial Guaranty Insurance Company
(the "Certificate Insurer"), which will unconditionally and irrevocably
guarantee payment of amounts due to the Owners of Class A Certificates
("Owners") to the extent described herein.
Distributions of principal and interest payable on the Class A Certificates
will be made on the 25th day of each month or if the 25th day is not a
Business Day, the first Business Day thereafter (each, a "Payment Date"),
beginning April 25, 1997.
One or more elections will be made to treat the Trust as one or more "real
estate mortgage investment conduits" ("REMICs") for federal income tax
purposes. As described more fully herein, each Class of Class A Certificates
will constitute a "regular interest" in a REMIC. See "Certain Federal Income
Tax Consequences" in the Prospectus.
Prior to their issuance there has been no market for the Class A Certificates
nor can there be any assurance that one will develop, or if it does develop,
that it will provide the Owners of the Class A Certificates with liquidity or
will continue for the life of the Class A Certificates. Prudential
Securities Incorporated and Salomon Brothers Inc (the "Underwriters") intend,
but are not obligated, to make a market in the Class A Certificates.
____________________
The Class A Certificates offered by this Prospectus Supplement constitute a
separate Series of Certificates being offered by the Sponsor pursuant to its
Prospectus dated March 12, 1997 of which this Prospectus Supplement is a part
and that accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering that is not contained herein,
and prospective investors are urged to read the Prospectus and this
Prospectus Supplement in full. Sales of Class A Certificates may not be
consummated unless the prospective investor has received both this Prospectus
Supplement and the Prospectus.
Reference is made to the Index of Principal Terms herein for the location in
this Prospectus Supplement of the definitions of certain capitalized terms
used herein, and reference is also made to the Index of Principal Terms in
the Prospectus for the location in the Prospectus of the definitions of
certain capitalized terms used but not otherwise defined herein.
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
AND A PROSPECTUS SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A
S-2
<PAGE>
PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE CLASS A
CERTIFICATES, INCLUDING PURCHASES OF THE CLASS A CERTIFICATES TO STABILIZE
ITS MARKET PRICE AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act
of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") on behalf of the Trust with respect to the
Class A Certificates offered pursuant to the Prospectus dated March 12, 1997
and this Prospectus Supplement. For further information, reference is made
to the Registration Statement and to the exhibits thereto, which are
available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; Seven World Trade Center, 13th Floor, New York, New York 10048; and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of the Registration Statement and exhibits thereto may be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Electronic
filings made through the Electronic Data Gathering Analysis and Retrieval
System are publicly available through the Commission's Web Site
(http://www.sec.gov).
REPORTS TO CERTIFICATE HOLDERS
So long as any Class A Certificate is in book-entry form, monthly and
annual reports concerning the Certificates and the Trust will be sent by the
Trustee to Cede & Co., as the nominee of DTC and as the registered holder of
the Class A Certificates pursuant to the Pooling and Servicing Agreement.
DTC will supply such reports to Beneficial Owners in accordance with its
procedures. See "Risk Factors," "Description of the Securities --Form of
Securities" and " --Reports to Securityholders" in the Prospectus. To the
extent required by the Securities Exchange Act of 1934, as amended, the Trust
will provide financial information to the Owners of any Class A Certificate
which has been examined and reported upon, with an opinion expressed by, an
independent public accountant; to the extent not so required, such financial
information will be unaudited. The Sponsor has determined that the financial
statements of no entity other than the Certificate Insurer are material to
the offering made hereby. The Trust will be formed to own the Mortgage Loans
and to issue the Certificates. The Trust will have no assets or obligations
prior to issuance of the Certificates and will engage in no activities other
than those described herein. Accordingly, no financial statements with
respect to the Trust are included in this Prospectus Supplement.
S-3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Caption Page Caption Page
- ------------------------------------------ --------------------------------------------------
<C> <C> <C> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT.......S-4 THE POOLING AND SERVICING AGREEMENT..........S-62
Formation of the Trust.............S-62
RISK FACTORS...........................S-18 Sale of Mortgage Loans.............S-62
Governing Law......................S-63
SPONSOR'S MORTGAGE LOAN PROGRAM........S-19 Termination of the Trust...........S-63
Delinquencies......................S-20 Optional Termination...............S-63
THE MORTGAGE LOAN GROUPS...............S-21 CERTAIN FEDERAL INCOME TAX
General............................S-21 CONSEQUENCES...............................S-64
Difference Between Statistic REMIC Elections......................S-64
Calculation Date Mortgage
Loan Groups and Closing Date ERISA CONSIDERATIONS.........................S-65
Mortgage Loan Groups...........S-22
Fixed Rate Group...................S-22 RATINGS......................................S-66
Adjustable Rate Group..............S-28
Interests Payments on the Mortgage LEGAL INVESTMENT
Loans.............................S-37 CONSIDERATIONS..............................S-66
PREPAYMENT AND YIELD UNDERWRITING.................................S-67
CONSIDERATIONS.........................S-37
Projected Prepayments and Yields EXPERTS......................................S-67
for Class A Certificates.........S-37
Payment Delay Feature of Class CERTAIN LEGAL MATTERS........................S-67
A-1 Certificates, Class A-2
Certificates, Class A-3 INDEX OF PRINCIPAL TERMS.....................S-69
Certificates and Class A-4
Certificates......................S-46 ANNEX I.......................................I-1
USE OF PROCEEDS........................S-46 APPENDIX A....................................A-1
THE SPONSOR, THE SERVICER APPENDIX B....................................B-1
AND THE SUB-SERVICER...................S-46
THE ORIGINATORS........................S-48
DESCRIPTION OF THE CERTIFICATES........S-49
General............................S-49
Payment Dates and Distributions....S-49
Book Entry Registration of the
Class A Certificates..............S-49
Distributions......................S-53
Subordination of Class B
Certificates.....................S-53
Crosscollateralization Provisions..S-54
Overcollateralization and the
Certificate Insurance Policy.....S-56
Credit Enhancement Does Not
Apply to Prepayment Risk..........S-56
Class A Distributions and
Insured Payments to the
Owners of the Class
A Certificates....................S-56
Flow of Funds......................S-57
Certain Activities.................S-59
THE CERTIFICATE INSURANCE POLICY.......S-59
THE CERTIFICATE INSURER................S-60
General............................S-60
Capitalization.....................S-61
</TABLE>
i
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and
the accompanying Prospectus.
Issuer...................... EquiVantage Home Equity Loan Trust 1997-1
Securities Offered.......... The Class A-1 Fixed Rate Certificates (the
"Class A-1 Certificates"), the Class A-2 Fixed
Rate Certificates (the "Class A-2 Certificates"),
the Class A-3 Fixed Rate Certificates (the
"Class A-3 Certificates"), the Class A-4 Fixed
Rate Certificates (the "Class A-4 Certificates")
and the Class A-5 Adjustable Rate Certificates
(the "Class A-5 Certificates," together with the
Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the
Class A-4 Certificates, the "Class A
Certificates").
Sponsor..................... EquiVantage Acceptance Corp., a Delaware
corporation. The Sponsor's principal office is
located at 13111 Northwest Freeway, Suite 301,
Houston, Texas 77040, and its phone number is
(713) 895-1957.
Servicer.................... EquiVantage Inc., a Delaware corporation
("EquiVantage Inc."). The Servicer's principal
office is located at 13111 Northwest Freeway,
Suite 300, Houston, Texas 77040. Its telephone
number is (713) 895-1900.
Sub-Servicer................ Transworld Mortgage Corporation, a Texas
corporation. The Sub-Servicer's principal
office is located at 13111 Northwest Freeway,
Suite 600, Houston, Texas 77040.
Trustee..................... Norwest Bank Minnesota, National Association
(the "Trustee").
Originators................. The Mortgage Loans to be acquired by the Trust
from the Sponsor will be acquired by the
Sponsor from the Servicer, which has heretofore
originated the Mortgage Loans or acquired the
Mortgage Loans from certain unaffiliated
originators (the "Originators"). See "Mortgage
Loan Program" in the Prospectus.
Cut-off Date................ The close of business on March 1, 1997 (the
"Cut-off Date").
Closing Date................ On or about March 27, 1997 (the "Closing Date").
Description of the
Certificates............... The Home Equity Loan Asset-Backed Certificates,
Series 1997-1 (the "Certificates") will consist
of the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the
Class A-4 Certificates, the Class A-5
Certificates, a subordinate class of
certificates (the "Class B Certificates") and
one or more classes of Residual Certificates
(the "Class R Certificates").
The Certificates will represent undivided
beneficial ownership interests in the Trust to
be created pursuant to a pooling and servicing
agreement (the "Pooling and Servicing Agreement")
to be dated as of March 1, 1997 among the
Sponsor, the Servicer
S-4
<PAGE>
and the Trustee. Only the Class A Certificates
are offered hereby.
The assets of the Trust will include two
investment pools (each, a "Mortgage Loan Group").
Distributions on the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates
and Class A-4 Certificates will be derived
primarily from amounts received, collected or
recovered in respect of the Mortgage Loan Group
comprised entirely of Mortgage Loans bearing
fixed interest rates (the "Fixed Rate Group").
Distributions on the Class A-5 Certificates will
be derived primarily from amounts received,
collected or recovered in respect of the
Mortgage Loan Group comprised entirely of
Mortgage Loans bearing interest at rates that
are subject to periodic adjustment (the
"Adjustable Rate Group").
The "Final Scheduled Payment Dates" for the
Class A Certificates are set forth below,
although it is anticipated that the actual final
payment date for each Class of Class A
Certificates will occur significantly earlier
than such Final Scheduled Payment Date. See
"Prepayment and Yield Considerations" herein.
Payment Date
Occurring In
------------
Class A-1 Certificates..................................February 2012
Class A-2 Certificates....................................August 2018
Class A-3 Certificates.....................................March 2028
Class A-4 Certificates.....................................March 2028
Class A-5 Certificates.....................................April 2027
Each Class of Class A Certificates is issuable
in original principal amounts of a minimum of
$1,000, except that one certificate for each
Class of Class A Certificates may be issued in
a lesser amount.
The Certificate Insurer does not directly or
indirectly guarantee any specified rate of
prepayments. See "Risk Factors" herein.
The Mortgage Loans.......... The statistical information presented in this
Prospectus Supplement concerning the two
Mortgage Loan Groups is as of the close of
business on February 28, 1997 (the "Statistic
Calculation Date"). The statistical information
presented herein is based on the number and the
principal balances of the Mortgage Loans in each
Mortgage Loan Group as of such date. Some
amortization of the Mortgage Loans in each
Mortgage Loan Group will occur prior to the
Closing Date. In addition, certain loans
included as of the Statistic Calculation Date
may prepay in full, or may be determined not to
meet the eligibility requirements for the
related final Mortgage Loan Group, and
S-5
<PAGE>
may not be included in the related final
Mortgage Loan Group. As a result of the
foregoing, the statistical distribution of the
characteristics of the Mortgage Loans in the
final Mortgage Loan Groups as of the Closing Date
will vary somewhat from the statistical
distribution of such characteristics as of the
Statistic Calculation Date as presented in this
Prospectus Supplement, although such variance
will not be material.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by the aggregate principal balance of
the Mortgage Loans of the related Mortgage Loan
Group as of the Statistic Calculation Date.
The aggregate principal balance of the Mortgage
Loans as of the Statistic Calculation Date is
$70,000,584.21 in the case of the Fixed Rate
Group and $15,535,773.85 in the case of the
Adjustable Rate Group. The Sponsor expects
that, as of the Closing Date, the Fixed Rate
Group will represent approximately $70,000,000
in Mortgage Loans and the Adjustable Rate Group
will represent approximately $15,481,500 in
Mortgage Loans.
92.12% of the Mortgage Loans are home equity
loans, i.e., loans used (x) to refinance an
existing mortgage loan on more favorable terms,
(y) to consolidate debt, or (z) to obtain cash
proceeds by borrowing against the Mortgagor's
equity in the related Mortgaged Property; the
remaining Mortgage Loans are "purchase money"
loans, the proceeds of which were used to
purchase the related Mortgaged Property. The
Mortgage Loans to be sold to the Trust by the
Sponsor consisted, as of the Statistic
Calculation Date, of 1,345 Mortgages and the
related Notes on single-family homes, including
investment properties (which may be
condominiums, townhouses, manufactured housing
units or homes in one-to-four family residences),
located in 23 states. The Mortgage Loans are
secured by liens on real property of which, in
the case of the Fixed Rate Group, approximately
95.99% by principal balance are first liens and
4.01% are junior liens and, in the case of the
Adjustable Rate Group, all are first liens. The
Mortgage Loans in the Trust are all closed-end
mortgage loans in that the mortgagee is not
required to make future advances thereunder. All
of the Mortgage Loans are Actuarial Loans, as
defined herein under "The Mortgage Loan Groups --
Interest Payments on the Mortgage Loans."
The Mortgage Loans are not insured by primary
mortgage insurance policies and there is no pool
insurance insuring the Mortgage Loans; however,
certain distributions due to the Owners of the
Class A Certificates are insured by the
Certificate Insurer pursuant to the Certificate
Insurance Policy. See "Credit Enhancement" in
this Summary and "The Certificate Insurance
Policy" and "The Certificate Insurer" herein.
The Mortgage Loans are not guaranteed by the
Sponsor, the Servicer, any
S-6
<PAGE>
Originator or any of their respective affiliates.
The Mortgage Loans are required to be serviced
by the Servicer in accordance with the terms of
the Pooling and Servicing Agreement and with
reasonable care, using that degree of skill and
attention that the Servicer exercises with
respect to comparable mortgage loans that it
services for itself and others. See "Description
of the Securities --Collection and Other
Servicing Procedures" in the Prospectus.
Original Class A-1
Certificate Principal
Balance................ $29,400,000
Original Class A-2
Certificate Principal
Balance............... $19,900,000
Original Class A-3
Certificate Principal
Balance................ $13,700,000
Original Class A-4
Certificate Principal
Balance................ $ 7,000,000
Original Class A-5
Certificate Principal
Balance................ $15,000,000
Class A-1 Pass-Through
Rate................... 6.650% per annum.
Class A-2 Pass-Through
Rate................... 6.975% per annum.
Class A-3 Pass-Through
Rate................... The Class A-3 Pass-Through Rate will be equal to
(x) with respect to any Payment Date that occurs
prior to the Step-Up Payment Date, 7.550% per
annum, and (y) with respect to any Payment Date
thereafter, 8.050% per annum.
Class A-4 Pass-Through
Rate.................... The Class A-4 Pass-Through Rate will be equal
to (x) with respect to any Payment Date that
occurs prior to the Step-Up Payment Date, 7.275%
per annum, and (y) with respect to any Payment
Date thereafter, 7.775% per annum.
Class A-5 Pass-Through
Rate................... The Class A-5 Pass-Through Rate for the initial
Accrual Period will be a per annum rate equal to
LIBOR plus 0.20%. The Class A-5 Pass-Through
Rate for each subsequent Accrual Period will be
a per annum rate equal to the lesser of (i) for
each Accrual Period ending prior to the Step-Up
Payment Date, LIBOR plus 0.20%, and for each
Accrual Period ending thereafter, LIBOR plus
0.40% and (ii) the Available Funds Cap. "LIBOR"
is the London interbank offered rate for
one-month United States dollar deposits,
calculated as described under "Description of
the Certificates -- Flow of Funds" herein,
determined on the second business day preceding
the first day of any Accrual Period as provided
herein (or, in the case of the first Accrual
Period, the second business day prior to the
Closing Date).
The "Step-Up Payment Date" is the second
Payment Date which immediately follows the
Clean-Up Call Date.
The "Available Funds Cap" will be, with respect
to any Payment Date and the Class A-5
Certificates, the per annum rate equal to the
percentage obtained by (I) dividing (x) the
amount of interest
S-7
<PAGE>
included in monthly payments due on the Mortgage
Loans in the Adjustable Rate Group during the
related Remittance Period, reduced by the sum of
(i) the Servicing Fee and the Trustee Fee with
respect to the Mortgage Loans in the Adjustable
Rate Group for such Remittance Period, (ii) the
premium due to the Certificate Insurer for such
Payment Date with respect to the Certificate
Insurance Policy relating to the Class A-5
Certificates, and (iii) in the case of each
Payment Date occurring after the Payment Date in
August 1997, an amount equal to one twelfth
(1/12) of 75 basis points multiplied by the
aggregate principal balance of the Mortgage
Loans in the Adjustable Rate Group as of the
first day of such Remittance Period, by (y) the
product of (i) the then outstanding aggregate
principal balance of the Class A-5 Certificates
as of the first day of such Remittance Period
and (ii) the actual number of days elapsed
during such Remittance Period divided by 360 and
(II) multiplying the result by 100. See
"Description of the Certificates -- Flow of
Funds" herein.
The "Class A-5 Formula Pass-Through Rate" for a
Payment Date is the rate determined by clause (i)
of the definition of "Class A-5 Pass-Through
Rate" on such Payment Date.
The Pooling and Servicing Agreement provides
that if, on any Payment Date, the Class A-5
Pass-Through Rate is less than the Class A-5
Formula Pass-Through Rate, then the amount of
any such shortfall will be payable from Net
Monthly Excess Cashflow in amounts otherwise
available for distribution to the Servicer or
the Trustee on account of certain reimbursable
amounts, or to the Owners of the Subordinate
Certificates following the satisfaction of the
overcollateralization and crosscollateralization
requirements on such Payment Date, and, if not
paid from such amounts on such Payment Date, will
be carried forward and be due and payable to the
Owners of the Class A-5 Certificates on future
Payment Dates and shall accrue interest at the
Class A-5 Formula Pass-Through Rate, until paid
(such shortfall, together with such accrued
interest thereon, the "Available Funds Cap
Carry-Forward Amount").
The Certificate Insurance Policy does not
guarantee payment of any Available Funds Cap
Carry-Forward Amount (or any interest thereon),
nor will the ratings assigned to the Class A-5
Certificates address the likelihood of the
payment of the Available Funds Cap
Carry-Forward Amount. The payment of such
amount may be funded only from such Net Monthly
Excess Cashflow. Upon the occurrence of
certain trigger events all Net Monthly Excess
Cashflow may be required to be applied to
increase the level of overcollateralization,
leaving no amounts remaining to satisfaction of
any Available Funds Cap Carry-Forward Amount. No
Available Funds Cap Carry-Forward Amount will
be due to the Owners of the Class A-5
Certificates
S-8
<PAGE>
once the Class A-5 Certificate Principal Balance
has been reduced to zero.
Distributions, Generally.... Distributions on the Certificates are required to
be made on the twenty-fifth day of each calendar
month, or if such day is not a Business Day, the
next succeeding Business Day (each, a "Payment
Date") commencing on April 25, 1997, to the Owners
of Record. See "Description of the Certificates
-- General" and "-- Payment Dates and
Distributions" herein. With respect to any
Payment Date, the "Owners of Record" of the Class
A Certificates shall be such Owners as of the last
day of the calendar month immediately preceding
the calendar month in which such Payment Date
occurs (or with respect to the first Payment Date,
such Owners as of the Closing Date), whether or
not such day is a Business Day.
A "Business Day" means any day that is not a
Saturday, Sunday or other day on which commercial
banking institutions in New York, Texas or the
city in which the corporate trust office of the
Trustee is located (initially, Minneapolis,
Minnesota) are authorized or obligated by law or
executive order to be closed.
Distributions of Interest... For each Payment Date, the interest due with
respect to the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3
Certificates and the Class A-4 Certificates
will be the interest that has accrued thereon
at the applicable Class A-1 Pass-Through
Rate, Class A-2 Pass-Through Rate, Class A-3
Pass-Through Rate and Class A-4 Pass-Through
Rate, respectively, during the calendar month
immediately preceding the calendar month in
which such Payment Date occurs, and the
interest due with respect to the Class A-5
Certificates will be the interest that has
accrued thereon at the applicable Class A-5
Pass-Through Rate from and including the
preceding Payment Date (or, in the case of
the first Payment Date, from and including
the Closing Date) to but excluding the
current Payment Date. Each period referred
to in the prior sentence relating to the
accrual of interest is the "Accrual Period"
for the related Class of Class A
Certificates. All calculations of interest
on the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates and
Class A-4 Certificates will be made on the
basis of a 360-day year assumed to consist of
twelve 30-day months, and all calculations of
interest on the Class A-5 Certificates will
be made on the basis of the actual number of
days elapsed in the related Accrual Period,
divided by 360.
The Pooling and Servicing Agreement defines the
"Class A Interest Distribution Amount" for each
Class of Class A Certificates with respect to
each Payment Date as being the aggregate amount
of interest accrued on such Class of Class A
Certificates during the related Accrual Period
at the related Pass-Through Rate, together with
any unpaid interest shortfalls (but in the case
of the Class A-5 Certificates, not the amount of
any Available Funds Cap Carry-Forward Amount or
any interest
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thereon) relating to such Class of Class A
Certificates from prior periods.
Distributions of Principal.. The Owners of each Class of Class A
Certificates will be entitled to receive
certain monthly distributions of principal on
each Payment Date that generally reflect
unscheduled collections of principal (e.g.,
prepayments) received in respect of the
related Mortgage Loan Group during the
related Remittance Period, and scheduled
collections of principal due and collected in
respect of the related Mortgage Loan Group
during the related Remittance Period, in each
case to the extent described in this
Prospectus Supplement. The "Remittance
Period" with respect to any Payment Date is
the period commencing at the opening of
business on the second calendar day of the
month preceding the month in which such
Payment Date occurs, and ending at the close
of business on the first calendar day of the
month in which such Payment Date occurs.
An amount equal to the amount of any loss on a
Liquidated Mortgage Loan (a "Realized Loss")
during a Remittance Period may or may not be
distributed to the Owners of a Class of Class A
Certificates in respect of the related Mortgage
Loan Group on the Payment Date that immediately
follows the event of such loss. However, based
on the subordination provisions of the Trust and
the Certificate Insurance Policy, the Owners of
each Class of related Class A Certificates are
entitled to receive ultimate recovery of 100% of
the Original Certificate Principal Balance of
such Class of related Class A Certificates.
The subordination provisions of the Trust result
in a limited acceleration of principal payments
to the Owners of each Class of Class A
Certificates. Such subordination provisions
are more fully described under "Description of
the Certificates --Subordination of Class B
Certificates" herein. Such subordination
provisions also have the effect of accelerating
and shortening the weighted average lives of the
Class A Certificates. See "Prepayment and
Yield Considerations" herein. In addition, the
following discussion makes use of a number of
technical defined terms that are defined under
"Description of the Certificates --
Subordination of Class B Certificates" herein.
The Pooling and Servicing Agreement generally
defines the "Class A Principal Distribution
Amount" for the Class A Certificates issued in
respect of a Mortgage Loan Group with respect
to each Payment Date as being the sum, without
duplication, of all amounts received, recovered
or collected on the Mortgage Loans in the
related Mortgage Loan Group in respect of
principal (including amounts received from the
Sponsor, the Servicer or any Originator in
connection with a repurchase, purchase or
substitution of such Mortgage Loans or
termination of the Trust) during the related
Remittance Period, together with any
Subordination Deficit or any Subordination
Increase Amount relating to such Payment Date,
and less
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any Subordination Reduction Amount relating to
such Payment Date. See "Description of the
Certificates -- Crosscollateralization
Provisions" herein.
In no event will the Class A Principal
Distribution Amount for either Mortgage Loan
Group on any Payment Date be (x) less than zero
or (y) greater than the aggregate of the
then-outstanding principal balances of the
related Class A Certificates.
Insured Payments paid by the Certificate Insurer
do not include Realized Losses until such time as
such aggregate, cumulative Realized Losses have
created a Subordination Deficit with respect to
the related Mortgage Loan Group, nor do Insured
Payments cover the Servicer's failure to make
Delinquency Advances until such time as the
aggregate, cumulative amount of such unpaid
Delinquency Advances, when added to Realized
Losses, have created a Subordination Deficit.
A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which (x)
the Class A Certificate Principal Balance of the
Class A Certificates issued in respect of the
related Mortgage Loan Group (not including any
amount attributable to the Available Funds Cap
Carry-Forward Amount), after taking into account
all distributions of principal with respect to
such Certificates to be made on such Payment Date
(except for any payment to be made as to
principal from the proceeds of the Certificate
Insurance Policy), exceeds (y) the aggregate Loan
Balances of the Mortgage Loans in the related
Mortgage Loan Group as of the close of business
on the last day of the preceding Remittance
Period; provided, that with respect to the Final
Scheduled Payment Date for the Class A-5
Certificates, the Subordination Deficit shall
include, in addition to amounts calculated as
described above with respect to the Class A-5
Certificates and the Adjustable Rate Group, any
additional amounts representing the aggregate
outstanding Certificate Principal Balance of
the Class A-5 Certificates plus accrued interest
thereon (but not including any Available Funds
Cap Carry-Forward Amount), if the Servicer has
not purchased all of the outstanding Mortgage
Loans in the Adjustable Rate Group as of such
Payment Date in accordance with the Pooling and
Servicing Agreement.
With respect to the Class A Certificates issued
in respect of a Mortgage Loan Group and any
Payment Date, the sum of the Class A Interest
Distribution Amount for such Certificates and
the portion, if any, of the Class A Principal
Distribution Amount which such Class A
Certificates are then entitled to receive with
respect to such Payment Date is the "Class A
Required Distribution Amount" for such Payment
Date.
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The actual amount distributed with respect to
the Class A Certificates on any Payment Date is
the "Class A Distribution Amount" for such
Certificates for such Payment Date.
Generally, the Class A-4 Certificates receive
payments of principal on each Payment Date in an
amount equal to the product of the applicable
Class A-4 Lockout Percentage and the Class A-4
Pro Rata Distribution Amount for such Payment
Date.
The "Class A-4 Lockout Percentage" for each
Payment Date is as follows:
Payment Date Class A-4
Occurring In Lockout Percentage
------------ ------------------
April 1997 - March 2000 0%
April 2000 - March 2002 45%
April 2002 - March 2003 80%
April 2003 - March 2004 100%
April 2004 and thereafter 140%
The "Class A-4 Pro Rata Distribution Amount"
for any Payment Date means an amount equal to
the product of (i) a fraction, the numerator of
which is the Class A-4 Certificate Principal
Balance and the denominator of which is the
aggregate of the certificate principal balances
of the Class A Certificates issued in respect
of the Fixed Rate Group, in each case
immediately prior to such Payment Date, and (ii)
the portion of the Class A Principal
Distribution Amount collected in respect of such
Mortgage Loan Group.
The Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates are
"sequential pay" Classes. Generally, on each
Payment Date, any portion of the Class A
Principal Distribution Amount collected in
respect of the Fixed Rate Group and not
otherwise paid to the Class A-4 Certificates
will be allocated first to the Class A-1
Certificates, until the Class A-1 Principal
Balance has been reduced to zero, second to the
Class A-2 Certificates, until the Class A-2
Principal Balance has been reduced to zero, and
third to the Class A-3 Certificates, until the
Class A-3 Principal Balance has been reduced to
zero. To the extent that distributions of
principal described above with respect to the
Class A-4 Certificates have not fully amortized
them, any additional principal collected in
respect of the Fixed Rate Group will be applied
to the Class A-4 Certificates until the Class
A-4 Principal Balance has been reduced to zero.
Generally, the Class A-5 Certificates receive
payments of principal on each Payment Date in an
amount equal to the portion of the Class A
Principal Distribution Amount collected in
respect of the Adjustable Rate Group.
With respect to any Payment Date, the sum of the
Class A Interest Distribution Amount and the
Subordination Deficit, if
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any, for the Class A Certificates with respect
to such Payment Date is the "Insured Distribution
Amount" for such Payment Date.
Credit Enhancement...... The Credit Enhancement provided for the benefit
of the Owners of the Class A Certificates
consists of (x) the overcollateralization and
crosscollateralization mechanics which utilize
the internal cash flows of the Trust and (y) the
Certificate Insurance Policy.
Overcollateralization and
Crosscollateralization... The subordination provisions of the Trust result
in a limited acceleration of the Class A
Certificates relative to the amortization of
the Mortgage Loans in the early months of the
transaction. The accelerated amortization is
achieved by the application of certain excess
interest to the payment of principal on the Class
A Certificates. This acceleration feature
creates, with respect to each Mortgage Loan
Group, overcollateralization that results from
the excess of the aggregate principal balances
of the Mortgage Loans in the related Mortgage
Loan Group over the related Class A Certificate
Principal Balances. Once the required level of
overcollateralization is reached, and subject to
the provisions described in the next paragraph,
the acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
Subject to certain floors, caps and triggers,
the required level of overcollateralization with
respect to a Mortgage Loan Group may increase or
decrease over time. An increase would result
in a temporary period of accelerated amortization
of the related Class A Certificates to increase
the actual level of overcollateralization to its
required level; a decrease would result in a
temporary period of decelerated amortization of
the related Class A Certificates to reduce the
actual level of overcollateralization to its
required level.
In addition to the foregoing, the Pooling and
Servicing Agreement provides that such excess
interest, together with certain other excess
amounts, generated by one Mortgage Loan Group
may be used to fund shortfalls in Available
Funds in the other Mortgage Loan Group, subject
to certain prior requirements of such Mortgage
Loan Group.
See "Description of the Certificates --
Overcollateralization and the Certificate
Insurance Policy" and " -- Crosscollateralization
Provisions" herein.
The Certificate Insurance
Policy................... The Sponsor will obtain the Certificate
Insurance Policy (the "Certificate Insurance
Policy"), which is noncancelable, in favor of the
Trustee on behalf of the Owners of the Class A
Certificates. On each Payment Date, the
Certificate Insurer will be required to make
available to the Trustee the amount, if any, by
which the Insured Distribution Amount for each
Class of Class A Certificates exceeds the
Available Funds for such Class
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<PAGE>
as of such Payment Date. The Certificate
Insurance Policy does not guarantee to the
Owners of the Class A Certificates any specified
rate of Prepayments or payment by the Final
Scheduled Payment Date, nor does the Certificate
Insurance Policy insure the payment of any
Available Funds Cap Carry- Forward Amount. A
payment by the Certificate Insurer under the
Certificate Insurance Policy is referred to
herein as an "Insured Payment." See "The
Certificate Insurance Policy" and "The
Certificate Insurer" herein and "Description of
Credit Enhancement" in the Prospectus.
The Trustee or paying agent will (i) receive as
attorney-in-fact of each Owner of each Class of
Class A Certificates any Insured Payment from the
Certificate Insurer and (ii) disburse the same to
each Owner of each Class of Class A
Certificates in accordance with the Pooling and
Servicing Agreement. The Pooling and Servicing
Agreement will provide that to the extent the
Certificate Insurer makes Insured Payments,
either directly or indirectly (as by paying
through the Trustee or a paying agent), to the
Owners of the Class A Certificates, the
Certificate Insurer will be subrogated to the
rights of such Owners of such Class A
Certificates with respect to such Insured
Payments. The Certificate Insurer will receive
reimbursement for such Insured Payment, but only
from the sources and in the manner provided in
the Pooling and Servicing Agreement. Such
subrogation and reimbursement will have no effect
on the Certificate Insurer's obligations under
the Certificate Insurance Policy.
Certificate Insurer..... Financial Guaranty Insurance Company, a New York
stock insurance company, and any successor
thereto.
Delinquency Advances and
Compensating Interest.... The Servicer will be obligated to make
Delinquency Advances to the extent that such
Delinquency Advances, in the Servicer's
reasonable judgment, are recoverable from the
related Mortgage Loan. Delinquency Advances may
be funded by the Servicer from amounts held for
future distributions on the Mortgage Loans
generally, and are reimbursable from (i) future
collections on the Mortgage Loan that gave rise
to the Delinquency Advance, (ii) Liquidation
Proceeds for such Mortgage Loan and (iii) from
certain excess moneys that would otherwise be
paid to the owners of the Subordinate
Certificates (the "Subordinate Certificate
Owners").
In addition, the Servicer will also be required
to deposit in the Principal and Interest Account
the Compensating Interest with respect to any
full or partial Prepayment received on a
Mortgage Loan during the related Remittance
Period out of its own funds without any right of
reimbursement therefor. The Servicer will not be
required to pay Compensating Interest with
respect to any Remittance Period in an amount in
excess of the aggregate Base
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<PAGE>
Servicing Fee received by the Servicer for such
Remittance Period.
Book-Entry Registration of
the Class A Certificates.... The Class A Certificates will initially be issued
in book-entry form. Persons acquiring beneficial
ownership interests in such Class A Certificates
("Beneficial Owners") may elect to hold their
interests through The Depository Trust Company
("DTC") in the United States, or Cedel Bank,
soci t anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as the
Class A Certificates are Book-Entry Certificates
(as defined herein), such Class A Certificates
will be evidenced by one or more Class A
Certificates of each Class registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC or
one of the relevant depositories (collectively,
the "European Depositories"). Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will be
effected in the DTC system through Citibank N.A.
("Citibank") or Morgan Guaranty Trust Company of
New York ("Morgan"), the relevant depositories of
Cedel or Euroclear, respectively, and each a
participating member of DTC. The Class A
Certificates will initially be registered in the
name of Cede. The interests of the Owners of such
Class A Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a definitive
certificate representing such person's interest,
except in the event that Definitive Certificates
(as defined herein) are issued under the limited
circumstances described herein. All references in
this Prospectus Supplement to any Class A
Certificates reflect the rights of Beneficial
Owners only as such rights may be exercised
through DTC and its participating organizations
for so long as such Class A Certificates are held
by DTC. See "Description of the Certificates --
Book Entry Registration of the Class A
Certificates" herein, Annex I to this Prospectus
Supplement, and "Description of the Certificates
-- Form of Securities" in the Prospectus.
Monthly Servicing Fee.... EquiVantage Inc. will retain a "Base Servicing
Fee" per Mortgage Loan equal to 0.50% per annum
(0.75% per annum if the related Mortgage is in a
junior lien position), payable monthly at
one-twelfth of the accrual rate. To the extent
that EquiVantage Inc. serves as Servicer with
respect to Mortgage Loans, if any, sub-serviced by
Originators, if any, it may retain a portion of
such Base Servicing Fee with respect to such
Mortgage Loans, and any such Sub-Servicer will
receive a portion of such Base Servicing Fee as a
Sub-Servicing Fee with respect to such Mortgage
Loans (such amounts retained by the
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<PAGE>
Servicer, including any Base Servicing Fee, the
"Servicing Fee").
Trustee Fee........... The Trustee will receive a "Trustee Fee" equal to
one-twelfth of the product of 0.025% and the
outstanding principal amount of the Class A
Certificates.
Subordination of
Class B Certificates..... The Class B Certificates are subordinated to the
Class A Certificates. Such subordination is
intended to enhance the likelihood that the Owners
of the Class A Certificates will receive full and
timely receipt of all amounts due to them. See
"Description of the Certificates -- Subordination
of Class B Certificates" herein.
Optional Termination..... The Owners of the Residual Certificates and the
Servicer, acting directly or through a permitted
designee, each will have the right to purchase
from the Trust all the Mortgage Loans then held by
the Trust, at a price generally equal to the
aggregate Loan Balances of the Mortgage Loans,
together with any unpaid accrued interest thereon,
on any Remittance Date on or after the Remittance
Date on which the then-outstanding aggregate Loan
Balances of the Mortgage Loans in the Trust has
declined to 10% or less of the aggregate principal
balance of the Mortgage Loans as of the Cut-off
Date. The first such Remittance Date on which
such option may be exercised is the "Clean-Up Call
Date." The right of the Residual Certificate
Owners to exercise such optional purchase right is
superior to such right of the Servicer; the
Servicer's right may only be exercised if the
Residual Certificate Owners decline to do so. In
addition, the Servicer has the option to purchase
from the Trust any Mortgage Loan that is in
default. See "The Pooling and Servicing Agreement
--Optional Termination" herein.
Ratings................ It is a condition of the original issuance of
the Class A Certificates that each Class of Class
A Certificates receives ratings of "AAA" by
Standard & Poor's Ratings Group, a division of
The McGraw-Hill Companies, Inc. ("S&P"), and
"Aaa" by Moody's Investors Service, Inc.
("Moody's"). A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning entity. The ratings
assigned to the Class A-5 Certificates do not
address the likelihood of the payment of the
"Available Funds Cap Carry-Forward Amount." See
"Prepayment and Yield Considerations" and
"Ratings" herein and "Yield Considerations" in
the Prospectus.
Federal Tax Aspects..... For U.S. Federal income tax purposes, an
election will be made to treat the Trust as one
or more REMICs. Each Class of Class A
Certificates will be designated as a "regular
interest" in a REMIC and each Class A Certificate
will be treated as a debt instrument of the Trust
for federal income tax purposes. In addition, or
Federal income tax purposes, the Class A-5
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<PAGE>
Certificates will represent an undivided
beneficial ownership interest in an interest
rate cap contract. A class of Class R
Certificates will be designated as the
"residual interest" with respect to each REMIC
election made by the Trust. Any other classes
of Subordinate Certificates that may be issued
will be designated as "regular interests." See
"Certain Federal Income Tax Consequences" herein
and in the Prospectus.
ERISA Considerations...... As described under "ERISA Considerations" herein,
the Class A Certificates may be purchased by
employee benefit plans that are subject to ERISA,
as amended, provided that certain conditions are
satisfied. See "ERISA Considerations" herein and
in the Prospectus.
Legal Investment
Considerations....... The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates,
Class A-4 Certificates and Class A-5
Certificates will not constitute
"mortgage related securities" for purposes of
SMMEA. See "Legal Investment Considerations"
herein and "Legal Investment Matters -- SMMEA"
in the Prospectus.
Risk Factors........... For a discussion of certain factors that should
be considered by prospective investors in the
Class A Certificates, see "Risk Factors" herein
and in the Prospectus.
Certain Legal Matters.... Certain legal matters with respect to the
Certificates will be passed upon by Andrews &
Kurth L.L.P. Certain legal matters with respect
to the Certificates will be passed upon for the
Underwriters by Arter & Hadden. Hunton &
Williams will act as counsel to the Certificate
Insurer.
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RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the factors set forth under "Risk Factors"
in the Prospectus) in connection with the purchase of the Class A
Certificates.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
As of the Statistic Calculation Date, 29.72% of the Mortgage Loans by
aggregate principal balance are Balloon Loans. The risk of default for
Balloon Loans may be lower for Mortgage Loans with a longer term to maturity.
All of such Balloon Loans have Balloon Payments due 15 years after the
origination date of the Balloon Loan. See "Risk Factors -- Risks Related to
the Mortgage Loans -- Risk of Losses Associated with Balloon Loans" in the
Prospectus.
Nature of Security. The total amount of a loan generally includes
origination fees, credit life insurance premium, if any, prepaid interest and
other closing costs.
The "Loan-to-Value Ratio" or "LTV" of a Mortgage Loan at any given time
is, with respect to any first lien refinance Mortgage Loans, the percentage
equal to the original balance of the related Mortgage Loan divided by the
appraised value of the related Mortgaged Property (which may be subject to a
downward adjustment by the underwriter). With respect to any Junior Lien
Loans, the Combined-Loan-to-Value Ratio ("CLTV") is the percentage determined
by dividing (x) the sum of the original principal balance of such Mortgage
Loan plus the then current principal balance of all mortgage loans secured by
liens on the related Mortgaged Property having priorities senior to that of
the lien that secures such Mortgage Loan, if any, by (y) the value of the
related Mortgaged Property, based upon the lesser of the appraisal (which may
be subject to a downward adjustment by the underwriter) or purchase price
valuation made at the time of origination of the Mortgage Loan (such value,
the "Property Value"). In the case of a first lien purchase money Mortgage
Loan, the lesser of (a) the appraised value (which may be subject to a
downward adjustment by the underwriter) or (b) the purchase price generally
is used to establish the Property Value. The Sponsor's underwriting
guidelines generally provide for a maximum LTV at origination of 90% for
owner-occupied properties and a maximum LTV at origination for non-owner
occupied homes of 85%.
Information is provided under "The Mortgage Loan Groups -- General"
herein with respect to the LTV's and CLTV's of the Mortgage Loans as of the
Statistic Calculation Date. As discussed in the Prospectus under "Risk
Factors," the value of the underlying Mortgaged Properties could have been
adversely affected by a number of factors since the respective dates of
origination. As a result, there can be no assurance that the LTV's or CLTV's
of the Mortgage Loans determined as of a date subsequent to the origination
date will be the same or lower than the LTV's or CLTV's for the Mortgage
Loans determined as of the origination date.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delay could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of such proceeds by the Trust could occur. Further, the Servicer
will be entitled to deduct from liquidation proceeds received in respect of a
fully liquidated Mortgage Loan all expenses incurred in attempting to recover
amounts due on such Mortgage Loan and not yet repaid, including payments to
senior mortgagees, if any, legal fees, real estate taxes, interest advances
and maintenance and preservation expenses, thereby reducing any collections.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a larger
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the smaller
mortgage loan than would be the case with a larger loan.
Investor-owned properties represent (based solely upon statements made by
the borrowers at the time of origination of the related Mortgage Loan), as a
percentage of the aggregate principal balance of the Mortgage Loans as of the
Statistic Calculation Date, approximately 5.92% of the Mortgage Loans in the
Fixed Rate Group and 4.44%
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of the Mortgage Loans in the Adjustable Rate Group. It is possible that the
rate of delinquencies, foreclosures and losses on mortgage loans secured by
non-owner occupied properties could be higher than for loans secured by the
borrower's residence.
Geographic Concentration of Mortgage Loans. Approximately 61.73% of the
aggregate Loan Balances, as of the Statistic Calculation Date, represent
Mortgage Loans in the Fixed Rate Group relating to Mortgaged Properties
located in five states: Tennessee, 17.91%; Ohio, 16.90%; Michigan, 10.19%;
Georgia, 8.56%; and North Carolina, 8.17%. Approximately 74.36% of the
aggregate Loan Balances, as of the Statistic Calculation Date, represent
Mortgage Loans in the Adjustable Rate Group relating to Mortgaged Properties
located in four states: Michigan, 29.64%; Ohio, 29.49%; Tennessee, 7.81%; and
Maryland, 7.42%.
Effect of Mortgage Loan Yield on Class A-5 Pass Through Rate. Subject to
the Available Funds Cap, the Class A-5 Pass Through Rate is based upon the
value of an index (one-month LIBOR) that is different from the value of the
index applicable to the Mortgage Loans in the Adjustable Rate Group
(six-month LIBOR), as described herein under "The Mortgage Loan Groups --
Adjustable Rate Group." In addition, the Adjustable Rate Group Mortgage Loans
have different rate determination dates, rate adjustment dates and rate caps
and floors. Consequently, the Class A-5 Pass Through Rate for any Payment
Date may not equal the Class A-5 Formula Pass-Through Rate for such Payment
Date. In particular, the Class A-5 Pass Through Rate adjusts monthly, while
the interest rates of the Mortgage Loans in the Adjustable Rate Group adjust
less frequently, with the result that the Class A-5 Pass-Through Rate may be
lower than the Class A-5 Formula Pass-Through Rate for extended periods in a
rising interest rate environment. In addition, LIBOR and the indices
applicable to such Mortgage Loans may respond to different economic and
market factors, and there is no necessary correspondence between them. Thus
it is possible, for example, that LIBOR may rise during a period in which one
or more of such indices are stable or are falling or that, even if both LIBOR
and such indices rise during the same period, LIBOR may rise much more
rapidly than such indices. In addition, the Adjustable Rate Group Mortgage
Loans are generally subject to periodic rate caps of 1.50% per semi-annual
adjustment period and to specified lifetime rate caps and, in some instances,
lifetime rate floors.
Recent Developments. During the latter part of 1996 and the early part
of 1997, major flooding (the "Flood") occurred in Ohio, Kentucky and Indiana
(the "Affected Areas"). The Flood caused significant property damage and may
have damaged some of the Mortgaged Properties in the Mortgage Loan Groups.
As of the Statistic Calculation Date, Mortgaged Properties securing Mortgage
Loans with an aggregate principal balance representing approximately 25.10%
of the aggregate principal balance of the Mortgage Loans are located in the
Affected Areas. However, there can be no assurance as to the number of
Mortgaged Properties that may have been damaged by the Flood or the extent of
any such damage.
With respect to each Mortgage Loan, EquiVantage Inc. will represent and
warrant in the Master Transfer Agreements that, to the best of its knowledge,
as of the Cut-off Date the related Mortgaged Property is free of material
damage and is in good repair. In the event a breach of such representation
and warranty materially and adversely affects the interest of the Owners of
the Certificates or the Certificate Insurer (notwithstanding that such
representation and warranty was made to the best of EquiVantage Inc.'s
knowledge), such breach is not cured within the time limits specified in the
Master Transfer Agreements and such breach is attributable to damage caused
by the Flood, EquiVantage Inc. will substitute another mortgage loan for such
Mortgage Loan in accordance with the terms of the Master Transfer Agreements
or, if unable to do so, repurchase such Mortgage Loan. In the event
EquiVantage Inc. is unable to effect a substitution and instead repurchases
such Mortgage Loan, the rate of principal payments on the Mortgage Loans in
the related Mortgage Loan Group will increase, affecting the yield on the
related Certificates. See "Prepayment and Yield Considerations" herein.
SPONSOR'S MORTGAGE LOAN PROGRAM
The Mortgage Loan Groups include loans that were either originated
directly by the Servicer or purchased by the Servicer from others on a
loan-by-loan basis or in bulk acquisitions of loan portfolios, and in either
case were acquired by the Sponsor.
S-19
<PAGE>
Mortgage Loans may have been originated pursuant to the Sponsor's
Guidelnies or Approved Guidelines or pursuant to Bulk Guidelines and
re-underwritten by the Servicer, pursuant to the Sponsor's Guidelines.
Delinquencies
The following table sets forth information relating to the delinquency
and foreclsoure experience of the Sub-Servicer for its servicing portfolio of
loans originated or acquired by the Sponsor (the "Sponsor's Portfolio") for
the periods indicated. In addition to the Sponsor's Portfolio, the
Sub-Servicer serviced as of February 28, 1997 approximately 64,529 mortgage
loans with an aggregate principal balance as of such date of approximately
$2.4 billion; such loans were not originated or acquired pursuant to the
Sponsor's Guidelines and are being serviced for third parties, including
FNMA, FHLMC and GNMA as well as private investors, on a contract servicing
basis (the "Third-Party Servicing Portfolio"). No loans in the Third-Party
Servicing Portfolio are included in the table relating to the Sponsor's
Portfolio set forth below.
DELINQUENCY EXPERIENCE OF THE SPONSOR'S
PORTFOLIO OF MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
As of
February 28,1997
----------------
<S> <C>
Number of mortgage loans............................ 8,192
Dollar amount of mortgage loans..................... $484,395,716
Delinquency Period:
30-59 Days
% of number of loans (2)....................... 1.35%
% of dollar amount of loans (3)................ 1.35%
60-89 Days
% of number of loans (2)........................ 0.57%
% of dollar amount of loans (3)................. 0.53%
90 Days and over
% of number of loans (2)........................ 3.68%
% of dollar amount of loans (3)................. 3.73%
Foreclosed Properties
% of number of loans (2)........................ 0.56%
% of dollar amount of loans (3)................. 0.64%
</TABLE>
(1) The mortgage loans comprising the Sponsor's Portfolio were originated
beginning in August 1993 and acquired by the Sponsor beginning in May 1994.
(2) The number of delinquent or foreclosed mortgage loans as a percentage of
the total "Number of mortgage loans" as of the date indicated. For
purposes of this table, a loan is considered delinquent if a payment is not
made on the same day in the month following the due date. For example, a
loan with an unpaid May 1 installment would be considered delinquent if the
payment were not received by the close of business on June 1. Such loan
would be shown as current in the May delinquency report and as 30 days'
delinquent in the June delinquency report.
S-20
<PAGE>
(3) The dollar amount of delinquent or foreclosed mortgage loans as a
percentage of the total "Dollar amount of mortgage loans" as of the date
indicated.
The Sponsor's net losses on mortgage loans in 1996 were 0.028% of the
Sponsor's average portfolio unpaid principal balance of $308,289,602. The
Sponsor's net losses on mortgage loans in 1995 were 0.02% of the Sponsor's
average portfolio unpaid principal balance of $85,713,227. The Sponsor had
no mortgage loan losses prior to 1995.
While the above delinquency and loan loss experience represents the
recent experience of the Sponsor's Portfolio, there can be no assurance that
the future delinquency and loan loss experience on the Mortgage Loans
included in the Mortgage Loan Groups will be similar. The Sponsor can
neither quantify the impact of any recent property value declines on the
Mortgage Loans nor predict whether, to what extent or how long such declines
may continue. In a period of such decline, the rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
heretofore experienced in the mortgage lending industry in general. In
addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly,
the actual rates of delinquencies, foreclosures and losses.
The Originators will represent that not more than 2.15% of the Mortgage
Loans (by aggregate principal balance as of the Cut-off Date) were originated
pursuant to a "no-income verification" program.
THE MORTGAGE LOAN GROUPS
General
92.12% of the Mortgage Loans are home equity loans, i.e., loans used (x)
to refinance an existing mortgage loan on more favorable terms, (y) to
consolidate debt, or (z) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property. The remaining Mortgage
Loans are "purchase money" loans, the proceeds of which were used to purchase
the related Mortgaged Property.
The Mortgage Loan Groups contained, as of the Statistic Calculation Date,
1,345 loans to be sold by the Sponsor to the Trust evidenced by promissory
notes (the "Notes") secured by Mortgages on the Mortgaged Properties, which
are located in 23 states. The Mortgaged Properties securing the Mortgage
Loans consist primarily of single-family residences (each of which may be
detached, a rowhouse or townhouse, part of a two-to four-family dwelling, a
condominium unit or a unit in a planned unit development ("PUD")). The
Mortgaged Properties may be owner-occupied (which includes second and
vacation homes) and non-owner occupied investment properties. 95.99% of the
Mortgage Loans in the Fixed Rate Group are secured by first lien mortgages on
the related Mortgaged Properties and 4.01% of the Mortgage Loans in the Fixed
Rate Group are secured by junior liens on the related Mortgaged Properties.
All of the Mortgage Loans in the Adjustable Rate Group are secured by first
lien mortgages on the related Mortgaged Properties.
The Mortgage Loans were required to satisfy the following criteria as of
the Cut-off Date: had remaining terms to maturity of no greater than 30 years
and were not 30 or more days delinquent (except that certain Mortgage Loans,
representing in the aggregate not in excess of 0.48% of the aggregate
principal balance of all Mortgage Loans as of the Cut-off Date were 30-59
days delinquent).
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group" and each,
a "Mortgage Loan Group") comprised of Mortgage Loans that bear fixed interest
rates only, in the case of the Fixed Rate Group, and Mortgage Loans that bear
adjustable interest rates only, in the case of the Adjustable Rate Group.
The Class A-1, Class A-2, Class A-3 and Class A-4 Certificates represent
undivided ownership interests in all Mortgage Loans contained in the Fixed
Rate Group, and the Class A-5 Certificates represent undivided ownership
interests in all Mortgage Loans contained in the Adjustable Rate Group.
S-21
<PAGE>
The LTV's or CLTV's described herein were calculated based upon the
Property Values of the related Mortgaged Properties at the time of
origination. No assurance can be given that such Property Values of the
Mortgaged Properties have remained or will remain at their levels on the
dates of origination of the related Mortgage Loans. If the Property Values
decline such that the outstanding balances of the Mortgage Loans, together
with the outstanding balances of any Senior Liens, become equal to or greater
than the then current value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those heretofore
experienced by the Servicer, as set forth above under "Sponsor's Mortgage
Loan Program," and in the mortgage lending industry in general.
Difference between Statistic Calculation Date Mortgage Loan Groups and Closing
Date Mortgage Loan Groups
The statistical information presented in this Prospectus Supplement is
based on the Mortgage Loan Groups as of the Statistic Calculation Date. Each
Mortgage Loan Group as of the Statistic Calculation Date reflects the
Mortgage Loans comprised thereof, and the statistical information presented
herein is based on the number and the principal balances of such Mortgage
Loans as of the Statistic Calculation Date. The aggregate principal balance
of the Mortgage Loans as of such date is $85,536,358.06. The Sponsor expects
that, as of the Closing Date, the Fixed Rate Group will represent
approximately $70,000,000 in Mortgage Loans and the Adjustable Rate Group
will represent approximately $15,481,500 in Mortgage Loans. With respect to
each Mortgage Loan Group as of the Statistic Calculation Date, as to which
statistical information is presented herein, some amortization of the
Mortgage Loans contained in such group will occur prior to the Closing Date.
Moreover, certain loans included as of the Statistic Calculation Date may
prepay in full, or may be determined not to meet the eligibility requirements
for the related final Mortgage Loan Group, and may not be included in the
related final Mortgage Loan Group. As a result of the foregoing, the
statistical distribution of characteristics as of the Closing Date for the
final Mortgage Loan Groups will vary somewhat from the statistical
distribution of such characteristics as of the Statistic Calculation Date as
presented in this Prospectus Supplement, although such variance will not be
material.
Fixed Rate Group
As of the Statistic Calculation Date, the Mortgage Loans in the Fixed
Rate Group consist of 1,181 loans secured by Mortgaged Properties located in
21 states, as set forth herein. As of the Statistic Calculation Date, the
Mortgage Loans in the Fixed Rate Group had an aggregate principal balance of
$70,000,584.21, the minimum principal balance of any of such Mortgage Loans
was $7,732.80, the maximum principal balance thereof was $499,764.25 and the
average principal balance of such Mortgage Loans was $59,272.30. The
Mortgage Rates on the Mortgage Loans in the Fixed Rate Group as of the
Statistic Calculation Date ranged from 8.00% to 15.15% per annum, and the
weighted average Mortgage Rate of the Mortgage Loans in the Fixed Rate Group
was 11.19% per annum. The original term to stated maturity of the Mortgage
Loans in the Fixed Rate Group as of the Statistic Calculation Date ranged
from 60 months to 360 months, the remaining term to stated maturity ranged
from 59 months to 360 months, the weighted average original term to stated
maturity was 244 months, the weighted average remaining term to stated
maturity was 243 months, the weighted average seasoning was 1.28 months and
the weighted average CLTV was 77.93%. As of the Statistic Calculation Date,
no Mortgage Loan in the Fixed Rate Group had a stated maturity later than
March 1, 2027. 63.69% of the Mortgage Loans in the Fixed Rate Group by
aggregate principal balance require monthly payments of principal that will
fully amortize the Mortgage Loans by their respective maturity dates, and
36.31% of the aggregate principal balance of the Mortgage Loans in the Fixed
Rate Group are Balloon Loans.
S-22
<PAGE>
FIXED RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
State Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ----- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Arizona 1 $ 90,283.75 0.13%
Colorado 5 326,595.69 0.47
Florida 37 2,039,724.59 2.91
Georgia 86 5,988,882.57 8.56
Iowa 3 144,225.09 0.21
Illinois 88 5,229,663.12 7.47
Indiana 76 3,412,221.91 4.87
Kentucky 27 1,303,575.69 1.86
Louisiana 71 2,897,506.14 4.14
Maryland 22 1,687,630.09 2.41
Michigan 113 7,133,645.61 10.19
Missouri 3 218,009.20 0.31
Mississippi 26 1,112,059.93 1.59
North Carolina 89 5,721,092.91 8.17
Ohio 195 11,826,763.24 16.90
Oregon 15 1,649,909.02 2.36
South Carolina 95 4,985,696.68 7.12
Tennessee 204 12,538,928.52 17.91
Utah 6 408,715.50 0.58
Washington 15 1,043,716.67 1.49
Wisconsin 4 241,738.29 0.35
---- ------------- -------
TOTAL 1,181 $70,000,584.21 100.00%
----- -------------- -------
----- -------------- -------
</TABLE>
S-23
<PAGE>
FIXED RATE GROUP
DISTRIBUTION OF CLTV'S
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
CLTV Ratios Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ----------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
00.00 to 50.00 67 $ 2,081,985.00 2.97%
50.01 to 55.00 28 978,492.33 1.40
55.01 to 60.00 41 1,701,033.52 2.43
60.01 to 65.00 45 2,161,982.49 3.09
65.01 to 70.00 87 4,010,771.35 5.73
70.01 to 75.00 169 8,712,117.03 12.45
75.01 to 80.00 381 23,212,945.20 33.16
80.01 to 85.00 293 20,966,440.05 29.95
85.01 to 90.00 67 5,928,022.03 8.47
90.01 to 95.00 2 168,666.01 0.24
110.00 to 115.00 1 78,129.20 0.11
--- ------------- ------
TOTAL 1,181 $70,000,584.21 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
S-24
<PAGE>
FIXED RATE GROUP
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
Mortgage Rates Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------------- --------------- -------------------------- --------------------------
<S> <C> <C> <C>
7.75% to 8.00% 1 $ 443,057.33 0.63%
8.50 to 8.75 4 252,555.88 0.36
8.76 to 9.00 10 855,883.36 1.22
9.01 to 9.25 21 1,439,189.76 2.06
9.26 to 9.50 21 1,440,206.37 2.06
9.51 to 9.75 36 2,846,866.07 4.07
9.76 to 10.00 67 4,192,322.61 5.99
10.01 to 10.25 61 3,527,477.16 5.04
10.26 to 10.50 113 8,433,770.98 12.05
10.51 to 10.75 105 6,826,652.37 9.75
10.76 to 11.00 109 6,198,808.31 8.86
11.01 to 11.25 65 3,416,250.29 4.88
11.26 to 11.50 62 3,371,095.74 4.82
11.51 to 11.75 78 4,261,111.77 6.09
11.76 to 12.00 79 4,176,493.84 5.97
12.01 to 12.25 51 2,723,606.44 3.89
12.26 to 12.50 73 4,130,587.01 5.90
12.51 to 12.75 57 3,324,398.00 4.75
12.76 to 13.00 43 2,213,720.44 3.16
13.01 to 13.25 31 1,632,833.56 2.33
13.26 to 13.50 32 1,630,493.37 2.33
13.51 to 13.75 19 919,329.31 1.31
13.76 to 14.00 16 779,671.17 1.11
14.01 to 14.25 13 474,557.20 0.68
14.26 to 14.50 6 223,291.34 0.32
14.51 to 14.75 5 150,332.30 0.21
14.76 to 15.00 2 94,500.00 0.13
15.01 to 15.25 1 21,522.23 0.03
---- --------- ----
TOTAL 1,181 $70,000,584.21 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
S-25
<PAGE>
FIXED RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Months Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ------ -------------- -------------------------- --------------------------
<S> <C> <C> <C>
48 to 60 5 $ 91,780.29 0.13%
72 to 84 2 35,873.93 0.05
85 to 96 1 21,667.67 0.03
97 to 108 2 48,514.91 0.07
109 to 120 41 1,350,344.11 1.93
132 to 144 5 204,440.18 0.29
156 to 168 4 126,717.18 0.18
169 to 180 669 37,537,025.03 53.62
216 to 228 1 23,574.68 0.03
229 to 240 146 7,661,128.58 10.94
336 to 348 1 41,385.15 0.06
349 to 360 304 22,858,132.50 32.65
--- ------------- -----
TOTAL 1,181 $70,000,584.21 100.00%
----- -------------- -------
----- -------------- -------
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
Principal Balances Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ------------------ -------------- -------------------------- --------------------------
<S> <C> <C> <C>
$0 to $50,000 568 $19,376,109.61 27.68%
50,001 to 100,000 496 33,591,457.48 47.99
100,001 to 150,000 82 9,823,504.80 14.03
150,001 to 200,000 24 3,966,529.51 5.67
200,001 to 250,000 5 1,076,812.96 1.54
250,001 to 300,000 1 252,100.31 0.36
300,001 to 350,000 3 971,247.96 1.39
400,000 to 450,000 1 443,057.33 0.63
450,001 to 500,000 1 499,764.25 0.71
-- ----------- ----
TOTAL 1,181 $70,000,584.21 100.00%
----- -------------- -------
----- -------------- -------
</TABLE>
S-26
<PAGE>
FIXED RATE GROUP
DISTRIBUTION OF PROPERTY TYPE
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Property Type Mortgage Loans Statistic Calculation Date Statistic Calculation Date
------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Condominiums 9 $ 465,962.42 0.67%
Manufactured Housing 64 3,270,963.47 4.67
PUD 8 871,552.81 1.25
Single Family Attached 10 506,920.29 0.72
Single Family Detached 1,055 63,202,141.13 90.29
Townhouse 2 85,431.40 0.12
Two to Four Family 33 1,597,612.69 2.28
-- ------------ ----
TOTAL 1,181 $70,000,584.21 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF OCCUPANCY
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Occupancy Type Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Owner Occupied 1,088 $65,721,839.66 93.89%
Investor 91 4,144,464.66 5.92
Second Home 2 134,279.89 0.19
----- ------------- -----
TOTAL 1,181 $70,000,584.21 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF TERM OF SEASONING
<TABLE>
<CAPTION>
Number of Aggregate Principal % of Aggregate Principal
Months of Mortgage Percent of Balance as of the Balance as of the
Seasoning Loans Loan Count Statistic Calculation Date Statistic Calculation Date
- --------- -------- ---------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
0 339 28.70% $20,064,474.22 28.66%
1 to 6 830 70.28 49,398,014.43 70.57
7 to 12 8 0.68 418,789.27 0.60
13 to 18 4 0.34 119,306.29 0.17
---- ------ ------------ ------
TOTAL 1,181 100.00% $70,000,584.21 100.00%
----- ------- ------------- -------
----- ------- ------------- -------
</TABLE>
S-27
<PAGE>
Adjustable Rate Group
The Mortgage Loans in the Adjustable Rate Group consist of 164 loans
secured by Mortgaged Properties located in 19 states, as set forth herein.
As of the Statistic Calculation Date, the Mortgage Loans in the Adjustable
Rate Group had an aggregate principal balance of $15,535,773.85, the minimum
principal balance of any of such Mortgage Loans was $20,000.00, the maximum
principal balance thereof was $301,403.80 and the average principal balance
of such Mortgage Loans was $94,730.33. As of the Statistic Calculation Date,
the weighted average current Mortgage Rate of the Mortgage Loans in the
Adjustable Rate Group was 10.085% and the weighted average margin was 6.727%.
For the Mortgage Loans in the Adjustable Rate Group as of the Statistic
Calculation Date, the original term to stated maturity ranged from 180 months
to 360 months, the remaining term to stated maturity ranged from 177 months
to 360 months, the weighted average remaining term to stated maturity was
357.57 months, the weighted average original term to stated maturity was
358.98 months and the weighted average seasoning was 1.41 months. No
Mortgage Loan in the Adjustable Rate Group had a stated maturity later than
March 15, 2027. All of the Mortgage Loans in the Adjustable Rate Group
require monthly payments of principal that will fully amortize the Mortgage
Loans by their respective maturity dates. As of the Statistic Calculation
Date, all of the Mortgage Loans in the Adjustable Rate Group were Actuarial
Loans.
As of the Statistic Calculation Date the weighted average LTV of the
Adjustable Rate Group was 81.71%. All Mortgage Loans in the Adjustable Rate
Group are secured by first lien mortgages or deeds of trust.
All of the Mortgage Loans in the Adjustable Rate Group bear interest at a
six-month LIBOR rate, plus a margin. 98.77% are indexed on the average of
the six-month LIBOR rates based on quotations at five major banks as set
forth in the "Money Rates" section of The Wall Street Journal on the 15th
business day of the month prior to the adjustment date; and 1.23% are indexed
on the average of the six-month LIBOR rates based on quotations at five major
banks as set forth in the "Money Rates" section of The Wall Street Journal on
the first business day of the month prior to the adjustment date.
The Adjustable Rate Group Mortgage Loans have semi-annual interest rate
and semi-annual payment adjustment frequencies. Approximately 73% of the
Mortgage Loans in the Adjustable Rate Group have fixed Mortgage Rates and
payments for 24 months from the date of origination thereof before such
Mortgage Loans become subject to the semi-annual adjustment described in the
preceding sentence. The margins for the Adjustable Rate Group Mortgage Loans
range from 3.80% to 8.76%. All Adjustable Rate Group Mortgage Loans have a
periodic (i.e., semi-annual) rate adjustment cap of 1.50% (or 1.00% in the
case of two Mortgage Loans), with 98.77% having a lifetime adjustment cap of
7.00%, and less than 1.95% having lifetime caps other than 7.00%. As of the
Statistic Calculation Date, the weighted average number of months until the
next adjustment date is 17.212. The weighted average maximum Mortgage Rate
as of the Statistic Calculation Date was 17.04%. The weighted average
minimum Mortgage Rate as of the Statistic Calculation Date was 9.19%.
S-28
<PAGE>
ADJUSTABLE RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
State Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ----- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Arizona 1 $ 168,165.00 1.08%
Delaware 1 85,000.00 0.55
Florida 4 461,773.66 2.97
Georgia 6 411,527.12 2.65
Iowa 1 37,567.92 0.24
Illinois 9 1,033,552.51 6.65
Indiana 3 184,041.84 1.18
Kentucky 2 164,700.00 1.06
Louisiana 1 101,957.68 0.66
Maryland 7 1,152,811.66 7.42
Michigan 46 4,604,783.31 29.64
North Carolina 3 281,624.99 1.81
New Jersey 2 190,144.32 1.22
Ohio 58 4,582,029.66 29.49
South Carolina 4 297,348.08 1.91
Tennessee 11 1,213,912.79 7.81
Utah 2 180,447.56 1.16
Washington 1 156,772.05 1.01
Wisconsin 2 277,613.70 1.47
---- ------------- -------
TOTAL 164 $15,535,773.85 100.00%
----- -------------- -------
----- -------------- -------
</TABLE>
S-29
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF CLTV'S
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
CLTV Ratios Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ----------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
00.00 to 50.00 3 $ 161,940.25 1.04%
50.01 to 55.00 3 356,000.00 2.29
55.01 to 60.00 1 71,231.29 0.46
60.01 to 65.00 5 266,861.76 1.72
65.01 to 70.00 10 853,839.36 5.50
70.01 to 75.00 7 694,782.17 4.47
75.01 to 80.00 39 3,127,047.18 20.13
80.01 to 85.00 63 6,411,922.27 41.27
85.01 to 90.00 32 3,306,297.84 21.28
95.00 to 100.00 1 285,851.73 1.84
-- ----------- ------
TOTAL 164 $15,535,773.85 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
Mortgage Rates Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------------- --------------- -------------------------- --------------------------
<S> <C> <C> <C>
8.00% to 8.50% 2 $ 91,400.00 0.59%
8.51 to 9.00 11 1,031,033.31 6.64
9.01 to 9.50 31 2,872,824.26 18.49
9.51 to 10.00 36 3,881,254.56 24.98
10.01 to 10.50 46 4,085,426.66 26.30
10.51 to 11.00 24 2,360,462.53 15.19
11.01 to 11.50 5 467,111.28 3.01
11.51 to 12.00 4 362,318.77 2.33
12.01 to 12.50 4 284,558.22 1.83
12.51 to 13.00 1 99,384.26 0.64
---- --------- ----
TOTAL 164 $15,535,773.85 100.00%
--- ------------- -------
--- ------------- -------
</TABLE>
S-30
<PAGE>
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Months Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ------ -------------- -------------------------- --------------------------
<S> <C> <C> <C>
168 to 180 1 $ 87,997.27 0.57%
324 to 336 2 190,144.32 1.22
348 to 360 161 15,257,632.26 98.21
---- ------------- -----
TOTAL 164 $15,535,773.85 100.00%
---- ------------- -------
---- ------------- -------
</TABLE>
S-31
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Range of Number of Balance as of the Balance as of the
Principal Balances Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- ------------------ -------------- -------------------------- --------------------------
<S> <C> <C> <C>
$15,000 to $20,000 1 $ 20,000.00 0.13%
25,000 to 30,000 1 30,000.00 0.19
30,001 to 35,000 2 66,484.96 0.43
35,001 to 40,000 4 156,227.29 1.01
40,001 to 45,000 7 303,166.28 1.95
45,001 to 50,000 7 340,563.31 2.19
50,001 to 55,000 10 520,093.122 3.35
55,001 to 60,000 9 518,842.50 3.34
60,001 to 65,000 6 382,458.13 2.46
65,001 to 70,000 11 748,912.15 4.82
70,001 to 75,000 9 651,162.86 4.19
75,001 to 80,000 9 704,527.80 4.53
80,001 to 85,000 8 668,283.05 4.30
85,001 to 90,000 6 527,693.81 3.40
90,001 to 95,000 8 742,541.54 4.78
95,001 to 100,000 9 874,935.02 5.63
100,001 to 150,000 36 4,298,362.44 27.67
150,001 to 200,000 14 2,303,705.05 14.83
200,001 to 250,000 5 1,090,559.01 7.02
250,001 to 300,000 1 285,851.73 1.84
300,001 to 350,000 1 301,403.80 1.94
- ---------- ----
TOTAL 164 $15,535,773.85 100.00%
--- ------------- -------
--- ------------- -------
</TABLE>
S-32
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF PROPERTY TYPE
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Property Type Mortgage Loans Statistic Calculation Date Statistic Calculation Date
------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Condominiums 2 $ 190,144.32 1.22%
Manufactured Housing 2 152,018.92 0.98
Single Family Detached 156 14,912,963.06 95.99
Two to Four Family 4 280,647.55 1.81
---- ----------- -----
TOTAL 164 $15,535,773.85 100.00%
---- ------------- --------
---- ------------- --------
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF OCCUPANCY
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Occupancy Type Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Owner Occupied 156 $14,845,253.21 95.56%
Investor 8 690,520.64 4.44
--- ------------- ------
TOTAL 164 $15,535,773.85 100.00%
--- -------------- -------
--- -------------- -------
</TABLE>
S-33
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF TERM OF SEASONING
<TABLE>
<CAPTION>
Number of Aggregate Principal % of Aggregate Principal
Months of Mortgage Percent of Balance as of the Balance as of the
Seasoning Loans Loan Count Statistic Calculation Date Statistic Calculation Date
- --------- -------- ---------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
0 76 46.34% $ 6,960,962.00 44.81%
1 to 6 86 52.44 8,384,667.53 53.97
24 to 30 1 0.61 71,231.29 0.46
31 to 36 1 0.61 118,913.03 0.77
-- ---- ---------- -----
TOTAL 164 100.00% $15,535,773.85 100.00%
--- ------- ------------- -------
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Aggregate Principal % of Aggregate Principal
Maximum Number of Balance as of the Balance as of the
Mortgage Rates Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------------- -------------- -------------------------- --------------------------
12.50% to 13.00% 1 $ 118,913.03 0.77%
15.00 to 15.50 2 91,400.00 0.59
15.51 to 16.00 11 1,031,033.31 6.64
16.01 to 16.50 32 2,944,055.55 18.95
16.51 to 17.00 36 3,881,254.56 24.98
17.01 to 17.50 44 3,854,358.71 24.81
17.51 to 18.00 25 2,472,617.45 15.92
18.01 to 18.50 5 467,111.28 3.01
18.51 to 19.00 4 362,318.77 2.33
19.01 to 19.50 3 213,326.93 1.37
19.51 to 20.00 1 99,384.26 0.64
- --------- ----
TOTAL 164 $15,535,773.85 100.00%
--- ------------- -------
--- ------------- -------
</TABLE>
S-34
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Minimum Number of Balance as of the Balance as of the
Mortgage Rates Mortgage Loans Statistic Calculation Date Statistic Calculation Date
- -------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
3.50% to 4.00% 1 $ 84,930.11 0.55%
4.01 to 4.50 1 118,913.03 0.77
5.00 to 5.50 1 93,184.12 0.60
5.51 to 6.00 8 634,090.57 4.08
6.01 to 6.50 10 1,134,667.47 7.30
6.51 to 7.00 9 952,519.27 6.13
7.01 to 7.50 7 561,529.11 3.61
7.51 to 8.00 2 176,729.33 1.14
8.01 to 8.50 3 180,342.06 1.16
8.51 to 9.00 11 981,031.22 6.31
9.01 to 9.50 21 1,866,905.21 12.02
9.51 to 10.00 23 2,335,301.47 15.03
10.01 to 10.50 35 3,218,630.24 20.72
10.51 to 11.00 23 2,389,624.42 15.38
11.01 to 11.50 7 669,198.81 4.31
11.51 to 12.00 2 138,177.41 0.89
---- ------------ -----
TOTAL 164 $15,535,773.85 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
S-35
<PAGE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MARGINS
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Number of Balance as of the Balance as of the
Margins Mortgage Loans Statistic Calculation Date Statistic Calculation Date
------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
3.50% to 4.00% 1 $ 84,930.11 0.55%
4.01 to 4.50 1 118,913.03 0.77
5.00 to 5.50 5 546,984.12 3.52
5.51 to 6.00 27 2,479,002.42 15.96
6.01 to 6.50 30 2,951,409.85 19.00
6.51 to 7.00 39 4,058,971.60 26.13
7.01 to 7.50 40 3,564,848.16 22.95
7.51 to 8.00 13 1,051,174.76 6.77
8.01 to 8.50 6 503,718.28 3.24
8.51 to 9.00 2 175,821.52 1.13
--- ----------------- -------
TOTAL 164 $ 15,535,773.85 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
ADJUSTABLE RATE GROUP
NEXT INTEREST RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
Aggregate Principal % of Aggregate Principal
Next Interest Number of Balance as of the Balance as of the
Adjustment Date Mortgage Loans Statistic Calculation Date Statistic Calculation Date
--------------- -------------- -------------------------- ---------------------------
<S> <C> <C> <C>
04/01/97 4 $ 257,688.73 1.66%
05/01/97 5 406,236.70 2.61
06/01/97 2 259,031.47 1.67
07/01/97 10 1,241,346.87 7.99
08/01/97 13 1,430,791.20 9.21
09/01/97 9 573,653.03 3.69
10/01/98 2 210,758.28 1.36
11/01/98 20 1,785,548.79 11.49
12/01/98 10 1,141,727.35 7.35
01/01/99 32 2,959,284.43 19.05
02/01/99 57 5,269,707.00 33.92
--- ----------------- -------
TOTAL 164 $15,535,773.85 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-36
<PAGE>
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor on the
related Note (the "Mortgagor") according to the actuarial method (the
"Actuarial Loans").
Actuarial Loans provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day
of each month which is fixed at the time of origination. Scheduled monthly
payments made by the Mortgagors on the Actuarial Loans either earlier or
later than the scheduled due dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and
interest.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on a Class A
Certificate Owner's yield resulting from the timing of the settlement date
and those considerations discussed below under "Payment Delay Feature of
Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates and
Class A-4 Certificates"), the yield to maturity on a Class A Certificate will
be directly related to the rate of payment of principal of the Mortgage Loans
in the related Mortgage Loan Group, including for this purpose voluntary
payment in full of Mortgage Loans in the related Mortgage Loan Group prior to
stated maturity (a "Prepayment"), liquidations due to defaults, casualties
and condemnations, and repurchases of Mortgage Loans in the related Mortgage
Loan Group by the Sponsor, the Originators or the Servicer. The actual rate
of principal prepayments on pools of mortgage loans is influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the
rate of principal prepayments may differ among pools of mortgage loans at any
time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage
loans, the geographic locations of the properties securing the loans and the
extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general,
the earlier the payment of principal of the Mortgage Loans the greater the
effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of prepayments occurring at a rate higher (or lower) than
the rate anticipated by the investor during the period immediately following
the issuance of the Class A Certificates will not be offset by a subsequent
like reduction (or increase) in the rate of principal prepayments. Investors
must make their own decisions as to the appropriate prepayment assumptions to
be used in deciding whether to purchase any of the Class A Certificates. The
Sponsor makes no representations or warranties as to the rate of prepayment
or the factors to be considered in connection with such determination.
Projected Prepayments and Yields for Class A Certificates
If purchased at other than par, the yield to maturity on a Class A
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower
than the rate anticipated by an investor who purchases a Class A Certificate
at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the Mortgage
Loans in the related Mortgage Loan Group is faster than the rate anticipated
by an investor who purchases a Class A Certificate at a premium, the actual
yield to such investor will be lower than such investor's anticipated yield.
All of the Mortgage Loans in the Fixed Rate Group are fixed-rate mortgage
loans. The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on
fixed rate mortgage loans, such mortgage loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or above the
interest rate on such mortgage loans. Conversely, if prevailing interest
rates rise appreciably above the interest rates on fixed rate mortgage
S-37
<PAGE>
loans, such mortgage loans are likely to experience a lower prepayment rate
than if prevailing rates remain at or below the interest rates on such
mortgage loans. The prepayment experience on non-conventional home equity
loans may differ from that on conventional first mortgage loans, primarily
due to the lower credit quality of the typical borrower. Because the credit
histories of many home equity borrowers may preclude them from other
traditional sources of financing, such borrowers may be less likely to
refinance due to a decline in market interest rates.
All of the Mortgage Loans in the Adjustable Rate Group are adjustable
rate mortgage loans. As is the case with conventional fixed-rate mortgage
loans, adjustable rate mortgage loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable rate mortgage
loans could be subject to higher prepayment rates than if prevailing interest
rates remain constant because the availability of fixed-rate mortgage loans
at competitive interest rates may encourage mortgagors to refinance their
adjustable rate mortgage loans to "lock-in" a lower fixed interest rate.
However, no assurance can be given as to the level of prepayments that the
Mortgage Loans will experience. In addition, the Mortgage Loans in the
Adjustable Rate Group generally are assumable by qualifying subsequent
purchasers of the related Mortgaged Property.
The "Final Scheduled Payment Date" for each Class of Class A Certificates
is the Payment Date occurring in the following months: Class A-1
Certificates, February 2012; Class A-2 Certificates, August 2018; Class A-3
Certificates, March 2028; Class A-4 Certificates, March 2028; and Class A-5
Certificates, April 2027. Each such date is the date on which the
Certificate Principal Balance of the related Class of Class A Certificates
would be reduced to zero, assuming, among other things that (i) no
Prepayments are received on any of the Mortgage Loans in the related Mortgage
Loan Group, (ii) each distribution of principal and interest on each of the
Mortgage Loans in the related Mortgage Loan Group is timely received, (iii)
no excess interest will be used to make accelerated payments of principal,
and (iv) the Mortgage Loans in the related Mortgage Loan Group have the
applicable characteristics set forth herein. The original principal amounts
of the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates and Class A-5 Certificates as of the
Closing Date less all amounts previously distributed to the Owners of each
such Class of Class A Certificates (other than the Certificate Insurer) on
account of principal shall be the "Class A-1 Certificate Principal Balance,"
the "Class A-2 Certificate Principal Balance," the "Class A-3 Certificate
Principal Balance," the "Class A-4 Certificate Principal Balance," and the
"Class A-5 Certificate Principal Balance," respectively and collectively, the
"Class A Certificate Principal Balances." The Final Scheduled Payment Date
for the Class A-3 and Class A-4 Certificates is the Payment Date in the
calendar month thirteen months after the month in which the final payment on
the Mortgage Loan in the Fixed Rate Group with the latest maturity occurs.
In the event that, due to delinquencies on one or more Mortgage Loans in the
Fixed Rate Group, or the acquisition by the Trust of one or more Mortgaged
Properties securing any of such Mortgage Loans by foreclosure or otherwise,
principal collections on such Mortgage Loans are delayed, the date on which
the Class A Certificate Principal Balances of one or more Classes of Class A
Certificates related to the Fixed Rate Group are reduced to zero may be
delayed beyond the Final Scheduled Payment Date for such Class(es). In such
circumstances the timing of reductions in the Class A Certificate Principal
Balances of such Class A Certificates will depend on the timing of
foreclosures and collections with respect to such Mortgage Loans. The
Pooling and Servicing Agreement will provide that, at the Remittance Date
preceding the Final Scheduled Payment Date for the Class A-5 Certificates, if
any Mortgage Loan in the Adjustable Rate Group has not been paid in full, the
Certificate Insurer will, on such Remittance Date, make an Insured Payment
equal to the remaining aggregate outstanding Certificate Principal Balance of
the Class A-5 Certificates plus accrued interest thereon (but not including
any Available Funds Cap Carry-Forward Amount) if the Servicer has not
purchased all of the remaining Mortgage Loans in the Adjustable Rate Group in
accordance with the Pooling and Servicing Agreement.
The actual final Payment Date with respect to each Class of Class A
Certificates could occur significantly earlier than its Final Scheduled
Payment Date because (i) Net Monthly Excess Spread will be used to make
accelerated payments of principal (i.e., Subordination Increase Amounts) to
the Owners of each Class of Class A Certificates, which payments will have
the effect of shortening the weighted average lives of each Class of Class A
Certificates, (ii) Prepayments are likely to occur that shall be applied to
the payment of the related Class A Certificate Principal Balances and (iii)
the Owners of the Residual Certificates and the Servicer may cause a
termination of the Trust on or after the Clean-Up Call Date.
S-38
<PAGE>
The "weighted average life" refers to the average amount of time that
will elapse from the date of issuance of a security until each dollar of
principal of such security will be repaid to the investor. The weighted
average life of each Class of Class A Certificates will be influenced by the
rate at which principal payments on the Mortgage Loans in the related
Mortgage Loan Group are received, which may be in the form of scheduled
amortization, accelerated amortization or prepayments (for this purpose, the
term "prepayment" includes Prepayments and liquidations due to default) or as
a result of an early termination of the Trust.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
with respect to the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, and Class A-4 Certificates is the Home Equity Prepayment
("HEP") assumption. HEP assumes that a pool of loans prepays in the first
month at a constant prepayment rate that corresponds in CPR (as defined
below) to one-tenth the given HEP percentage and increases by an additional
one-tenth each month thereafter until the tenth month, where it remains at a
CPR equal to the given HEP percentage. The model used in this Prospectus
Supplement with respect to the Class A-5 Certificates is the CPR. The
Constant Prepayment Rate ("CPR") represents an assumed constant rate of
prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of home equity loans for the life of
such home equity loans. Neither model purports to be either an historical
description of the prepayment experience of any pool of home equity loans or
a prediction of the anticipated rate of prepayment of any home equity loans,
including the Mortgage Loans.
The tables below were prepared on the basis of the assumptions in the
following paragraph ("Structuring Assumptions"). There are discrepancies
between the characteristics of the actual Mortgage Loans in each Mortgage
Loan Group and the characteristics of the Mortgage Loans assumed in preparing
the tables. Any such discrepancy may have an effect upon the percentage of
the Class A Certificate Principal Balances outstanding and the weighted
average lives of the Class A Certificates set forth in the tables. In
addition, since the actual Mortgage Loans in each Mortgage Loan Group have
characteristics that differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Class A Certificates may
be made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of synthetic mortgage loans having the characteristics set
forth below, (ii) the Closing Date for the Certificates is March 27, 1997,
(iii) distributions on the Certificates are made on the 25th day of each
month regardless of the day on which the Payment Date actually occurs,
commencing in April 1997, in accordance with the priorities described herein,
(iv) the Mortgage Loans prepay at the specified percentages of HEP or CPR, as
applicable, as specified above, (v) prepayments include 30 day's interest
thereon, (vi) early termination of the Trust occurs on the Clean-Up Call
Date, (vii) the "Specified Subordinated Amount" (as defined under
"Description of the Certificates --Subordination of Class B Certificates") is
set initially as specified in the Pooling and Servicing Agreement, does not
increase above its base level (i.e., does not "step up" as a result of any
loss or delinquency trigger events occurring) and thereafter decreases in
accordance with the provisions of the Pooling and Servicing Agreement, (viii)
no Mortgage Loan in the related Mortgage Loan Group is ever delinquent, (ix)
the six-month LIBOR rate remains constant at 5.7891%, (x) the Mortgage Rate
for each Mortgage Loan in the Adjustable Rate Group is adjusted on its next
Mortgage Rate adjustment date (and on subsequent Mortgage Rate adjustment
dates, if necessary) to equal the sum of the applicable gross margin set
forth below plus the six-month LIBOR rate specified in clause (ix) above
(such sum being subject to the applicable assumed periodic adjustment cap set
forth below), (xi) for the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, the Mortgage Loans in the Fixed Rate Group prepay according to
the indicated percentages of HEP under the "Percentage of Original
Certificate Principal Balance Outstanding" table for each such Class set
forth below and the Mortgage Loans in the Adjustable Rate Group prepay at 25%
CPR, (xii) for the Class A-5 Certificates, the Mortgage Loans in the
Adjustable Rate Group prepay according to the indicated percentages of CPR
under the "Percentage of Original Certificate Principal Balance Outstanding"
table for such Class set forth below and the Mortgage Loans in the Fixed Rate
Group prepay at 24% HEP, and (xiii) the one-month LIBOR rate remains constant
at 5.4375%.
S-39
<PAGE>
FIXED RATE GROUP
<TABLE>
<CAPTION>
Mortgage Rate Original
Net ofthe OriginalTerm Remaining Amortization
Amortization Principal Mortgage Servicing to Maturity Term Maturity Ter
Methodology Balance Rate Fees (inMonths) (inMonths) (inMonths
<S> <C> <C> <C> <C> <C> <C>
Level $13,996,839.25 11.042% 10.511% 172 171 172
Level $7,685,210.86 11.169% 10.637% 240 239 240
Level $22,899,431.78 10.941% 10.440% 360 359 360
Balloon $25,418,869.27 11.504% 11.003% 180 179 360
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE RATE GROUP
Original
Term to
Maturity/ Remaining Periodic
Maximum Amortization Term Rate
Amortization Principal Months Mortgage Mortgage Term Maturity Adjustment
Methodology Balance To Reset Rate Margin Rates (in Months) (in Months) Cap
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Level $2,156,816.45 3 9.973% 6.939 16.973% 360 358 1.500%
Level $1,997,458.86 5 9.807% 6.852 16.428% 360 357 1.453%
Level $1,989,417.87 20 10.871% 6.439 17.871% 352 349 1.500%
Level $1,137,787.28 21 10.969% 6.945 17.969% 360 358 1.500%
Level $2,949,072.01 22 9.963% 6.822 16.974% 360 359 1.500%
Level $5,251,521.38 23 9.812% 6.600 16.812% 360 360 1.500%
</TABLE>
The following tables indicate, based on the Structuring Assumptions, the
percentages of the Original Certificate Principal Balance of each Class of
Class A Certificates that would be outstanding after each of the dates shown
at various percentages of HEP or CPR, as applicable, and the corresponding
weighted average life of the related Class of Class A Certificates. It is
not likely that (i) all of the Mortgage Loans in the related Mortgage Loan
Group will have the characteristics assumed and (ii) the Mortgage Loans in
the related Mortgage Loan Group will prepay at the specified percentages of
HEP or CPR, as applicable, or at any other constant percentage. Moreover,
the diverse remaining terms to maturity of the Mortgage Loans in the related
Mortgage Loan Group could produce slower or faster principal distributions
than indicated in the tables at the specified percentages of HEP or CPR, if
applicable, even if the weighted average remaining term to maturity of the
Mortgage Loans in the related Mortgage Loan Group is consistent with the
remaining terms to maturity of the Mortgage Loans specified in the
Structuring Assumptions.
S-40
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-1 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
Class A-1 Percentage of HEP
Payment Date 0% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
March, 1998 89 63 56 49 42 36
March, 1999 86 26 13 0 0 0
March, 2000 82 0 0 0 0 0
March, 2001 79 0 0 0 0 0
March, 2002 75 0 0 0 0 0
March, 2003 71 0 0 0 0 0
March, 2004 67 0 0 0 0 0
March, 2005 62 0 0 0 0 0
March, 2006 57 0 0 0 0 0
March, 2007 51 0 0 0 0 0
March, 2008 45 0 0 0 0 0
March, 2009 37 0 0 0 0 0
March, 2010 29 0 0 0 0 0
March, 2011 20 0 0 0 0 0
March, 2012 0 0 0 0 0 0
March, 2013 0 0 0 0 0 0
March, 2014 0 0 0 0 0 0
March, 2015 0 0 0 0 0 0
March, 2016 0 0 0 0 0 0
March, 2017 0 0 0 0 0 0
March, 2018 0 0 0 0 0 0
March, 2019 0 0 0 0 0 0
March, 2020 0 0 0 0 0 0
March, 2021 0 0 0 0 0 0
March, 2022 0 0 0 0 0 0
March, 2023 0 0 0 0 0 0
March, 2024 0 0 0 0 0 0
March, 2025 0 0 0 0 0 0
March, 2026 0 0 0 0 0 0
March, 2027 0 0 0 0 0 0
March, 2028 0 0 0 0 0 0
- - - - - -
Weighted Average
Life (Years) (1) 9.1 1.4 1.2 1.1 0.9 0.9
First Principal
Payment Date(1) 4/97 4/97 4/97 4/97 4/97 4/97
Last Principal
Payment Date(1) 2/12 2/00 8/99 3/99 12/98 10/98
(1) To Clean-Up Call Date.
S-41
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-2 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
Class A-2 Percentage of HEP
Payment Date 0% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
March, 1998 100 100 100 100 100 100
March, 1999 100 100 100 99 81 63
March, 2000 100 95 69 46 26 8
March, 2001 100 61 35 13 0 0
March, 2002 100 36 9 0 0 0
March, 2003 100 16 0 0 0 0
March, 2004 100 1 0 0 0 0
March, 2005 100 0 0 0 0 0
March, 2006 100 0 0 0 0 0
March, 2007 100 0 0 0 0 0
March, 2008 100 0 0 0 0 0
March, 2009 100 0 0 0 0 0
March, 2010 100 0 0 0 0 0
March, 2011 100 0 0 0 0 0
March, 2012 31 0 0 0 0 0
March, 2013 26 0 0 0 0 0
March, 2014 21 0 0 0 0 0
March, 2015 15 0 0 0 0 0
March, 2016 8 0 0 0 0 0
March, 2017 1 0 0 0 0 0
March, 2018 0 0 0 0 0 0
March, 2019 0 0 0 0 0 0
March, 2020 0 0 0 0 0 0
March, 2021 0 0 0 0 0 0
March, 2022 0 0 0 0 0 0
March, 2023 0 0 0 0 0 0
March, 2024 0 0 0 0 0 0
March, 2025 0 0 0 0 0 0
March, 2026 0 0 0 0 0 0
March, 2027 0 0 0 0 0 0
March, 2028 0 0 0 0 0 0
- - - - - -
Weighted Average
Life (Years)(1) 15.8 4.6 3.7 3.1 2.6 2.3
First Principal
Payment Date(1) 2/12 2/00 8/99 3/99 12/98 10/98
Last Principal
Payment Date(1) 5/17 4/04 9/02 9/01 1/01 6/00
(1) To Clean-Up Call Date.
S-42
<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-3 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
Class A-3 Percentage of HEP
Payment Date 0% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
March, 1998 100 100 100 100 100 100
March, 1999 100 100 100 100 100 100
March, 2000 100 100 100 100 100 100
March, 2001 100 100 100 100 90 66
March, 2002 100 100 100 82 57 37
March, 2003 100 100 87 60 38 22
March, 2004 100 100 68 44 26 0
March, 2005 100 85 55 34 0 0
March, 2006 100 71 44 0 0 0
March, 2007 100 58 0 0 0 0
March, 2008 100 48 0 0 0 0
March, 2009 100 0 0 0 0 0
March, 2010 100 0 0 0 0 0
March, 2011 100 0 0 0 0 0
March, 2012 100 0 0 0 0 0
March, 2013 100 0 0 0 0 0
March, 2014 100 0 0 0 0 0
March, 2015 100 0 0 0 0 0
March, 2016 100 0 0 0 0 0
March, 2017 100 0 0 0 0 0
March, 2018 95 0 0 0 0 0
March, 2019 88 0 0 0 0 0
March, 2020 81 0 0 0 0 0
March, 2021 73 0 0 0 0 0
March, 2022 64 0 0 0 0 0
March, 2023 53 0 0 0 0 0
March, 2024 41 0 0 0 0 0
March, 2025 0 0 0 0 0 0
March, 2026 0 0 0 0 0 0
March, 2027 0 0 0 0 0 0
March, 2028 0 0 0 0 0 0
- - - - - -
Weighted Average
Life (Years)(1) 25.6 10.0 8.1 6.6 5.6 4.8
First Principal
Payment Date(1) 5/17 4/04 9/02 9/01 1/01 6/00
Last Principal
Payment Date(1) 1/25 7/08 9/06 5/05 5/04 8/03
(1) To Clean-Up Call Date.
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<PAGE>
PERCENTAGE OF ORIGINAL CLASS A-4 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
Class A-4 Percentage of HEP
Payment Date 0% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
March, 1998 100 100 100 100 100 100
March, 1999 100 100 100 100 100 100
March, 2000 100 100 100 100 100 100
March, 2001 99 91 90 88 86 84
March, 2002 98 84 81 77 73 70
March, 2003 97 72 66 61 56 50
March, 2004 95 59 52 45 38 0
March, 2005 91 44 37 29 0 0
March, 2006 87 33 25 0 0 0
March, 2007 83 25 0 0 0 0
March, 2008 78 18 0 0 0 0
March, 2009 73 0 0 0 0 0
March, 2010 67 0 0 0 0 0
March, 2011 61 0 0 0 0 0
March, 2012 17 0 0 0 0 0
March, 2013 16 0 0 0 0 0
March, 2014 15 0 0 0 0 0
March, 2015 14 0 0 0 0 0
March, 2016 12 0 0 0 0 0
March, 2017 10 0 0 0 0 0
March, 2018 10 0 0 0 0 0
March, 2019 9 0 0 0 0 0
March, 2020 8 0 0 0 0 0
March, 2021 7 0 0 0 0 0
March, 2022 5 0 0 0 0 0
March, 2023 4 0 0 0 0 0
March, 2024 3 0 0 0 0 0
March, 2025 0 0 0 0 0 0
March, 2026 0 0 0 0 0 0
March, 2027 0 0 0 0 0 0
March, 2028 0 0 0 0 0 0
- - - - - -
Weighted Average
Life (Years)(1) 14.3 7.7 7.0 6.4 5.9 5.5
First Principal
Payment Date(1) 4/00 4/00 4/00 4/00 4/00 4/00
Last Principal
Payment Date(1) 1/25 7/08 9/06 5/05 5/04 8/03
(1) To Clean-Up Call Date.
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PERCENTAGE OF ORIGINAL CLASS A-5 CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
Class A-5 Percentage of CPR
Payment Date 0% 16% 20% 24% 28% 32%
- ------------ --- --- --- --- --- ---
Initial Balance 100 100 100 100 100 100
March, 1998 95 77 73 70 67 63
March, 1999 94 61 54 49 45 39
March, 2000 94 48 41 36 32 27
March, 2001 93 39 32 27 23 18
March, 2002 93 32 25 20 16 12
March, 2003 92 26 19 15 12 8
March, 2004 91 21 15 11 8 6
March, 2005 90 17 11 8 0 0
March, 2006 90 0 0 0 0 0
March, 2007 88 0 0 0 0 0
March, 2008 87 0 0 0 0 0
March, 2009 86 0 0 0 0 0
March, 2010 84 0 0 0 0 0
March, 2011 83 0 0 0 0 0
March, 2012 81 0 0 0 0 0
March, 2013 79 0 0 0 0 0
March, 2014 76 0 0 0 0 0
March, 2015 73 0 0 0 0 0
March, 2016 70 0 0 0 0 0
March, 2017 66 0 0 0 0 0
March, 2018 62 0 0 0 0 0
March, 2019 57 0 0 0 0 0
March, 2020 52 0 0 0 0 0
March, 2021 46 0 0 0 0 0
March, 2022 40 0 0 0 0 0
March, 2023 34 0 0 0 0 0
March, 2024 26 0 0 0 0 0
March, 2025 0 0 0 0 0 0
March, 2026 0 0 0 0 0 0
March, 2027 0 0 0 0 0 0
March, 2028 0 0 0 0 0 0
- - - - - -
Weighted Average
Life (Years)(1) 20.8 3.7 3.2 2.9 2.6 2.3
First Principal
Payment Date(1) 4/97 4/97 4/97 4/97 4/97 4/97
Last Principal
Payment Date(1) 1/25 12/05 7/05 5/05 3/05 1/05
(1) To Clean-Up Call Date.
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<PAGE>
The weighted average life of each Class of Class A Certificates has been
determined by (a) multiplying the amount of the reduction, if any, of the
Class A Certificate Principal Balance of such Class on each Payment Date by
the number of years from the date of issuance to such Payment Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the Class A Certificate Principal Balance of such Class
referred to in clause (a).
Payment Delay Feature of Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates and Class A-4 Certificates
The effective yield to the Owners of the Class A-1 Certificates, Class
A-2 Certificates, Class A-3 Certificates and Class A-4 Certificates will be
lower than the yield otherwise produced by the related Pass-Through Rate and
the purchase price of such Certificates because principal and interest
distributions will not be payable to such holders until at least the
twenty-fifth day of the month following the month of accrual (without any
additional distribution of interest or earnings thereon in respect of such
delay).
USE OF PROCEEDS
The Sponsor will sell the Mortgage Loans to the Trust concurrently with
the sale of the Class A Certificates and the net proceeds from the sale of
the Class A Certificates will be applied to the purchase of the Mortgage
Loans. Such net proceeds will (together with the Subordinate Certificates
retained by the Sponsor or its affiliates) represent the purchase price paid
by the Trust to the Sponsor for the sale of the Mortgage Loans to the Trust.
Such amount will be determined as a result of the pricing of the Class A
Certificates through the offering described in this Prospectus Supplement.
The net proceeds to be received from the sale of the Mortgage Loans will be
added to the Sponsor's general funds and will be available for general
corporate purposes, including the purchase of new mortgage loans.
THE SPONSOR, THE SERVICER AND THE SUB-SERVICER
The Sponsor, EquiVantage Acceptance Corp. is a wholly-owned subsidiary
of the Servicer. The Sub-Servicer, Transworld Mortgage Corporation, is an
affiliate of the Sponsor and the Servicer. See "The Sponsor" in the
Prospectus. Transworld Mortgage Corporation is an approved servicer for FHA,
VA, GNMA, FHLMC and FNMA as well as other major private investors.
Pursuant to the Pooling and Servicing Agreement, the Servicer may enter
into Sub-Servicing Agreements with qualified sub-servicers with respect to
the servicing of all or any portion of the Mortgage Loans and with affiliates
of the Servicer that are qualified to service mortgage loans and are
qualified sub-servicers. No Sub-Servicing Agreements discharge the Servicer
from its servicing obligations. See "Mortgage Loan Program --Sub-Servicing"
in the Prospectus. The Servicer will employ the Sub-Servicer to service the
Mortgage Loans. The Servicer anticipates terminating the sub-servicing
arrangement with the Sub-Servicer and assuming the direct servicing of the
Mortgage Loans by September 1997. The Servicer has taken steps to implement
this change. In order to effect a smooth transition, the Servicer will (i)
employ substantially the same personnel who are currently sub-servicing
mortgage loans as employees of the Sub-Servicer, (ii) utilize substantially
the same types of servicing software that is used by the Sub-Servicer and
(iii) implement substantially similar operational procedures as maintained by
the Sub-Servicer. As of February 28, 1997, the Sub-Servicer was servicing
8,154 Mortgage Loans in the Sponsor's Servicing Portfolio representing an
aggregate outstanding principal balance of approximately $481.3 million. In
addition to the Sponsor's Portfolio, the Sub-Servicer serviced as of February
28, 1997 approximately 64,529 mortgage loans with an aggregate principal
balance as of such date of approximately $2.4 billion; such loans were not
originated or acquired pursuant to the Sponsor's underwriting guidelines and
are being serviced for third parties, including FNMA, FHLMC, GNMA as well as
private investors, on a contract servicing basis.
The Sub-Servicer is a party to C.A. No. H-94-1825; Resolution Trust
Corporation (the "RTC") as Receiver of Commonwealth Federal Savings Association
et. al. (Plaintiffs) vs. Transworld Mortgage Corporation et. al.
(Defendants), in the United States District Court for the Southern District of
Texas, Houston Division (the "RTC Lawsuit"). The RTC Lawsuit relates to certain
services provided by the Sub-Servicer in connection with the acquisition of
assets by the Sub-Servicer from an RTC controlled entity. A judgment was
entered in the RTC Lawsuit in September 1995, which was generally in favor of
the RTC; however, the judgment has been stayed pending an appeal in the United
States Court of Appeals for the Fifth Circuit. Oral arguments were presented to
the Court of Appeals in March 1997
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<PAGE>
and a decision with respect to this matter is anticipated later this year.
The Sub-Servicer does not expect the outcome of the RTC Lawsuit to have a
material adverse effect on the Sub-Servicer's financial position, its
operations or its ability to perform its obligations with respect to the
Mortgage Loans.
The Trustee and the Certificate Insurer may remove the Servicer, and the
Servicer may resign, only in accordance with the terms of the Pooling and
Servicing Agreement. No removal or resignation shall become effective until
the Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Trustee and the Certificate Insurer, which consent
is required not to be unreasonably withheld; provided, however, that any
assignee must meet the eligibility requirements for a successor servicer set
forth in the Pooling and Servicing Agreement.
The Certificate Insurer (or with the consent of the Certificate Insurer,
the majority of Certificateholders) may, pursuant to the Pooling and
Servicing Agreement, remove the Servicer upon the occurrence of, without
limitation, any of the events described in clauses (i) through (xi) below and
may remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clause (ii), (iii), (iv) or
(vi) below:
(i) The Servicer shall (a) apply for or consent to the appointment of
a receiver, trustee, liquidator or custodian or similar entity with respect
to itself or its property, (b) admit in writing its inability to pay its
debts generally as they become due, (c) make a general assignment for the
benefit of creditors, (d) be adjudicated a bankrupt or insolvent, (e)
commence a voluntary case under the federal bankruptcy laws of the United
States of America or file a voluntary petition or answer seeking
reorganization, an arrangement with creditors or an order for relief or
seeking to take advantage of any insolvency law or file an answer admitting
the material allegations of a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding or (f) cause corporate action to be
taken by it for the purpose of effecting any of the foregoing; or
(ii) If without the application, approval or consent of the Servicer,
a proceeding shall be instituted in any court of competent jurisdiction,
under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, seeking in respect of the Servicer an order for relief or an
adjudication in bankruptcy, reorganization, dissolution, winding up,
liquidation, a composition or arrangement with creditors, a readjustment of
debts, the appointment of a trustee, receiver, conservator, liquidator or
custodian or similar entity with respect to the Servicer or of all or any
substantial part of its assets, or other like relief in respect thereof
under any bankruptcy or insolvency law, and, if such proceeding is being
contested by the Servicer in good faith, the same shall (a) result in the
entry of an order for relief or any such adjudication or appointment or (b)
continue undismissed or pending and unstayed for any period of thirty (30)
consecutive days; or
(iii) The Servicer shall fail to perform any one or more of its
obligations under the Pooling and Servicing Agreement (other than its
obligations referenced in clauses (vi) and (vii) below) and shall continue
in default thereof for a period of thirty (30) days after the earlier to
occur of (x) the date on which an individual authorized to act for the
Servicer in connection with the Pooling and Servicing Agreement (an
"Authorized Officer") knows or reasonably should know of such failure or
(y) receipt by the Servicer of a written notice from the Trustee, any
Owner, the Sponsor or the Certificate Insurer of said failure; or
(iv) The Servicer shall fail to cure any breach of any of its
representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely affects the interests of the
Owners or Certificate Insurer for a period of thirty (30) days after the
earlier of (x) the date on which an Authorized Officer knows or reasonably
should know of such breach or (y) receipt by the Servicer of a written
notice from the Trustee, any Owner, the Sponsor or the Certificate Insurer
of such breach; or
(v) If the Certificate Insurer pays out any money under the
Certificate Insurance Policy, or if the Certificate Insurer otherwise funds
any shortfall with its own money, because the amounts available to the
Trustee (other than from the Certificate Insurer) are insufficient to make
required distributions on the Class A Certificates; or
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<PAGE>
(vi) The failure by the Servicer to make any required Servicing
Advance for a period of 30 days following the earlier of (x) the date on
which an Authorized Officer knows or reasonably should know of such failure
or (y) receipt by the Servicer of a written notice from the Trustee, any
Owner, the Sponsor or the Certificate Insurer of such failure; or
(vii) The failure by the Servicer to make any required Delinquency
Advance, to pay any Compensating Interest or to pay over any Monthly
Remittance Amount or other amounts required to be remitted by the Servicer
pursuant to the Pooling and Servicing Agreement; or
(viii) The delinquency or loss experience of the Mortgage Loan Groups
exceeds certain levels specified in the Pooling and Servicing Agreement; or
(ix) The Certificate Insurer determines that the performance of the
Servicer (or any Sub-Servicer) is not in compliance with the Servicer's or
Sub-Servicer's general servicing standards for similar mortgage loans and
the Servicer's or Sub-Servicer's servicing and collection guidelines, which
non-compliance is reasonably likely to have a material adverse effect on
the servicing of the Mortgage Loans; or
(x) Certain events of merger or consolidation occur, which events fail
to meet certain conditions required by the Certificate Insurer; or
(xi) The Servicer fails to meet the net worth requirement specified in
the Pooling and Servicing Agreement.
The Certificate Insurer may allow a reasonable extended cure period upon
the Servicer's prompt and diligent pursuit of a cure of the default described
in clause (iii) above or of the breach described in clause (iv) above.
Upon removal or resignation of the Servicer, the Trustee will be required
to appoint a successor Servicer approved by the Certificate Insurer. If such
successor Servicer is unable or not qualified to so serve, the Trustee may
solicit bids for a successor Servicer and, pending the appointment of a
successor Servicer as a result of soliciting such bids, will be required to
serve as Servicer. If the Trustee is unable to obtain a qualifying bid and
is prevented by law from acting as Servicer, the Trustee will be required to
appoint, or petition a court of competent jurisdiction to appoint, an
eligible successor. Any successor is required to be a housing and home
finance institution, bank or mortgage servicing institution which is
acceptable to the Certificate Insurer and is experienced in servicing loans
of a type similar to the Mortgage Loans and has shareholders' equity of not
less than the amount specified in the Pooling and Servicing Agreement and
which is acceptable to the Certificate Insurer and shall assume all or any
part of the responsibilities, duties or liabilities of the Servicer. The
successor Servicer may, at its option, and shall, if so directed by the
Certificate Insurer, terminate the Sub-Servicer.
THE ORIGINATORS
The Servicer, EquiVantage Inc., originated the Mortgage Loans or acquired
the Mortgage Loans from Originators, including various retail mortgage
lenders. EquiVantage Inc. is a home equity lender based in Houston, Texas
that typically originates or purchases mortgage loans on a flow basis from
retail correspondents and brokers. EquiVantage Inc. correspondents and
brokers are subjected to an approval process, including but not limited to
verification that appropriate local, state and federal requirements for
licensing are obtained and maintained. They are required to execute a
correspondent agreement with EquiVantage Inc. prior to closing any loans,
which agreement contains certain representations and warranties related to
the origination of the loans. Appraisers and closing agents must meet
specified standards, including verification that certification and licensing
requirements are obtained and maintained. To maintain uniformity, loans
(other than loans acquired through bulk purchases) generally are closed
utilizing EquiVantage Inc. loan closing documents, and closings are
coordinated by its central loan closing department. All loans are
underwritten by EquiVantage Inc. prior to funding or purchase.
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will consist of the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates and the Subordinate Certificates. The Certificates
will be issued by EquiVantage Home Equity Loan Trust 1997-1, a trust to be
organized under the laws of the State of New York. The Subordinate
Certificates will be retained by the Sponsor or affiliates thereof, and are
not being offered hereby.
The Certificates will not represent an interest in or obligation of, nor
are the Mortgage Loans guaranteed by, the Sponsor or the Servicer, nor will
they be insured or guaranteed by the Federal Deposit Insurance Corporation
(the "FDIC") or any other governmental agency or instrumentality.
Persons in whose name a Certificate is registered in the Register
maintained by the Trustee are the "Owners" of the Certificates. For so long
as the Class A Certificates are in book-entry form with DTC, the only "Owner"
of the Class A Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No person acquiring a beneficial interest
in a Class A Certificate (a "Beneficial Owner") will be entitled to receive a
definitive certificate representing such person's interest in the Trust,
except in the event that Definitive Certificates are issued under the limited
circumstances set forth in the Pooling and Servicing Agreement. All
references herein to the Owners of Class A Certificates shall mean and
include the rights of Beneficial Owners, as such rights may be exercised
through DTC and its participating organizations, except as otherwise
specified in the Pooling and Servicing Agreement. See "Description of the
Securities --Form of Securities" in the Prospectus.
Each Class of Class A Certificates will evidence the right to receive on
each Payment Date the Class A Distribution Amount for such Class of Class A
Certificates, in each case until the related Class A Certificate Principal
Balance has been reduced to zero. The Subordinate Certificate Owners will be
entitled to receive distributions of residual Net Monthly Excess Spread.
Payment Dates and Distributions
On each Payment Date, the Trustee will be required to distribute to the
Owners of Record of the Class A Certificates as of the related Record Date
such Owner's Percentage Interest in the amounts required to be distributed to
the Owners of the Class A Certificates on such Payment Date. For so long as
any Class A Certificate is in book-entry form with DTC, Cede will be the only
"Owner" of such Class A Certificate. See " --Book Entry Registration of the
Class A Certificates" herein. The "Percentage Interest" of each Class A
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Class A Certificate as of
the Cut-off Date by the Class A Certificate Principal Balance as of the
Cut-off Date.
The Pooling and Servicing Agreement will require that the Trustee create
and maintain a Distribution Account. See "Description of the Securities
- --Payments on Mortgage Loans; Deposits to Distribution Account" in the
Prospectus.
On each Remittance Date the Servicer is required to withdraw from the
Principal and Interest Account and remit to the Trustee, for deposit in the
Distribution Account, the Monthly Remittance Amount. The "Monthly Remittance
Amount" is the sum of the amounts representing scheduled interest,
unscheduled collections of principal (e.g., prepayments) received during the
related Remittance Period and scheduled collections of principal due and
collected during the related Remittance Period, plus any related loan
purchase prices relating to the Sponsor's or any Originator's required
purchase of Mortgage Loans from the Trust, Substitution Amounts, Delinquency
Advances and Compensating Interest, less the sum of certain amounts the
Servicer is permitted to withdraw from the Principal and Interest Account, as
described in the Prospectus under "Description of the Securities
- --Withdrawals from the Principal and Interest Account."
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry certificates (the "Book-Entry
Certificates"). The Beneficial Owners may elect to hold their Class A
Certificates through DTC in the United States, or Cedel or Euroclear (in Europe)
if they are participants of such systems ("Participants"), or indirectly through
organizations that are Participants in such
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<PAGE>
systems. The Book-Entry Certificates will be issued in one or more
certificates per Class of Class A Certificates, which in the aggregate equal
the principal balance of such Class of Class A Certificates and will
initially be registered in the name of Cede, the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in Cedel's and Euroclear's names on the books
of their respective depositaries, which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Cedel and Morgan will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only "Owner"
of such Class A Certificates will be Cede, as nominee of DTC. Beneficial
Owners will not be Owners as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the Beneficial Owner's account for such purpose. In turn, the
Financial Intermediary's Ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on
the records of DTC, if the Beneficial Owner's Financial Intermediary is not a
DTC Participant and on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
Participants. While such Class A Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC
is required to make book-entry transfers among Participants on whose behalf
it acts with respect to such Class A Certificates and is required to receive
and transmit distributions of principal of, and interest on, such Class A
Certificates. Participants and indirect participants with whom Beneficial
Owners have accounts with respect to Class A Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess certificates, the Rules provide a
mechanism by which Beneficial Owners will receive distributions and will be
able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect
participants to transfer such Class A Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Class A Certificates,
which account is maintained with their respective Participants. Under the
Rules and in accordance with DTC's normal procedures, transfers of ownership
of such Class A Certificates will be executed through DTC and the accounts of
the respective Participants at DTC will be debited and credited. Similarly,
the Participants and indirect participants will make debits or credits, as
the case may be, on their records on behalf of the selling and purchasing
Beneficial Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Cedel or Euroclear cash account only as of
the business day following settlements in DTC. For information with respect
to tax documentation procedures relating to the Certificates, see "Certain
Federal Income Tax Consequences --Foreign Investors" and " --Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures --Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I to this Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
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<PAGE>
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Cedel Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC
Participant in the Book-Entry Certificates, whether held for its own account
or as a nominee for another person. In general, beneficial ownership of
Book-Entry Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes
in accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by
the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and
certain other organizations. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedel Participant, either
directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement
of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. Euroclear includes various
other services, including securities lending and borrowing and interfaces
with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear
is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York (the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear Securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not the Cooperative. The Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are
held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no
record of or relationship with persons holding through Euroclear
Participants.
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Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Class A Certificates held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a Beneficial Owner to pledge Book-Entry Certificates, to
persons or entities that do not participate in the Depository system, or
otherwise take actions in respect of such Book-Entry Certificates, may be
limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Certificates under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates are credited, to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates. Cedel or the Euroclear
Operator, as the case may be, will take any action permitted to be taken by
an Owner under the Pooling and Servicing Agreement on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Class A
Certificates which conflict with actions taken with respect to other Class A
Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as a
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, elects to terminate a book-entry system
through DTC or (c) DTC, at the direction of the Beneficial Owners
representing a majority of the outstanding Percentage Interests of the Class
A Certificates, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the
best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Owners under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among Participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
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Distributions
Distributions on the Certificates are required to be made on each Payment
Date, commencing on April 25, 1997, to the Owners on the related Record Date
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholders' Class of such
Certificates on such Payment Date. See "Description of the Securities
- --Distributions" in the Prospectus.
Subordination of Class B Certificates
The Class B Certificates are subordinated to the Class A Certificates.
Such subordination is intended to enhance the likelihood that the Owners of
the Class A Certificates will receive full and timely receipt of all amounts
due to them.
The Pooling and Servicing Agreement requires that the excess of the
aggregate Loan Balances of the Mortgage Loans in a Mortgage Loan Group as of
the last day of a particular Remittance Period over the Class A Certificate
Principal Balance of the Class A Certificates issued in respect of the
related Mortgage Loan Group (after application of the Class A Required
Distribution for such Class A Certificates on the then-related Payment Date)
be maintained at a certain amount (which amount may vary over time) over the
life of the transaction, which amount is specified by the Certificate
Insurer. The actual amount of this excess with respect to a Mortgage Loan
Group is the "Subordinated Amount" for such Mortgage Loan Group, and the
specified target amount of the excess at a point in time with respect to a
Mortgage Loan Group is the "Specified Subordinated Amount" for such Mortgage
Loan Group. The Certificate Insurer may permit the reduction of the
Specified Subordinated Amount for a Mortgage Loan Group without the consent
of, or the giving of notice to, the Owners of the Class A Certificates;
provided, that the Certificate Insurer is not then in default; and provided,
further, that such reduction would not change materially the weighted average
life of the related Class A Certificates or the current rating thereof.
The Pooling and Servicing Agreement generally provides that, subject to
the priorities described below under " -- Crosscollateralization Provisions,"
the Owners of the Class B Certificates will receive distributions of
principal on each Payment Date equal to the Subordination Reduction Amount.
"Subordination Reduction Amount" means, with respect to any Payment Date and
with respect to a Mortgage Loan Group, an amount equal to the lesser of (x)
the excess of (i) the actual Subordinated Amount for such Mortgage Loan Group
over (ii) the Specified Subordinated Amount for such Mortgage Loan Group, in
each case for such Payment Date and (y) the amount described in either clause
(a) or clause (b)(i) of the definition of "Class A Principal Distribution
Amount," whichever is applicable, for such Payment Date. Thus, the Owners of
the Class B Certificates will receive principal distributions to the extent
that there is a level of subordination greater than that required by the
Certificate Insurer for a Mortgage Loan Group, as will be the case when
amortization of the Class A Certificates Principal Balance is accelerated by
application of Net Monthly Excess Spread (described below), or when the
Specified Subordinated Amount for a Mortgage Loan Group decreases or "steps
down" in accordance with its terms. Consequently, unless there exists on any
particular Payment Date such an excess level of subordination, the Owners of
the related Class A Certificates will be entitled to receive 100% of the
principal of a Mortgage Loan Group to be distributed on such Payment Date.
To the extent a Subordination Reduction Amount is payable to the Owners of
the Class B Certificates, such payment will have the effect of decelerating
the amortization of the related Class A Certificates relative to the
amortization of the Mortgage Loans in such Mortgage Loan Group.
The Subordinate Certificates are also entitled to receive the Net Monthly
Excess Spread available on any Payment Date. "Net Monthly Excess Spread"
means, with respect to a Mortgage Loan Group, the difference between Total
Monthly Excess Spread for such Mortgage Loan Group and any portion thereof
used to cover an Available Funds Shortfall (as defined below) with respect to
such Mortgage Loan Group, or with respect to the other Mortgage Loan Group,
or to pay to the Certificate Insurer any Reimbursement Amounts (as defined
below). "Total Monthly Excess Spread" means, with respect to the related
Mortgage Loan Group, the difference between (x) the interest that is
collected on the Mortgage Loans in such Mortgage Loan Group during a
Remittance Period (net of the Servicing Fee, the Trustee Fee and the
Certificate Insurer's premium, in each case for the related Mortgage Loan
Group) plus any Delinquency Advances and Compensating Interest relating to
such Mortgage Loan Group and (y) the interest that accrues on the related
Class A Certificates during the related Accrual Period.
On each Payment Date, the Total Monthly Excess Spread will be used, to the
extent available, to fund any shortfalls in amounts due to the Owners of the
Class A Certificates and Reimbursement Amounts due to the Certificate
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Insurer on such Payment Date. See "Crosscollateralization Provisions" below.
In addition, after application to any such shortfalls and Reimbursement
Amounts, until the Subordinated Amount reaches the Specified Subordinated
Amount, or to the extent that the Specified Subordinated Amount for a
Mortgage Loan Group increases or "steps up" due to the effect of the triggers
set forth in the Pooling and Servicing Agreement or if, due to Realized
Losses, the Subordinated Amount for a Mortgage Loan Group has been reduced
below the Specified Subordinated Amount for such Mortgage Loan Group, the
Pooling and Servicing Agreement requires that Net Monthly Excess Spread be
used to make payments of principal to the Owners of the related Class A
Certificates for the purposes of accelerating the amortization of the related
Class A Certificates relative to the amortization of the Mortgage Loans in
such Mortgage Loan Group. Such accelerated payments of principal will be
applied to the "Subordination Increase Amount," which will equal, as of any
Payment Date and with respect to a Mortgage Loan Group, the excess of (x) the
Specified Subordinated Amount for such Mortgage Loan Group over (y) the
actual Subordinated Amount for such Mortgage Loan Group.
Crosscollateralization Provisions
On each Payment Date, an amount equal to the sum of (x) the Total Monthly
Excess Spread with respect to each Mortgage Loan Group plus (y) any
Subordination Reduction Amount with respect to such Mortgage Loan Group (such
amount being the "Total Monthly Excess Cashflow" with respect to such
Mortgage Loan Group and Payment Date) with respect to each Mortgage Loan
Group will be required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on such Payment Date
with respect to the related Mortgage Loan Group and equal to the
difference, if any, between (x) the Class A Required Distribution Amount
for the Class A Certificates issued in respect of the related Group for
such Payment Date and (y) the Available Funds with respect to such Mortgage
Loan Group for such Payment Date (the amount of such difference being equal
to an "Available Funds Shortfall" with respect to the related Mortgage Loan
Group);
(ii) any portion of the Total Monthly Excess Cashflow with respect to such
Mortgage Loan Group remaining after the application described in clause (i)
above shall be used to fund any Available Funds Shortfall with respect to
the other Mortgage Loan Group;
(iii) any portion of the Total Monthly Excess Cashflow with respect to such
Mortgage Loan Group remaining after the applications described in clauses
(i) and (ii) above shall be paid to the Certificate Insurer in respect of
amounts owed on account of any Insured Payments theretofore made with
respect to the related Mortgage Loan Group and other payments made by the
Certificate Insurer pursuant to the Certificate Insurance Policy and not
previously repaid (any such amount so owed to the Certificate Insurer and
not theretofore paid, together with accrued interest thereon, the
"Reimbursement Amount" with respect to the related Mortgage Loan Group);
and
(iv) any portion of the Total Monthly Excess Cashflow with respect to such
Mortgage Loan Group remaining after the applications described in clauses
(i), (ii) and (iii) above shall be paid to the Certificate Insurer in
respect of any Reimbursement Amount with respect to the other Mortgage Loan
Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect to a
Mortgage Loan Group on a Payment Date remaining after such applications is the
"Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for such
Payment Date; such amount is required to be applied in the following order of
priority on such Payment Date:
(i) such amount shall be used to fund the payment of any required
Subordination Increase Amount with respect to the related Mortgage Loan
Group as a portion of the distribution of the Class A Principal
Distribution Amount on such Payment Date; and
(ii) any portion of the Net Monthly Excess Cashflow remaining after the
application described in clause (i) immediately above shall be used to make
any required Subordination Increase Amount with respect to the other
Mortgage Loan Group.
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The Pooling and Servicing Agreement defines the "Class A Principal
Distribution Amount" with respect to each Payment Date for the Classes of Class
A Certificates issued in respect of a Mortgage Loan Group as being the sum,
without duplication, of:
(A) the portion of any Subordination Deficit due from any prior
period with respect to the related Mortgage Loan Group, together
with accrued interest thereon;
(B) the principal actually collected by the Servicer with respect to
the Mortgage Loans in the related Mortgage Loan Group during the
related Remittance Period;
(C) the Loan Balance of each Mortgage Loan in the related Mortgage
Loan Group that either was repurchased by the Sponsor or an
Originator or purchased by the Servicer or any Sub-Servicer on
the related Remittance Date, to the extent such Loan Balance is
actually received by the Trustee;
(D) any Substitution Amounts delivered by the Sponsor or an
Originator on the related Remittance Date in connection with a
substitution of a Mortgage Loan in the related Mortgage Loan
Group, to the extent such Substitution Amounts are actually
received by the Trustee;
(E) all Net Liquidation Proceeds actually collected by the Servicer
with respect to the Mortgage Loans in the related Mortgage Loan
Group during the related Remittance Period (to the extent such
Net Liquidation Proceeds relate to principal);
(F) the portion of any Subordination Deficit with respect to such
Mortgage Loan Group for such Payment Date;
(G) the proceeds received by the Trustee from any termination of the
related Mortgage Loan Group (to the extent such proceeds relate
to principal);
(H) the portion of any Subordination Increase Amount with respect to
such Mortgage Loan Group for such Payment Date to the extent of
any Net Monthly Excess Cashflow available for such purpose, after
giving effect to the crosscollateralization provisions described
above;
minus
(ii) the portion of any Subordination Reduction Amount to be applied
for such Payment Date.
The "Loan Balance" is the outstanding principal balance of each Mortgage
Loan on the Cut-off Date (but not including any amounts in respect of accrued
interest thereon, even if the terms of the Mortgage Loan permit such amounts to
be added to the principal balance thereof), less any principal collections or
recoveries relating to such Mortgage Loan included in previous related Monthly
Remittance Amounts. "Net Liquidation Proceeds" means, with respect to a
Liquidated Mortgage Loan, any amounts (including the proceeds of any insurance
policy other than the Certificate Insurance Policy) recovered by the Servicer or
any Sub-Servicer with respect to such Liquidated Mortgage Loan, whether through
Trustee's sale, foreclosure sale or otherwise, net of liquidation expenses
incurred by the Servicer, unreimbursed Delinquency Advances and certain other
related and unreimbursed Servicer advances. The "Remittance Date" is any date,
as set forth in the Pooling and Servicing Agreement, on which the Servicer is
required to remit moneys on deposit in the "Principal and Interest Account" to
the Trustee. A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage
Loan as to which the Servicer has determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered (exclusive of any possibility
of a deficiency judgment), the Loan Balance of which shall be zero following
such determination. The "Substitution Amount" is the difference between the
Loan Balance of a (x) replaced Mortgage Loan as of the close of business on the
first day of the calendar month in which such Mortgage Loan is replaced and (y)
the Loan Balance of the replacement Mortgage Loan, as of the date the Trust
acquired it, plus accrued and unpaid interest on such amount.
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Overcollateralization and the Certificate Insurance Policy
The Pooling and Servicing Agreement defines a "Subordination Deficit" with
respect to a Mortgage Loan Group and a Payment Date to be the amount, if any, by
which (x) the Class A Certificate Principal Balance of the Class A Certificates
issued in respect of the related Mortgage Loan Group as of such Payment Date,
and following the making of all distributions to be made on such Payment Date
(except for any payment to be made as to principal from proceeds of the
Certificate Insurance Policy), exceeds (y) the aggregate Loan Balances of the
Mortgage Loans in the related Mortgage Loan Group as of the close of business on
the last day of the preceding Remittance Period; provided, that with respect to
the Final Scheduled Payment Date for the Class A-5 Certificates, the
Subordination Deficit shall include, in addition to amounts calculated as
described above with respect to the Class A-5 Certificates and the Adjustable
Rate Group, any additional amounts representing the aggregate outstanding
Certificate Principal Balance of the Class A-5 Certificates plus accrued
interest thereon (but not including any Available Funds Cap Carry-Forward
Amount), if the Servicer has not purchased all of the outstanding Mortgage Loans
in the Adjustable Rate Group as of such Payment Date in accordance with the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement requires
the Trustee to make a claim for an Insured Payment under the Certificate
Insurance Policy not later than the third Business Day prior to any Payment Date
as to which the Trustee has determined that a Subordination Deficit will occur
for the purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Owners of the related Class A Certificates on such Payment
Date. Thus, neither the Certificate Insurance Policy nor the subordination
provisions described above guarantees current payment of the amounts of any
Realized Losses to the Owners of the related Class A Certificates. Investors in
the Class A Certificates should realize that, under extreme loss or delinquency
scenarios applicable to the related Mortgage Loan Group, they may temporarily
receive no distributions of principal.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination provisions and by
the Certificate Insurance Policy is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Certificate Insurance Policy to guarantee or insure that
any particular rate of prepayment is experienced by the Trust.
Class A Distributions and Insured Payments to the Owners of the Class A
Certificates
No later than the third Business Day prior to each Payment Date the Trustee
will be required to determine the amount for each Mortgage Loan Group to be on
deposit in the Distribution Account on such Payment Date (including amounts
available with respect to such Mortgage Loan Group as a result of the
crosscollateralization described above) (less the Servicing Fee for such
Mortgage Loan Group, such amount being the "Available Funds"), but net of the
Trustee Fee and the Certificate Insurer's premium (and without regard to the
amount of any Insured Payment), in each case for the related Mortgage Loan
Group. If the amount of the Insured Distribution Amount for a Mortgage Loan
Group for any Payment Date exceeds the related Available Funds for such Payment
Date, net of the Trustee Fee and the Certificate Insurer's premium, the Trustee
will be required to draw the amount of such insufficiency from the Certificate
Insurer under the Certificate Insurance Policy. The Trustee will be required to
deposit to the Distribution Account the amount of any Insured Payment made by
the Certificate Insurer. The Pooling and Servicing Agreement provides that
amounts which cannot be distributed to the Owners of the Certificates as a
result of proceedings under the United States Bankruptcy Code or similar
insolvency laws will not be considered in determining the amount of Available
Funds with respect to any Payment Date.
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Flow of Funds
On each Payment Date, the Trustee shall distribute for each Mortgage Loan
Group, to the extent of the Available Funds on deposit in the Distribution
Account for such Mortgage Loan Group and the amount of any Insured Payment for
such Mortgage Loan Group for such Payment Date as follows:
(a) to the Certificate Insurer, the premium amount then due;
(b) to the Trustee, an amount equal to the Trustee Fee then due to it;
(c) from the remaining Available Funds then on deposit for such Mortgage
Loan Group in the Distribution Account, to the Certificate Insurer the
lesser of (x) the excess of (i) the amount then on deposit in the
Distribution Account for such Mortgage Loan Group over (ii) the
Insured Distribution Amount for such Mortgage Loan Group for such
Payment Date and (y) the Reimbursement Amount for such Mortgage Loan
Group as of such Payment Date;
(d) from remaining Available Funds then on deposit in the Distribution
Account for the related Mortgage Loan Group, together with the amount
of any related Insured Payment, concurrently to the Owners of the
Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates and the Class A-5
Certificates, respectively, the Class A Interest Distribution Amount
for each such Class of Class A Certificates;
(e) from remaining Available Funds then on deposit in the Distribution
Account for the Fixed Rate Group, together with the amount of any
related Insured Payment, to the Owners of the Class A-4 Certificates,
in reduction of the Class A-4 Certificate Principal Balance, an amount
equal to the Class A-4 Lockout Distribution;
(f) from remaining Available Funds then on deposit in the Distribution
Account for the Fixed Rate Group, together with the amount of any
related Insured Payment, in respect of the Class A Principal
Distribution Amount and net of amounts distributed pursuant to clause
(e) above, to the Owners of the Class A-1 Certificates, in reduction
of the Class A-1 Certificate Principal Balance, until such Class A-1
Certificate Principal Balance is reduced to zero, then to the Owners
of the Class A-2 Certificates, in reduction of the Class A-2
Certificate Principal Balance, until such Class A-2 Certificate
Principal Balance is reduced to zero, then to the Owners of the Class
A-3 Certificates, in reduction of the Class A-3 Certificate Principal
Balance, until such Class A-3 Certificate Principal Balance is reduced
to zero, then to the Owners of the Class A-4 Certificates, in
reduction of the Class A-4 Certificate Principal Balance, until such
Class A-4 Certificate Principal Balance is reduced to zero;
(g) from remaining amounts then on deposit in the Distribution Account for
the Adjustable Rate Group, together with the amount of any related
Insured Payment, in respect of the Class A Principal Distribution
Amount, to the Owners of the Class A-5 Certificates, in reduction of
the Class A-5 Certificate Principal Balance, until such Class A-5
Certificate Principal Balance is reduced to zero;
(h) from remaining amounts then on deposit in the Distribution Account for
the Adjustable Rate Group, to the Owners of the Class A-5
Certificates, an amount equal to the Available Funds Cap Carry-Forward
Amount for such Distribution Date;
(i) from remaining amounts then on deposit in the Distribution Account, to
the Servicer and/or the Trustee, reimbursement for certain permitted
reimbursable amounts; and
(j) following the making by the Trustee of all allocations, transfers and
disbursements described above, from amounts then on deposit in the
Distribution Account, the Trustee shall distribute to the Subordinate
Certificate Owners, the amount remaining on such Payment Date, if any.
Notwithstanding the foregoing, on any Payment Date on or after which a
Certificate Insurer Default has occurred, any amounts of principal (including
any Class A-4 Lockout Distribution) that would otherwise be distributed
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sequentially to the Owners of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificate and Class A-4 Certificates shall instead be
distributed concurrently to the Owners of such Certificates, pro rata, until the
Certificate Principal Balance of each such Class has been reduced to zero. A
"Certificate Insurer Default" means the occurrence and continuation of a failure
by the Certificate Insurer to make any Insured Payment under the terms of the
Certificate Insurance Policy or certain events of insolvency or bankruptcy with
respect to the Certificate Insurer.
The "Class A-4 Lockout Distribution" on each Payment Date means an amount
equal to the product of the applicable Class A-4 Lockout Percentage and the
Class A-4 Pro Rata Distribution Amount for such Payment Date.
The "Class A-4 Lockout Percentage" for each Payment Date is as follows:
Payment Date Class A-4
Occurring In Lockout Percentage
---------------- -------------------
April 1997 - March 2000 0%
April 2000 - March 2002 45%
April 2002 - March 2003 80%
April 2003 - March 2004 100%
April 2004 and thereafter 140%
The "Class A-4 Pro Rata Distribution Amount" for any Payment Date means an
amount equal to the product of (i) a fraction, the numerator of which is the
Class A-4 Certificate Principal Balance and the denominator of which is the
aggregate of the certificate principal balances of the Class A Certificates
issued in respect of the Fixed Rate Group, in each case immediately prior to
such Payment Date, and (ii) the portion of the Class A Principal Distribution
Amount collected in respect of such Mortgage Loan Group.
"LIBOR" shall mean the London interbank offered rate for one-month United
States dollar deposits. LIBOR for each Accrual Period shall be determined on
the second business day preceding the first day of any Accrual Period (each, a
"LIBOR Determination Date"), on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Reuters Screen LIBOR Page, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. As used in this paragraph, "business day" means a day on
which banks are open for dealing in foreign currency and exchange in London and
New York City; "Reuters Screen LIBOR Page" means the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar deposits
in the international Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters Screen LIBOR
Page on the LIBOR Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by or
under common control with the Sponsor or any Originator.
On each LIBOR Determination Date, LIBOR will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR shall be the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
such offered quotations.
(b) If on such LIBOR Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR shall be the greater of (x)
LIBOR as determined on the previous LIBOR Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per
annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
the one-month U.S. dollar lending rates that New York City banks selected
by the Trustee are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Trustee are quoting on such LIBOR Determination Date
to leading European banks.
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The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-5 Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding. Each such rate of interest may be
obtained by telephoning the Trustee at (410) 884-2000.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Description of the Securities -- Reports To The
Securityholders" in the Prospectus for information regarding reports to the
Owners.
THE CERTIFICATE INSURANCE POLICY
On the Closing Date, the Certificate Insurance Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Insurance Agreement, dated
as of the Cut-off Date, among the Sponsor, the Servicer and the Certificate
Insurer.
The Certificate Insurance Policy unconditionally guarantees the timely
payment of interest due and the ultimate payment of principal on the Class A
Certificates (but not any amounts in respect to Available Funds Cap
Carry-Forward Amounts). The Certificate Insurer is required to make Insured
Payments to the Trustee as paying agent on the later of the Payment Date or on
the business day next following the day on which the Certificate Insurer shall
have received telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice by registered or certified mail, from the Trustee
that an Insured Payment is due.
The Pooling and Servicing Agreement will provide that the "Available Funds"
does not include Insured Payments and does not include any amounts that cannot
be distributed to the Owners of any Class A Certificates by the Trustee as a
result of final, non-appealable proceedings under the United States Bankruptcy
Code.
In addition, the Certificate Insurance Policy will provide for payment of
the amount (a "Preference Amount") of any distributions in respect of principal
or interest previously paid to a Class A Certificateholder that are subsequently
recovered from such Certificateholder prior to the expiration date of the
Certificate Insurance Policy pursuant to a final, nonappealable order (a "Final
Order") of a court of competent jurisdiction under the United States Bankruptcy
Code. Any such payments would be made under the Certificate Insurance Policy on
the second business day following receipt by the Certificate Insurer of a
certified copy of such Final Order, assignment to the Certificate Insurer of
such Certificateholder's rights and claims with respect to such Preference
Amount and appointment of the Certificate Insurer as such Certificateholder's
agent in respect of such Preference Amount. No such Certificateholder shall be
entitled to reimbursement for any payment avoided as a preference as to which
the Certificate Insurer previously has made a payment under the Certificate
Insurance Policy, nor is the Certificate Insurer obligated to make any payment
in respect of any Preference Amount which represents a payment of the principal
amount of the Class A Certificates prior to the time the Certificate Insurer
otherwise would have been required to make a payment in respect of such
principal.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Certificate Insurer, or the majority of Owners of the Class A Certificates with
the consent of the Certificate Insurer, may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee with respect
to the Certificates or exercising any trust or power conferred on the Trustee
with respect to the Certificates or the Trust Estate.
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee. For purposes of the Certificate Insurance
Policy, the term "Certificateholder" does not include the Trust, the Servicer or
the Sponsor. The Certificate Insurance Policy does not guarantee any specific
rate of prepayments of principal of the Mortgage Loans. The Certificate
Insurance Policy does not guarantee payment of any Available Funds Cap
Carry-Forward Amount (or any interest thereon). The Certificate Insurance
Policy is non-cancelable. The Certificate Insurance Policy expires and
terminates without any action on the part of the Certificate
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Insurer or any other person on the date that is one year and one day
following the date on which the Class A Certificates have been paid in full.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Pursuant to the Pooling and Servicing Agreement, the Certificate Insurer is
subrogated to the rights of the Owners of the Class A Certificates to the extent
of any such payment under the Certificate Insurance Policy.
THE CERTIFICATE INSURER
General
Financial Guaranty Insurance Company, the "Certificate Insurer," a New York
stock insurance corporation, is a monoline financial guaranty insurance company
which, since January 1984, has been a leading insurer of bonds issued by
municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations and
pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also authorized
to carry on general insurance business in the United Kingdom and to write credit
and guaranty insurance in France.
The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Certificate Insurer.
The Certificate Insurer and its holding company, FGIC Corporation, are
subject to regulation by the State of New York Insurance Department and by each
jurisdiction in which the Certificate Insurer is licensed to write insurance.
These regulations vary from jurisdiction to jurisdiction, but generally require
insurance holding companies and their insurance subsidiaries to register and
file certain reports, including information concerning their capital structure,
ownership and financial condition and require prior approval by the insurance
department of their state of domicile of changes in control, of dividends and
other intercorporate transfers of assets and of transactions between insurance
companies, their parents and affiliates. The Certificate Insurer is required to
file quarterly and annual statutory financial statements and is subject to
statutory restrictions concerning the types and quality of investments, the use
of policy forms, premium rates and the size of risk that it may insure, subject
to reinsurance. Additionally, the Certificate Insurer is subject to triennial
audits by the State of New York Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer
only insures securities that it considers to be of investment grade quality.
With respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains its own underwriting standards
that are based on those aspects of credit quality that the Certificate Insurer
deems important for the category and that take into account criteria established
for the category typically used by rating agencies. Credit criteria for
evaluating securities include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flow, including the historical and expected performance of
assets pledged for payment of securities under varying economic scenarios,
underlying levels of protection such as insurance or overcollateralization, and,
particularly in the case of long-term municipal securities, the importance of
the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities such as the Class A Certificates. If the issuer of a security
insured by the Certificate Insurer defaults on its
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obligations to pay such debt service or, in the case of a pass-through
security, available funds are insufficient to pay the insured amounts, the
Certificate Insurer will make scheduled insured payments, without regard to
any acceleration of the securities which may have occurred, and will be
subrogated to the rights of security holders to the extent of its payments.
The claims paying ability of the Certificate Insurer is rated "Aaa," "AAA"
and "AAA" by Moody's, S&P and Fitch Investors Service, Inc. ("Fitch"),
respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semi-annual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
As of September 30, 1996, December 31, 1995 and December 31, 1994 the
Certificate Insurer had written directly or assumed through reinsurance,
guaranties of approximately $197.8 billion, $180.0 billion and $160.2 billion
par value of securities, respectively (of which approximately 86 percent, 88
percent and 89 percent constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.01 billion, $1.95 billion and
$1.78 billion, respectively. As of September 30, 1996, the Certificate Insurer
had reinsured approximately 18 percent of the risks it had written, 34 percent
through quota share reinsurance and 66 percent through facultative arrangements.
Capitalization
The following table sets forth capitalization of the Certificate Insurer as
of December 31, 1994, December 31, 1995 and September 30, 1996, respectively, on
the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since
September 30, 1996.
(Unaudited)
December 31, 1994 December 31, 1995 September 30, 1996
(in millions) (in millions) (in millions)
----------------- ----------------- ------------------
Unearned Premiums $757 $728 $685
Other Liabilities 261 304 332
Stockholder's Equity
Common Stock 15 15 15
Additional Paid-in
Capital 334 334 334
Unrealized Gains
(Losses) (42) 64 12
Foreign Currency (1) (2) (2)
Translation Adjustment
Retained Earnings 974 1,137 1,273
Total Stockholder's
Equity 1,280 1,548 1,632
Total Liabilities
and Stockholder's
Equity $2,298 $2,580 $2,649
For further financial information concerning the Certificate Insurer, see
the audited and unaudited financial statements of the Certificate Insurer
included as Appendix A and Appendix B, respectively, of this Prospectus
Supplement.
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Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth under the
headings "The Certificate Insurance Policy" and "The Certificate Insurer" and in
Appendix A and Appendix B of this Prospectus Supplement.
An indemnification agreement between the Certificate Insurer and Prudential
Securities Incorporated and an insurance agreement among the Certificate
Insurer, the Sponsor and EquiVantage Inc. each provide that the parties to such
agreements will indemnify each other for certain liabilities under the 1933 Act.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement and the Prospectus, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant to
the Pooling and Servicing Agreement. On such date, the Sponsor will sell
without recourse the Mortgage Loans to the Trust and the Trust will issue the
Class A Certificates to the Owners thereof.
The property of the Trust shall include all money, instruments and other
property to the extent such money, instruments and other property are subject or
intended to be held in trust for the benefit of the Owners, and all proceeds
thereof, including, without limitation, (i) the Mortgage Loans, (ii) such
amounts, including eligible investments as specified in the Pooling and
Servicing Agreement, as from time to time may be held by the Trustee in the
Distribution Account and by the Servicer in the Principal and Interest Account
(except as otherwise provided in the Pooling and Servicing Agreement), each to
be created pursuant to the Pooling and Servicing Agreement, (iii) any Mortgaged
Property, the ownership of which has been effected on behalf of the Trust as a
result of foreclosure or acceptance by the Servicer of a deed in lieu of
foreclosure and that has not been withdrawn from the Trust, (iv) any insurance
policies relating to the Mortgage Loans and any rights of the Sponsor under any
related insurance policies, (v) Net Liquidation Proceeds with respect to any
Liquidated Loan, (vi) rights under the Certificate Insurance Policy and (vii)
the Sponsor's rights under the Master Transfer Agreements as described below
(collectively, the "Trust Estate").
Sale of Mortgage Loans
EquiVantage will sell the Mortgage Loans to the Sponsor on or prior to the
Closing Date pursuant to one or more Master Mortgage Loan Transfer Agreements,
together with the related Conveyance Agreement, between EquiVantage and the
Sponsor (collectively, the "Master Transfer Agreements"). In the Master
Transfer Agreements EquiVantage will make certain representations and
warranties. The Sponsor will assign its rights to enforce such representations
and warranties to the Trustee as part of the Trust Estate.
Pursuant to the Pooling and Servicing Agreement, on the Closing Date the
Sponsor will sell without recourse to the Trustee in trust all right, title and
interest of the Sponsor in each Mortgage Loan listed on the schedule delivered
to the Trustee on the Closing Date (the "Schedule of Mortgage Loans") and all
its right, title and interest in all principal collected and all interest due on
each such Mortgage Loan on or after the Cut-off Date. The Sponsor will reserve
and retain all its right, title and interest in principal collected (including
Prepayments) and interest due on each Mortgage Loan prior to the Cut-off Date.
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In connection with the sale of the Mortgage Loans on the Closing Date, the
Sponsor will be required to deliver to the Trustee, as document custodian, a
file (a "Mortgage Loan File") consisting of (i) the original Notes, endorsed by
the Originator thereof to the order of the Trustee, (ii) originals or certified
copies of all intervening assignments, if any, showing a complete chain of
assignment from origination to the Originator, including warehousing
assignments, with evidence of recording (or transmission for recordation)
thereon, (iii) originals of all assumption and modification agreements if any,
(iv) any of: (a) the original Mortgage, with evidence of recording thereon, (b)
a true and accurate copy of the Mortgage where the original Mortgage has been
transmitted for recording, until such time as the original Mortgage is returned
by the public recording office or (c) a copy of the Mortgage certified by the
public recording office in those instances where the original recorded Mortgage
has been lost, (v) the original Mortgage Insurance Policy, title commitment,
binder or attorney's opinion of title and abstract of title, and (vi) an
assignment in blank, in recordable form, of each Mortgage for which an
assignment is not recorded, executed by the record holder of such Mortgage. The
Pooling and Servicing Agreement also provides that the Certificate Insurer will
require assignments of mortgages prepared and recorded in the name of the
Trustee (unless the Trustee and the Certificate Insurer receive an acceptable
opinion of counsel, or other documentation acceptable to the Trustee or the
Certificate Insurer, concluding that such recordation is not necessary to
protect the Trustee's interests in the related Mortgage Loans), and that
evidence of the recording thereof be included in the related Mortgage Loan File
upon receipt thereof.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policy
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate, or (ii)
any time when a Qualified Liquidation of the Trust Estate is effected.
Optional Termination
By the Residual Certificate Owners and the Servicer. At their option, the
Residual Certificate Owners and the Servicer acting directly or through one or
more affiliates each have the right and may determine to purchase from the Trust
all of the Mortgage Loans and other property then held by the Trust, and thereby
effect early retirement of the Certificates, on and after the Clean-Up Call
Date. The right of the Residual Certificate Owners so to exercise such optional
purchase right is superior to such right of the Servicer. The Servicer may
exercise its right if the Residual Certificate Owners decline to do so. In
addition, the Pooling and Servicing Agreement provides that the Servicer has the
option to purchase from the Trust any Mortgage Loan that is in default.
Upon Loss of REMIC Status. Following a final determination by the Internal
Revenue Service, or by a court of competent jurisdiction, in each case from
which no appeal is taken within the permitted time for such appeal, or if any
appeal is taken, following a final determination of such appeal from which no
further appeal can be taken to the effect that the Trust does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code (the "Final
Determination"), at any time on or after the date which is 30 calendar days
following such Final Determination, (i) the Owners of a majority in Percentage
Interest represented by the Class A Certificates then outstanding may direct the
Trustee to adopt a plan of complete liquidation with respect to the Trust and
(ii) the Certificate Insurer may notify the Trustee of the Certificate Insurer's
determination to purchase from the Trust all Mortgage Loans and other property
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any Mortgage Loan then remaining in the Trust, and thereby effect the early
retirement of the Certificates. Upon receipt of such notice or direction, the
Trustee will be required to notify the Residual Certificate Owners of the
determination of the Certificate Insurer or the Owners of the Class A
Certificates to liquidate (the "Termination Notice"). The Owners of a majority
of the Percentage Interest represented by the Residual Certificates then
outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "Purchase Option Period"), at their option, purchase from the Trust
all Mortgage Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage
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Loan then remaining in the Trust as of the date of such purchase plus one
month's interest on such amount at the weighted average of the Class A
Pass-Through Rates.
If, during the Purchase Option Period, the Residual Certificate Owners have
not exercised the option described above, then upon the expiration of the
Purchase Option Period the Certificate Insurer will be obligated so to purchase
the Trust Estate within 60 days after the expiration of the Purchase Option
Period or the Trustee will sell the Mortgage Loans and distribute the proceeds
of the liquidation thereof.
Following a Final Determination, the Owners of a majority of the Percentage
Interest represented by the Residual Certificates then outstanding may, at their
option (and upon delivery to the Owners of the Class A Certificates of an
opinion of counsel experienced in U.S. Federal income tax matters selected by
the Residual Certificate Owners, which opinion will be required to be reasonably
satisfactory in form and substance to a majority of the Percentage Interests
represented by the Class A Certificates then outstanding, to the effect that the
effect of the Final Determination is to substantially increase the probability
that the gross income of the Trust will be subject to federal taxation),
purchase from the Trust all Mortgage Loans and all property theretofore acquired
by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust Estate at a purchase price equal to
the Class A Principal Balances as of the date of such purchase plus interest
accrued on the Class A Certificates since the prior Payment Date at the weighted
average of the Class A Pass-Through Rates. The Pooling and Servicing Agreement
provides that the foregoing opinion shall be deemed satisfactory unless a
majority of the Percentage Interest of the Class A Certificates give the
Residual Certificate Owners notice that such opinion is not satisfactory within
thirty days after receipt of such opinion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC Elections
The Trustee will cause one or more REMIC elections to be made with respect
to the Trust for federal income tax purposes. Qualification as a REMIC requires
ongoing compliance with certain conditions. Andrews & Kurth L.L.P., tax
counsel, will advise that, in its opinion, for federal income tax purposes,
assuming (i) the REMIC elections are made and (ii) compliance with the Pooling
and Servicing Agreement, each Class of Class A Certificates will be treated as a
"regular interest" in a REMIC. For federal income tax purposes, regular
interests in a REMIC are treated as debt instruments issued by the REMIC on the
date on which those interests are created, and not as ownership interests in the
REMIC or its assets. Owners of Class A Certificates that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Class A Certificates under an accrual method. The Class A
Certificates may be issued with "original issue discount" for federal income tax
purposes. It is possible that the Internal Revenue Service could treat a
portion of the additional interest that would become payable on the Class A-3
Certificates, Class A-4 Certificates and Class A-5 Certificates after the
Step-Up Payment Date as "original issue discount." The prepayment assumption to
be used in determining whether the Class A Certificates are issued with original
issue discount and the rate of accrual of original issue discount is 24% HEP
with respect to the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates and Class A-4 Certificates and 25% CPR with respect to the Class
A-5 Certificates, as described under "Prepayment and Yield Considerations"
herein. No representation is made that any of the Mortgage Loans will prepay at
this rate or any other rate. See "Certain Federal Income Tax Consequences
- --Discount and Premium --Original Issue Discount" in the Prospectus.
Class A-5 Certificates
The Class A-5 Certificates, except to the extent of any Available Funds Cap
Carry-Forward Amounts, will be treated as regular interests in a REMIC under
section 860G of the Code (the "Class A-5 Regular Interests").
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Accordingly, the portion representing the Class A-5 Regular Interests will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of section 856(c)(5) of the
Code, in each case to the extent described in the Prospectus. Interest on
such portion of the Class A-5 Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of
section 856(c)(3)(B) of the Code to the same extent that such portion of the
Class A-5 Certificates is treated as real estate assets. See "Certain
Federal Income Tax Consequences " in the Prospectus.
Each holder of a Class A-5 Certificate is deemed to own an undivided
beneficial ownership interest in two assets (i) the Class A-5 Regular Interests,
and (ii) an interest rate cap contract (a "Cap Agreement"). The Cap Agreement
with respect to the Class A-5 Certificates is not included in any REMIC related
to the Series 1997-1 REMIC. The treatment of amounts received by a Class A-5
Certificateholder under such Certificateholder's right to receive Available
Funds Cap Carry-Forward Amounts will depend on the portion of such
Certificateholder's purchase price allocable thereto. Under the REMIC
regulations, each Class A-5 Certificateholder must allocate its purchase price
for the Class A-5 Certificates between its undivided interest in the Class A-5
Regular Interests and its undivided interest in the Cap Agreement in accordance
with the relative fair market values of each property right. Payments made to
the Class A-5 Certificates under the Cap Agreement will be included in income
based on the regulations relating to notional principal contracts (the "Notional
Principal Contract Regulations"). The original issue discount regulations (as
described in the Prospectus), which technically do not apply to REMIC regular
interests, provide that the issuer's allocations of the issue price are binding
on all holders unless the holder explicitly discloses on its tax return that its
allocation is different from the issuer's allocation. Holders of the Class A-5
Certificates may obtain information as to the value assigned to the Cap
Agreement from the Trustee. Under the REMIC regulations, the Trustee is
required to account for the Class A-5 Regular Interests and the Cap Agreement as
discrete property rights. Ownership of the Cap Agreement will entitle the owner
to amortize the separate price paid for the related Cap Agreement under the
Notional Principal Contract Regulations. The Internal Revenue Service issued
regulations applicable to debt instruments acquired after August 13, 1996 that
provide for the integration of a qualifying debt instrument with a hedge if the
combined cash flows of the components are substantially equivalent to the cash
flows on a variable rate debt instrument. These regulations expressly exclude
REMIC regular instruments from their application.
ERISA CONSIDERATIONS
The Employment Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh plans,
and any entities whose underlying assets include plan assets by reason of a
plan's investment in such entities (each a "Plan") and (b) persons who have
certain specified relationships to such Plans ("Parties-in-Interest" under ERISA
and "Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account (e.g.,
through the purchase of an annuity contract). ERISA also imposes certain duties
on persons who are fiduciaries of Plans subject to ERISA and prohibits certain
transactions between a Plan and Parties-in-Interest or Disqualified Persons with
respect to such Plans. See "ERISA Considerations" in the Prospectus.
The DOL has issued to each of Prudential Securities Incorporated and
Salomon Brothers Inc an individual prohibited transaction exemption, Prohibited
Transaction Exemption 90-32 and Prohibited Transaction Exemption 89-89,
respectively (together, the "Exemptions"), which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, the initial purchase,
the servicing, management, operation and holding and the subsequent resale by
Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemptions. The loans covered by the Exemptions include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
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(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from S&P, Moody's, Duff & Phelps Credit Rating Co.
("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the Underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the Originator and the Sponsor
pursuant to the assignment of the loans to the Trust Estate represents not
more than the fair market value of such loans; the sum of all payments made
to and retained by any Servicer represents not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
1933 Act.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to the Plan's acquisition of certificates.
Moreover, the Exemptions provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to Plans sponsored by the Sponsor, the Certificate
Insurer, the Underwriters, the Trustee, the Servicer, any other servicer, any
obligor with respect to Mortgage Loans included in the Trust Estate constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust Estate, or any affiliate of such parties (the "Restricted
Group").
As of the date hereof, there is no single Mortgage Loan included in the
Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemptions, and the potential consequences in their specific circumstances prior
to making an investment in the Class A Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the Class A
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's
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investment portfolio.
RATINGS
It is a condition of the original issuance of the Class A Certificates that
each Class of Class A Certificates receive ratings of "AAA" by S&P and "Aaa" by
Moody's. The ratings assigned to the Class A Certificates will be based on the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from Moody's Investors Service,
Inc., 99 Church Street, New York, New York 10007 and Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc., 25 Broadway, New York, New
York 10004. Such ratings will be the views only of such rating agencies. There
is no assurance that any such ratings will continue for any period of time or
that such ratings will not be revised or withdrawn. Any such revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Class A Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates and Class A-5 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA. Institutions subject to the
jurisdiction of the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration or state banking or insurance authorities should review
applicable rules, supervisory policies and guidelines of these agencies before
purchasing any of the Class A Certificates, since the Class A Certificates may
be deemed to be unsuitable investments under one or more of these rules,
policies and guidelines and certain restrictions may apply to such investments.
It should also be noted that certain states have enacted legislation limiting to
varying extents the ability of certain entities (in particular, insurance
companies) to invest in mortgage related securities. Investors should consult
with their own legal advisors in determining whether and to what extent the
Class A Certificates constitute legal investments for such investors. See
"Legal Investment Matters" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Class A Certificates, the Sponsor has agreed to cause the Trust
to sell to each of the Underwriters named below, and each of the Underwriters
has severally agreed to purchase, the percentage interest of the Class A
Certificates set forth opposite its name below:
Percentage Interest of
Underwriter Class A Certificates
----------- ------------------------
Prudential Securities Incorporated........... 50%
Salomon Brothers Inc......................... 50%
The Underwriters are collectively committed to purchase all of the Class A
Certificates if any Class A Certificates are purchased. The Underwriters have
advised the Sponsor that they propose to offer the Class A Certificates for sale
from time to time in one or more negotiated transactions, or otherwise, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices. The Underwriters may effect such transactions
by selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters or purchasers of the Class A Certificates for
whom they may act as agents. In connection with the sale of the Class A
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the form of underwriting compensation. Any dealers that
participate with the Underwriters in the distribution of the Class A
Certificates purchased by the Underwriters may be deemed to be underwriters, and
any discounts or commissions received by them or the Underwriters and any profit
on the resale of the Class A Certificates by them or the Underwriters may be
deemed to be underwriting discounts or commissions under the 1933 Act.
The Sponsor has been advised by the Underwriters that the Underwriters
intend to make a market in the Class A Certificates, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make
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a market in the Class A Certificates and such market-making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Class A Certificates.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the 1933 Act, or contribute to
payments which the Underwriters may be required to make in respect thereof.
EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A and the registration statement, as
of December 31, 1995 and 1994 and for each of the years in the three year period
ended December 31, 1995, have been included in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing in
Appendix A and the registration statement, and upon the authority of such firm
as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
by Andrews & Kurth L.L.P. Certain legal matters with respect to the
Certificates will be passed upon for the Underwriters by Arter & Hadden. Hunton
& Williams will act as counsel for the Certificate Insurer.
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Distributions
Distributions on the Certificates are required to be made on each Payment
Date, commencing on April 25, 1997, to the Owners on the related Record Date in
an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholders' Class of such
Certificates on such Payment Date. See "Description of the Securities --
Distributions" in the Prospectus.
Subordination of Class B Certificates
The Class B Certificates are subordinated to the Class A Certificates.
Such subordination is intended to enhance the likelihood that the Owners of the
Class A Certificates will receive full and timely receipt of all amounts due to
them.
The Pooling and Servicing Agreement requires that the excess of the
aggregate Loan Balances of the Mortgage Loans in a Mortgage Loan Group as of the
last day of a particular Remittance Period over the Class A Certificate
Principal Balance of the Class A Certificates issued in respect of the related
Mortgage Loan Group (after application of the Class A Required Distribution for
such Class A Certificates on the then-related Payment Date) be maintained at a
certain amount (which amount may vary over time) over the life of the
transaction, which amount is specified by the Certificate Insurer. The actual
amount of this excess with respect to a Mortgage Loan Group is the "Subordinated
Amount" for such Mortgage Loan Group, and the specified target amount of the
excess at a point in time with respect to a Mortgage Loan Group is the
"Specified Subordinated Amount" for such Mortgage Loan Group. The Certificate
Insurer may permit the reduction of the Specified Subordinated Amount for a
Mortgage Loan Group without the consent of, or the giving of notice to, the
Owners of the Class A Certificates; provided, that the Certificate Insurer is
not then in default; and provided, further, that such reduction would not change
materially the weighted average life of the related Class A Certificates or the
current rating thereof.
The Pooling and Servicing Agreement generally provides that, subject to the
priorities described below under " -- Crosscollateralization Provisions," the
Owners of the Class B Certificates will receive distributions of principal on
each Payment Date equal to the Subordination Reduction Amount. "Subordination
Reduction Amount" means, with respect to any Payment Date and with respect to a
Mortgage Loan Group, an amount equal to the lesser of (x) the excess of (i) the
actual Subordinated Amount for such Mortgage Loan Group over (ii) the Specified
Subordinated Amount for such Mortgage Loan Group, in each case for such Payment
Date and (y) the amount described in either clause (a) or clause (b)(i) of the
definition of "Class A Principal Distribution Amount," whichever is applicable,
for such Payment Date. Thus, the Owners of the Class B Certificates will
receive principal distributions to the extent that there is a level of
subordination greater than that required by the Certificate Insurer for a
Mortgage Loan Group, as will be the case when amortization of the Class A
Certificates Principal Balance is accelerated by application of Net Monthly
Excess Spread (described below), or when the Specified Subordinated Amount for a
Mortgage Loan Group decreases or "steps down" in accordance with its terms.
Consequently, unless there exists on any particular Payment Date such an excess
level of subordination, the Owners of the related Class A Certificates will be
entitled to receive 100% of the principal of a Mortgage Loan Group to be
distributed on such Payment Date. To the extent a Subordination Reduction
Amount is payable to the Owners of the Class B Certificates, such payment will
have the effect of decelerating the amortization of the related Class A
Certificates relative to the amortization of the Mortgage Loans in such Mortgage
Loan Group.
The Subordinate Certificates are also entitled to receive the Net Monthly
Excess Spread available on any Payment Date. "Net Monthly Excess Spread" means,
with respect to a Mortgage Loan Group, the difference between Total Monthly
Excess Spread for such Mortgage Loan Group and any portion thereof used to cover
an Available Funds Shortfall (as defined below) with respect to such Mortgage
Loan Group, or with respect to the other Mortgage Loan Group, or to pay to the
Certificate Insurer any Reimbursement Amounts (as defined below). "Total
Monthly Excess Spread" means, with respect to the related Mortgage Loan Group,
the difference between (x) the interest that is collected on the Mortgage Loans
in such Mortgage Loan Group during a Remittance Period (net of the Servicing
Fee, the Trustee Fee and the Certificate Insurer's premium, in each case for the
related Mortgage Loan Group) plus any Delinquency Advances and Compensating
Interest relating to such Mortgage Loan Group and (y) the interest that accrues
on the related Class A Certificates during the related Accrual Period.
On each Payment Date, the Total Monthly Excess Spread will be used, to the
extent available, to fund any shortfalls in amounts due to the Owners of the
Class A Certificates and Reimbursement Amounts due to the Certificate
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Insurer on such Payment Date. See "Crosscollateralization Provisions" below.
In addition, after application to any such shortfalls and Reimbursement
Amounts, until the Subordinated Amount reaches the Specified Subordinated
Amount, or to the extent that the Specified Subordinated Amount for a
Mortgage Loan Group increases or "steps up" due to the effect of the triggers
set forth in the Pooling and Servicing Agreement or if, due to Realized
Losses, the Subordinated Amount for a Mortgage Loan Group has been reduced
below the Specified Subordinated Amount for such Mortgage Loan Group, the
Pooling and Servicing Agreement requires that Net Monthly Excess Spread be
used to make payments of principal to the Owners of the related Class A
Certificates for the purposes of accelerating the amortization of the related
Class A Certificates relative to the amortization of the Mortgage Loans in
such Mortgage Loan Group. Such accelerated payments of principal will be
applied to the "Subordination Increase Amount," which will equal, as of any
Payment Date and with respect to a Mortgage Loan Group, the excess of (x) the
Specified Subordinated Amount for such Mortgage Loan Group over (y) the
actual Subordinated Amount for such Mortgage Loan Group.
Crosscollateralization Provisions
On each Payment Date, an amount equal to the sum of (x) the Total Monthly
Excess Spread with respect to each Mortgage Loan Group plus (y) any
Subordination Reduction Amount with respect to such Mortgage Loan Group (such
amount being the "Total Monthly Excess Cashflow" with respect to such Mortgage
Loan Group and Payment Date) with respect to each Mortgage Loan Group will be
required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on such Payment Date
with respect to the related Mortgage Loan Group and equal to the
difference, if any, between (x) the Class A Required Distribution Amount
for the Class A Certificates issued in respect of the related Group for
such Payment Date and (y) the Available Funds with respect to such Mortgage
Loan Group for such Payment Date (the amount of such difference being equal
to an "Available Funds Shortfall" with respect to the related Mortgage Loan
Group);
(ii) any portion of the Total Monthly Excess Cashflow with respect to such
Mortgage Loan Group remaining after the application described in clause (i)
above shall be used to fund any Available Funds Shortfall with respect to
the other Mortgage Loan Group;
(iii) any portion of the Total Monthly Excess Cashflow with respect to such
Mortgage Loan Group remaining after the applications described in clauses
(i) and (ii) above shall be paid to the Certificate Insurer in respect of
amounts owed on account of any Insured Payments theretofore made with
respect to the related Mortgage Loan Group and other payments made by the
Certificate Insurer pursuant to the Certificate Insurance Policy and not
previously repaid (any such amount so owed to the Certificate Insurer and
not theretofore paid, together with accrued interest thereon, the
"Reimbursement Amount" with respect to the related Mortgage Loan Group);
and
(iv) any portion of the Total Monthly Excess Cashflow with respect to such
Mortgage Loan Group remaining after the applications described in clauses
(i), (ii) and (iii) above shall be paid to the Certificate Insurer in
respect of any Reimbursement Amount with respect to the other Mortgage Loan
Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect to a
Mortgage Loan Group on a Payment Date remaining after such applications is the
"Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for such
Payment Date; such amount is required to be applied in the following order of
priority on such Payment Date:
(i) such amount shall be used to fund the payment of any required
Subordination Increase Amount with respect to the related Mortgage Loan
Group as a portion of the distribution of the Class A Principal
Distribution Amount on such Payment Date; and
(ii) any portion of the Net Monthly Excess Cashflow remaining after the
application described in clause (i) immediately above shall be used to make
any required Subordination Increase Amount with respect to the other
Mortgage Loan Group.
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The Pooling and Servicing Agreement defines the "Class A Principal
Distribution Amount" with respect to each Payment Date for the Classes of Class
A Certificates issued in respect of a Mortgage Loan Group as being the sum,
without duplication, of:
(A) the portion of any Subordination Deficit due from any prior
period with respect to the related Mortgage Loan Group, together
with accrued interest thereon;
(B) the principal actually collected by the Servicer with respect to
the Mortgage Loans in the related Mortgage Loan Group during the
related Remittance Period;
(C) the Loan Balance of each Mortgage Loan in the related Mortgage
Loan Group that either was repurchased by the Sponsor or an
Originator or purchased by the Servicer or any Sub-Servicer on
the related Remittance Date, to the extent such Loan Balance is
actually received by the Trustee;
(D) any Substitution Amounts delivered by the Sponsor or an
Originator on the related Remittance Date in connection with a
substitution of a Mortgage Loan in the related Mortgage Loan
Group, to the extent such Substitution Amounts are actually
received by the Trustee;
(E) all Net Liquidation Proceeds actually collected by the Servicer
with respect to the Mortgage Loans in the related Mortgage Loan
Group during the related Remittance Period (to the extent such
Net Liquidation Proceeds relate to principal);
(F) the portion of any Subordination Deficit with respect to such
Mortgage Loan Group for such Payment Date;
(G) the proceeds received by the Trustee from any termination of the
related Mortgage Loan Group (to the extent such proceeds relate
to principal);
(H) the portion of any Subordination Increase Amount with respect to
such Mortgage Loan Group for such Payment Date to the extent of
any Net Monthly Excess Cashflow available for such purpose, after
giving effect to the crosscollateralization provisions described
above;
minus
(ii) the portion of any Subordination Reduction Amount to be applied
for such Payment Date.
The "Loan Balance" is the outstanding principal balance of each Mortgage
Loan on the Cut-off Date (but not including any amounts in respect of accrued
interest thereon, even if the terms of the Mortgage Loan permit such amounts to
be added to the principal balance thereof), less any principal collections or
recoveries relating to such Mortgage Loan included in previous related Monthly
Remittance Amounts. "Net Liquidation Proceeds" means, with respect to a
Liquidated Mortgage Loan, any amounts (including the proceeds of any insurance
policy other than the Certificate Insurance Policy) recovered by the Servicer or
any Sub-Servicer with respect to such Liquidated Mortgage Loan, whether through
Trustee's sale, foreclosure sale or otherwise, net of liquidation expenses
incurred by the Servicer, unreimbursed Delinquency Advances and certain other
related and unreimbursed Servicer advances. The "Remittance Date" is any date,
as set forth in the Pooling and Servicing Agreement, on which the Servicer is
required to remit moneys on deposit in the "Principal and Interest Account" to
the Trustee. A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage
Loan as to which the Servicer has determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered (exclusive of any possibility
of a deficiency judgment), the Loan Balance of which shall be zero following
such determination. The "Substitution Amount" is the difference between the
Loan Balance of a (x) replaced Mortgage Loan as of the close of business on the
first day of the calendar month in which such Mortgage Loan is replaced and (y)
the Loan Balance of the replacement Mortgage Loan, as of the date the Trust
acquired it, plus accrued and unpaid interest on such amount.
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Overcollateralization and the Certificate Insurance Policy
The Pooling and Servicing Agreement defines a "Subordination Deficit" with
respect to a Mortgage Loan Group and a Payment Date to be the amount, if any, by
which (x) the Class A Certificate Principal Balance of the Class A Certificates
issued in respect of the related Mortgage Loan Group as of such Payment Date,
and following the making of all distributions to be made on such Payment Date
(except for any payment to be made as to principal from proceeds of the
Certificate Insurance Policy), exceeds (y) the aggregate Loan Balances of the
Mortgage Loans in the related Mortgage Loan Group as of the close of business on
the last day of the preceding Remittance Period; provided, that with respect to
the Final Scheduled Payment Date for the Class A-5 Certificates, the
Subordination Deficit shall include, in addition to amounts calculated as
described above with respect to the Class A-5 Certificates and the Adjustable
Rate Group, any additional amounts representing the aggregate outstanding
Certificate Principal Balance of the Class A-5 Certificates plus accrued
interest thereon (but not including any Available Funds Cap Carry-Forward
Amount), if the Servicer has not purchased all of the outstanding Mortgage Loans
in the Adjustable Rate Group as of such Payment Date in accordance with the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement requires
the Trustee to make a claim for an Insured Payment under the Certificate
Insurance Policy not later than the third Business Day prior to any Payment Date
as to which the Trustee has determined that a Subordination Deficit will occur
for the purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Owners of the related Class A Certificates on such Payment
Date. Thus, neither the Certificate Insurance Policy nor the subordination
provisions described above guarantees current payment of the amounts of any
Realized Losses to the Owners of the related Class A Certificates. Investors in
the Class A Certificates should realize that, under extreme loss or delinquency
scenarios applicable to the related Mortgage Loan Group, they may temporarily
receive no distributions of principal.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination provisions and by
the Certificate Insurance Policy is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Certificate Insurance Policy to guarantee or insure that
any particular rate of prepayment is experienced by the Trust.
Class A Distributions and Insured Payments to the Owners of the Class A
Certificates
No later than the third Business Day prior to each Payment Date the Trustee
will be required to determine the amount for each Mortgage Loan Group to be on
deposit in the Distribution Account on such Payment Date (including amounts
available with respect to such Mortgage Loan Group as a result of the
crosscollateralization described above) (less the Servicing Fee for such
Mortgage Loan Group, such amount being the "Available Funds"), but net of the
Trustee Fee and the Certificate Insurer's premium (and without regard to the
amount of any Insured Payment), in each case for the related Mortgage Loan
Group. If the amount of the Insured Distribution Amount for a Mortgage Loan
Group for any Payment Date exceeds the related Available Funds for such Payment
Date, net of the Trustee Fee and the Certificate Insurer's premium, the Trustee
will be required to draw the amount of such insufficiency from the Certificate
Insurer under the Certificate Insurance Policy. The Trustee will be required to
deposit to the Distribution Account the amount of any Insured Payment made by
the Certificate Insurer. The Pooling and Servicing Agreement provides that
amounts which cannot be distributed to the Owners of the Certificates as a
result of proceedings under the United States Bankruptcy Code or similar
insolvency laws will not be considered in determining the amount of Available
Funds with respect to any Payment Date.
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Flow of Funds
On each Payment Date, the Trustee shall distribute for each Mortgage Loan
Group, to the extent of the Available Funds on deposit in the Distribution
Account for such Mortgage Loan Group and the amount of any Insured Payment for
such Mortgage Loan Group for such Payment Date as follows:
(a) to the Certificate Insurer, the premium amount then due;
(b) to the Trustee, an amount equal to the Trustee Fee then due to it;
(c) from the remaining Available Funds then on deposit for such Mortgage
Loan Group in the Distribution Account, to the Certificate Insurer the
lesser of (x) the excess of (i) the amount then on deposit in the
Distribution Account for such Mortgage Loan Group over (ii) the
Insured Distribution Amount for such Mortgage Loan Group for such
Payment Date and (y) the Reimbursement Amount for such Mortgage Loan
Group as of such Payment Date;
(d) from remaining Available Funds then on deposit in the Distribution
Account for the related Mortgage Loan Group, together with the amount
of any related Insured Payment, concurrently to the Owners of the
Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates and the Class A-5
Certificates, respectively, the Class A Interest Distribution Amount
for each such Class of Class A Certificates;
(e) from remaining Available Funds then on deposit in the Distribution
Account for the Fixed Rate Group, together with the amount of any
related Insured Payment, to the Owners of the Class A-4 Certificates,
in reduction of the Class A-4 Certificate Principal Balance, an amount
equal to the Class A-4 Lockout Distribution;
(f) from remaining Available Funds then on deposit in the Distribution
Account for the Fixed Rate Group, together with the amount of any
related Insured Payment, in respect of the Class A Principal
Distribution Amount and net of amounts distributed pursuant to clause
(e) above, to the Owners of the Class A-1 Certificates, in reduction
of the Class A-1 Certificate Principal Balance, until such Class A-1
Certificate Principal Balance is reduced to zero, then to the Owners
of the Class A-2 Certificates, in reduction of the Class A-2
Certificate Principal Balance, until such Class A-2 Certificate
Principal Balance is reduced to zero, then to the Owners of the Class
A-3 Certificates, in reduction of the Class A-3 Certificate Principal
Balance, until such Class A-3 Certificate Principal Balance is reduced
to zero, then to the Owners of the Class A-4 Certificates, in
reduction of the Class A-4 Certificate Principal Balance, until such
Class A-4 Certificate Principal Balance is reduced to zero;
(g) from remaining amounts then on deposit in the Distribution Account for
the Adjustable Rate Group, together with the amount of any related
Insured Payment, in respect of the Class A Principal Distribution
Amount, to the Owners of the Class A-5 Certificates, in reduction of
the Class A-5 Certificate Principal Balance, until such Class A-5
Certificate Principal Balance is reduced to zero;
(h) from remaining amounts then on deposit in the Distribution Account for
the Adjustable Rate Group, to the Owners of the Class A-5
Certificates, an amount equal to the Available Funds Cap Carry-Forward
Amount for such Distribution Date;
(i) from remaining amounts then on deposit in the Distribution Account, to
the Servicer and/or the Trustee, reimbursement for certain permitted
reimbursable amounts; and
(j) following the making by the Trustee of all allocations, transfers and
disbursements described above, from amounts then on deposit in the
Distribution Account, the Trustee shall distribute to the Subordinate
Certificate Owners, the amount remaining on such Payment Date, if any.
Notwithstanding the foregoing, on any Payment Date on or after which a
Certificate Insurer Default has occurred, any amounts of principal (including
any Class A-4 Lockout Distribution) that would otherwise be distributed
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sequentially to the Owners of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificate and Class A-4 Certificates shall instead be
distributed concurrently to the Owners of such Certificates, pro rata, until the
Certificate Principal Balance of each such Class has been reduced to zero. A
"Certificate Insurer Default" means the occurrence and continuation of a failure
by the Certificate Insurer to make any Insured Payment under the terms of the
Certificate Insurance Policy or certain events of insolvency or bankruptcy with
respect to the Certificate Insurer.
The "Class A-4 Lockout Distribution" on each Payment Date means an amount
equal to the product of the applicable Class A-4 Lockout Percentage and the
Class A-4 Pro Rata Distribution Amount for such Payment Date.
The "Class A-4 Lockout Percentage" for each Payment Date is as follows:
Payment Date Class A-4
Occurring In Lockout Percentage
------------ ------------------
April 1997 - March 2000 0%
April 2000 - March 2002 45%
April 2002 - March 2003 80%
April 2003 - March 2004 100%
April 2004 and thereafter 140%
The "Class A-4 Pro Rata Distribution Amount" for any Payment Date means an
amount equal to the product of (i) a fraction, the numerator of which is the
Class A-4 Certificate Principal Balance and the denominator of which is the
aggregate of the certificate principal balances of the Class A Certificates
issued in respect of the Fixed Rate Group, in each case immediately prior to
such Payment Date, and (ii) the portion of the Class A Principal Distribution
Amount collected in respect of such Mortgage Loan Group.
"LIBOR" shall mean the London interbank offered rate for one-month United
States dollar deposits. LIBOR for each Accrual Period shall be determined on
the second business day preceding the first day of any Accrual Period (each, a
"LIBOR Determination Date"), on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Reuters Screen LIBOR Page, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. As used in this paragraph, "business day" means a day on
which banks are open for dealing in foreign currency and exchange in London and
New York City; "Reuters Screen LIBOR Page" means the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar deposits
in the international Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters Screen LIBOR
Page on the LIBOR Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by or
under common control with the Sponsor or any Originator.
On each LIBOR Determination Date, LIBOR will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR shall be the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
such offered quotations.
(b) If on such LIBOR Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR shall be the greater of (x)
LIBOR as determined on the previous LIBOR Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per
annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
the one-month U.S. dollar lending rates that New York City banks selected
by the Trustee are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Trustee are quoting on such LIBOR Determination Date
to leading European banks.
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The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-5 Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding. Each such rate of interest may be
obtained by telephoning the Trustee at (410) 884-2000.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Description of the Securities -- Reports To The
Securityholders" in the Prospectus for information regarding reports to the
Owners.
THE CERTIFICATE INSURANCE POLICY
On the Closing Date, the Certificate Insurance Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Insurance Agreement, dated
as of the Cut-off Date, among the Sponsor, the Servicer and the Certificate
Insurer.
The Certificate Insurance Policy unconditionally guarantees the timely
payment of interest due and the ultimate payment of principal on the Class A
Certificates (but not any amounts in respect to Available Funds Cap
Carry-Forward Amounts). The Certificate Insurer is required to make Insured
Payments to the Trustee as paying agent on the later of the Payment Date or on
the business day next following the day on which the Certificate Insurer shall
have received telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice by registered or certified mail, from the Trustee
that an Insured Payment is due.
The Pooling and Servicing Agreement will provide that the "Available Funds"
does not include Insured Payments and does not include any amounts that cannot
be distributed to the Owners of any Class A Certificates by the Trustee as a
result of final, non-appealable proceedings under the United States Bankruptcy
Code.
In addition, the Certificate Insurance Policy will provide for payment of
the amount (a "Preference Amount") of any distributions in respect of principal
or interest previously paid to a Class A Certificateholder that are subsequently
recovered from such Certificateholder prior to the expiration date of the
Certificate Insurance Policy pursuant to a final, nonappealable order (a "Final
Order") of a court of competent jurisdiction under the United States Bankruptcy
Code. Any such payments would be made under the Certificate Insurance Policy on
the second business day following receipt by the Certificate Insurer of a
certified copy of such Final Order, assignment to the Certificate Insurer of
such Certificateholder's rights and claims with respect to such Preference
Amount and appointment of the Certificate Insurer as such Certificateholder's
agent in respect of such Preference Amount. No such Certificateholder shall be
entitled to reimbursement for any payment avoided as a preference as to which
the Certificate Insurer previously has made a payment under the Certificate
Insurance Policy, nor is the Certificate Insurer obligated to make any payment
in respect of any Preference Amount which represents a payment of the principal
amount of the Class A Certificates prior to the time the Certificate Insurer
otherwise would have been required to make a payment in respect of such
principal.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Certificate Insurer, or the majority of Owners of the Class A Certificates with
the consent of the Certificate Insurer, may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee with respect
to the Certificates or exercising any trust or power conferred on the Trustee
with respect to the Certificates or the Trust Estate.
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee. For purposes of the Certificate Insurance
Policy, the term "Certificateholder" does not include the Trust, the Servicer or
the Sponsor. The Certificate Insurance Policy does not guarantee any specific
rate of prepayments of principal of the Mortgage Loans. The Certificate
Insurance Policy does not guarantee payment of any Available Funds Cap
Carry-Forward Amount (or any interest thereon). The Certificate Insurance
Policy is non-cancelable. The Certificate Insurance Policy expires and
terminates without any action on the part of the Certificate
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Insurer or any other person on the date that is one year and one day
following the date on which the Class A Certificates have been paid in full.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Pursuant to the Pooling and Servicing Agreement, the Certificate Insurer is
subrogated to the rights of the Owners of the Class A Certificates to the extent
of any such payment under the Certificate Insurance Policy.
THE CERTIFICATE INSURER
General
Financial Guaranty Insurance Company, the "Certificate Insurer," a New York
stock insurance corporation, is a monoline financial guaranty insurance company
which, since January 1984, has been a leading insurer of bonds issued by
municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations and
pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also authorized
to carry on general insurance business in the United Kingdom and to write credit
and guaranty insurance in France.
The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Certificate Insurer.
The Certificate Insurer and its holding company, FGIC Corporation, are
subject to regulation by the State of New York Insurance Department and by each
jurisdiction in which the Certificate Insurer is licensed to write insurance.
These regulations vary from jurisdiction to jurisdiction, but generally require
insurance holding companies and their insurance subsidiaries to register and
file certain reports, including information concerning their capital structure,
ownership and financial condition and require prior approval by the insurance
department of their state of domicile of changes in control, of dividends and
other intercorporate transfers of assets and of transactions between insurance
companies, their parents and affiliates. The Certificate Insurer is required to
file quarterly and annual statutory financial statements and is subject to
statutory restrictions concerning the types and quality of investments, the use
of policy forms, premium rates and the size of risk that it may insure, subject
to reinsurance. Additionally, the Certificate Insurer is subject to triennial
audits by the State of New York Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer
only insures securities that it considers to be of investment grade quality.
With respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains its own underwriting standards
that are based on those aspects of credit quality that the Certificate Insurer
deems important for the category and that take into account criteria established
for the category typically used by rating agencies. Credit criteria for
evaluating securities include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flow, including the historical and expected performance of
assets pledged for payment of securities under varying economic scenarios,
underlying levels of protection such as insurance or overcollateralization, and,
particularly in the case of long-term municipal securities, the importance of
the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities such as the Class A Certificates. If the issuer of a security
insured by the Certificate Insurer defaults on its
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obligations to pay such debt service or, in the case of a pass-through
security, available funds are insufficient to pay the insured amounts, the
Certificate Insurer will make scheduled insured payments, without regard to
any acceleration of the securities which may have occurred, and will be
subrogated to the rights of security holders to the extent of its payments.
The claims paying ability of the Certificate Insurer is rated "Aaa," "AAA"
and "AAA" by Moody's, S&P and Fitch Investors Service, Inc. ("Fitch"),
respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semi-annual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
As of September 30, 1996, December 31, 1995 and December 31, 1994 the
Certificate Insurer had written directly or assumed through reinsurance,
guaranties of approximately $197.8 billion, $180.0 billion and $160.2 billion
par value of securities, respectively (of which approximately 86 percent, 88
percent and 89 percent constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.01 billion, $1.95 billion and
$1.78 billion, respectively. As of September 30, 1996, the Certificate Insurer
had reinsured approximately 18 percent of the risks it had written, 34 percent
through quota share reinsurance and 66 percent through facultative arrangements.
Capitalization
The following table sets forth capitalization of the Certificate Insurer as
of December 31, 1994, December 31, 1995 and September 30, 1996, respectively, on
the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since
September 30, 1996.
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1994 December 31, 1995 September 30, 1996
(in millions) (in millions) (in millions)
----------------- ----------------- ------------------
<S> <C> <C> <C>
Unearned Premiums $757 $728 $685
Other Liabilities 261 304 332
Stockholder's Equity
Common Stock 15 15 15
Additional Paid-in
Capital 334 334 334
Unrealized Gains
(Losses) (42) 64 12
Foreign Currency
Translation Adjustment (1) (2) (2)
Retained Earnings 974 1,137 1,273
Total Stockholder's
Equity 1,280 1,548 1,632
Total Liabilities and
Stockholder's Equity $2,298 $2,580 $2,649
</TABLE>
For further financial information concerning the Certificate Insurer, see
the audited and unaudited financial statements of the Certificate Insurer
included as Appendix A and Appendix B, respectively, of this Prospectus
Supplement.
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Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth under the
headings "The Certificate Insurance Policy" and "The Certificate Insurer" and in
Appendix A and Appendix B of this Prospectus Supplement.
An indemnification agreement between the Certificate Insurer and Prudential
Securities Incorporated and an insurance agreement among the Certificate
Insurer, the Sponsor and EquiVantage Inc. each provide that the parties to such
agreements will indemnify each other for certain liabilities under the 1933 Act.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement and the Prospectus, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant to
the Pooling and Servicing Agreement. On such date, the Sponsor will sell
without recourse the Mortgage Loans to the Trust and the Trust will issue the
Class A Certificates to the Owners thereof.
The property of the Trust shall include all money, instruments and other
property to the extent such money, instruments and other property are subject or
intended to be held in trust for the benefit of the Owners, and all proceeds
thereof, including, without limitation, (i) the Mortgage Loans, (ii) such
amounts, including eligible investments as specified in the Pooling and
Servicing Agreement, as from time to time may be held by the Trustee in the
Distribution Account and by the Servicer in the Principal and Interest Account
(except as otherwise provided in the Pooling and Servicing Agreement), each to
be created pursuant to the Pooling and Servicing Agreement, (iii) any Mortgaged
Property, the ownership of which has been effected on behalf of the Trust as a
result of foreclosure or acceptance by the Servicer of a deed in lieu of
foreclosure and that has not been withdrawn from the Trust, (iv) any insurance
policies relating to the Mortgage Loans and any rights of the Sponsor under any
related insurance policies, (v) Net Liquidation Proceeds with respect to any
Liquidated Loan, (vi) rights under the Certificate Insurance Policy and (vii)
the Sponsor's rights under the Master Transfer Agreements as described below
(collectively, the "Trust Estate").
Sale of Mortgage Loans
EquiVantage will sell the Mortgage Loans to the Sponsor on or prior to the
Closing Date pursuant to one or more Master Mortgage Loan Transfer Agreements,
together with the related Conveyance Agreement, between EquiVantage and the
Sponsor (collectively, the "Master Transfer Agreements"). In the Master
Transfer Agreements EquiVantage will make certain representations and
warranties. The Sponsor will assign its rights to enforce such representations
and warranties to the Trustee as part of the Trust Estate.
Pursuant to the Pooling and Servicing Agreement, on the Closing Date the
Sponsor will sell without recourse to the Trustee in trust all right, title and
interest of the Sponsor in each Mortgage Loan listed on the schedule delivered
to the Trustee on the Closing Date (the "Schedule of Mortgage Loans") and all
its right, title and interest in all principal collected and all interest due on
each such Mortgage Loan on or after the Cut-off Date. The Sponsor will reserve
and retain all its right, title and interest in principal collected (including
Prepayments) and interest due on each Mortgage Loan prior to the Cut-off Date.
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In connection with the sale of the Mortgage Loans on the Closing Date, the
Sponsor will be required to deliver to the Trustee, as document custodian, a
file (a "Mortgage Loan File") consisting of (i) the original Notes, endorsed by
the Originator thereof to the order of the Trustee, (ii) originals or certified
copies of all intervening assignments, if any, showing a complete chain of
assignment from origination to the Originator, including warehousing
assignments, with evidence of recording (or transmission for recordation)
thereon, (iii) originals of all assumption and modification agreements if any,
(iv) any of: (a) the original Mortgage, with evidence of recording thereon, (b)
a true and accurate copy of the Mortgage where the original Mortgage has been
transmitted for recording, until such time as the original Mortgage is returned
by the public recording office or (c) a copy of the Mortgage certified by the
public recording office in those instances where the original recorded Mortgage
has been lost, (v) the original Mortgage Insurance Policy, title commitment,
binder or attorney's opinion of title and abstract of title, and (vi) an
assignment in blank, in recordable form, of each Mortgage for which an
assignment is not recorded, executed by the record holder of such Mortgage. The
Pooling and Servicing Agreement also provides that the Certificate Insurer will
require assignments of mortgages prepared and recorded in the name of the
Trustee (unless the Trustee and the Certificate Insurer receive an acceptable
opinion of counsel, or other documentation acceptable to the Trustee or the
Certificate Insurer, concluding that such recordation is not necessary to
protect the Trustee's interests in the related Mortgage Loans), and that
evidence of the recording thereof be included in the related Mortgage Loan File
upon receipt thereof.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policy
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate, or (ii)
any time when a Qualified Liquidation of the Trust Estate is effected.
Optional Termination
By the Residual Certificate Owners and the Servicer. At their option, the
Residual Certificate Owners and the Servicer acting directly or through one or
more affiliates each have the right and may determine to purchase from the Trust
all of the Mortgage Loans and other property then held by the Trust, and thereby
effect early retirement of the Certificates, on and after the Clean-Up Call
Date. The right of the Residual Certificate Owners so to exercise such optional
purchase right is superior to such right of the Servicer. The Servicer may
exercise its right if the Residual Certificate Owners decline to do so. In
addition, the Pooling and Servicing Agreement provides that the Servicer has the
option to purchase from the Trust any Mortgage Loan that is in default.
Upon Loss of REMIC Status. Following a final determination by the Internal
Revenue Service, or by a court of competent jurisdiction, in each case from
which no appeal is taken within the permitted time for such appeal, or if any
appeal is taken, following a final determination of such appeal from which no
further appeal can be taken to the effect that the Trust does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code (the "Final
Determination"), at any time on or after the date which is 30 calendar days
following such Final Determination, (i) the Owners of a majority in Percentage
Interest represented by the Class A Certificates then outstanding may direct the
Trustee to adopt a plan of complete liquidation with respect to the Trust and
(ii) the Certificate Insurer may notify the Trustee of the Certificate Insurer's
determination to purchase from the Trust all Mortgage Loans and other property
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any Mortgage
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Loan then remaining in the Trust, and thereby effect the early retirement of
the Certificates. Upon receipt of such notice or direction, the Trustee will
be required to notify the Residual Certificate Owners of the determination of
the Certificate Insurer or the Owners of the Class A Certificates to
liquidate (the "Termination Notice"). The Owners of a majority of the
Percentage Interest represented by the Residual Certificates then outstanding
may, within 60 days from the date of receipt of the Termination Notice (the
"Purchase Option Period"), at their option, purchase from the Trust all
Mortgage Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage Loan then
remaining in the Trust as of the date of such purchase plus one month's
interest on such amount at the weighted average of the Class A Pass-Through
Rates.
If, during the Purchase Option Period, the Residual Certificate Owners have
not exercised the option described above, then upon the expiration of the
Purchase Option Period the Certificate Insurer will be obligated so to purchase
the Trust Estate within 60 days after the expiration of the Purchase Option
Period or the Trustee will sell the Mortgage Loans and distribute the proceeds
of the liquidation thereof.
Following a Final Determination, the Owners of a majority of the Percentage
Interest represented by the Residual Certificates then outstanding may, at their
option (and upon delivery to the Owners of the Class A Certificates of an
opinion of counsel experienced in U.S. Federal income tax matters selected by
the Residual Certificate Owners, which opinion will be required to be reasonably
satisfactory in form and substance to a majority of the Percentage Interests
represented by the Class A Certificates then outstanding, to the effect that the
effect of the Final Determination is to substantially increase the probability
that the gross income of the Trust will be subject to federal taxation),
purchase from the Trust all Mortgage Loans and all property theretofore acquired
by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust Estate at a purchase price equal to
the Class A Principal Balances as of the date of such purchase plus interest
accrued on the Class A Certificates since the prior Payment Date at the weighted
average of the Class A Pass-Through Rates. The Pooling and Servicing Agreement
provides that the foregoing opinion shall be deemed satisfactory unless a
majority of the Percentage Interest of the Class A Certificates give the
Residual Certificate Owners notice that such opinion is not satisfactory within
thirty days after receipt of such opinion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC Elections
The Trustee will cause one or more REMIC elections to be made with respect
to the Trust for federal income tax purposes. Qualification as a REMIC requires
ongoing compliance with certain conditions. Andrews & Kurth L.L.P., tax
counsel, will advise that, in its opinion, for federal income tax purposes,
assuming (i) the REMIC elections are made and (ii) compliance with the Pooling
and Servicing Agreement, each Class of Class A Certificates will be treated as a
"regular interest" in a REMIC. For federal income tax purposes, regular
interests in a REMIC are treated as debt instruments issued by the REMIC on the
date on which those interests are created, and not as ownership interests in the
REMIC or its assets. Owners of Class A Certificates that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Class A Certificates under an accrual method. The Class A
Certificates may be issued with "original issue discount" for federal income tax
purposes. It is possible that the Internal Revenue Service could treat a
portion of the additional interest that would become payable on the Class A-3
Certificates, Class A-4 Certificates and Class A-5 Certificates after the
Step-Up Payment Date as "original issue discount." The prepayment assumption to
be used in determining whether the Class A Certificates are issued with original
issue discount and the rate of accrual of original issue discount is 24% HEP
with respect to the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates and Class A-4 Certificates and 25% CPR with respect to the Class
A-5 Certificates, as described under "Prepayment and Yield Considerations"
herein. No representation is made that any of the Mortgage Loans will prepay at
this rate or any other rate. See "Certain Federal Income Tax Consequences
- --Discount and Premium --Original Issue Discount" in the Prospectus.
Class A-5 Certificates
The Class A-5 Certificates, except to the extent of any Available Funds Cap
Carry-Forward Amounts, will be treated as regular interests in a REMIC under
section 860G of the Code (the "Class A-5 Regular Interests").
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Accordingly, the portion representing the Class A-5 Regular Interests will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of section 856(c)(5) of the
Code, in each case to the extent described in the Prospectus. Interest on
such portion of the Class A-5 Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of
section 856(c)(3)(B) of the Code to the same extent that such portion of the
Class A-5 Certificates is treated as real estate assets. See "Certain
Federal Income Tax Consequences " in the Prospectus.
Each holder of a Class A-5 Certificate is deemed to own an undivided
beneficial ownership interest in two assets (i) the Class A-5 Regular Interests,
and (ii) an interest rate cap contract (a "Cap Agreement"). The Cap Agreement
with respect to the Class A-5 Certificates is not included in any REMIC related
to the Series 1997-1 REMIC. The treatment of amounts received by a Class A-5
Certificateholder under such Certificateholder's right to receive Available
Funds Cap Carry-Forward Amounts will depend on the portion of such
Certificateholder's purchase price allocable thereto. Under the REMIC
regulations, each Class A-5 Certificateholder must allocate its purchase price
for the Class A-5 Certificates between its undivided interest in the Class A-5
Regular Interests and its undivided interest in the Cap Agreement in accordance
with the relative fair market values of each property right. Payments made to
the Class A-5 Certificates under the Cap Agreement will be included in income
based on the regulations relating to notional principal contracts (the "Notional
Principal Contract Regulations"). The original issue discount regulations (as
described in the Prospectus), which technically do not apply to REMIC regular
interests, provide that the issuer's allocations of the issue price are binding
on all holders unless the holder explicitly discloses on its tax return that its
allocation is different from the issuer's allocation. Holders of the Class A-5
Certificates may obtain information as to the value assigned to the Cap
Agreement from the Trustee. Under the REMIC regulations, the Trustee is
required to account for the Class A-5 Regular Interests and the Cap Agreement as
discrete property rights. Ownership of the Cap Agreement will entitle the owner
to amortize the separate price paid for the related Cap Agreement under the
Notional Principal Contract Regulations. The Internal Revenue Service issued
regulations applicable to debt instruments acquired after August 13, 1996 that
provide for the integration of a qualifying debt instrument with a hedge if the
combined cash flows of the components are substantially equivalent to the cash
flows on a variable rate debt instrument. These regulations expressly exclude
REMIC regular instruments from their application.
ERISA CONSIDERATIONS
The Employment Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh plans,
and any entities whose underlying assets include plan assets by reason of a
plan's investment in such entities (each a "Plan") and (b) persons who have
certain specified relationships to such Plans ("Parties-in-Interest" under ERISA
and "Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account (e.g.,
through the purchase of an annuity contract). ERISA also imposes certain duties
on persons who are fiduciaries of Plans subject to ERISA and prohibits certain
transactions between a Plan and Parties-in-Interest or Disqualified Persons with
respect to such Plans. See "ERISA Considerations" in the Prospectus.
The DOL has issued to each of Prudential Securities Incorporated and
Salomon Brothers Inc an individual prohibited transaction exemption, Prohibited
Transaction Exemption 90-32 and Prohibited Transaction Exemption 89-89,
respectively (together, the "Exemptions"), which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, the initial purchase,
the servicing, management, operation and holding and the subsequent resale by
Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemptions. The loans covered by the Exemptions include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
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(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from S&P, Moody's, Duff & Phelps Credit Rating Co.
("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the Underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the Originator and the Sponsor
pursuant to the assignment of the loans to the Trust Estate represents not
more than the fair market value of such loans; the sum of all payments made
to and retained by any Servicer represents not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
1933 Act.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to the Plan's acquisition of certificates.
Moreover, the Exemptions provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to Plans sponsored by the Sponsor, the Certificate
Insurer, the Underwriters, the Trustee, the Servicer, any other servicer, any
obligor with respect to Mortgage Loans included in the Trust Estate constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust Estate, or any affiliate of such parties (the "Restricted
Group").
As of the date hereof, there is no single Mortgage Loan included in the
Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemptions, and the potential consequences in their specific circumstances prior
to making an investment in the Class A Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the Class A
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's
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investment portfolio.
RATINGS
It is a condition of the original issuance of the Class A Certificates that
each Class of Class A Certificates receive ratings of "AAA" by S&P and "Aaa" by
Moody's. The ratings assigned to the Class A Certificates will be based on the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from Moody's Investors Service,
Inc., 99 Church Street, New York, New York 10007 and Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc., 25 Broadway, New York, New
York 10004. Such ratings will be the views only of such rating agencies. There
is no assurance that any such ratings will continue for any period of time or
that such ratings will not be revised or withdrawn. Any such revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Class A Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates and Class A-5 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA. Institutions subject to the
jurisdiction of the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration or state banking or insurance authorities should review
applicable rules, supervisory policies and guidelines of these agencies before
purchasing any of the Class A Certificates, since the Class A Certificates may
be deemed to be unsuitable investments under one or more of these rules,
policies and guidelines and certain restrictions may apply to such investments.
It should also be noted that certain states have enacted legislation limiting to
varying extents the ability of certain entities (in particular, insurance
companies) to invest in mortgage related securities. Investors should consult
with their own legal advisors in determining whether and to what extent the
Class A Certificates constitute legal investments for such investors. See
"Legal Investment Matters" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Class A Certificates, the Sponsor has agreed to cause the Trust
to sell to each of the Underwriters named below, and each of the Underwriters
has severally agreed to purchase, the percentage interest of the Class A
Certificates set forth opposite its name below:
<TABLE>
<CAPTION>
Percentage Interest of
Underwriter Class A Certificates
----------- -----------------------
<S> <C>
Prudential Securities Incorporated................... 50%
Salomon Brothers Inc................................. 50%
</TABLE>
The Underwriters are collectively committed to purchase all of the Class
A Certificates if any Class A Certificates are purchased. The Underwriters
have advised the Sponsor that they propose to offer the Class A Certificates
for sale from time to time in one or more negotiated transactions, or
otherwise, at market prices prevailing at the time of sale, at prices related
to such market prices or at negotiated prices. The Underwriters may effect
such transactions by selling the Class A Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters or purchasers of
the Class A Certificates for whom they may act as agents. In connection with
the sale of the Class A Certificates, the Underwriters may be deemed to have
received compensation from the Sponsor in the form of underwriting
compensation. Any dealers that participate with the Underwriters in the
distribution of the Class A Certificates purchased by the Underwriters may be
deemed to be underwriters, and any discounts or commissions received by them
or the Underwriters and any profit on the resale of the Class A Certificates
by them or the Underwriters may be deemed to be underwriting discounts or
commissions under the 1933 Act.
The Sponsor has been advised by the Underwriters that the Underwriters
intend to make a market in the Class A Certificates, as permitted by
applicable laws and regulations. The Underwriters are not obligated,
however, to make
S-67
<PAGE>
a market in the Class A Certificates and such market-making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Class A Certificates.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the 1933 Act, or contribute to
payments which the Underwriters may be required to make in respect thereof.
EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A and the registration statement, as
of December 31, 1995 and 1994 and for each of the years in the three year period
ended December 31, 1995, have been included in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing in
Appendix A and the registration statement, and upon the authority of such firm
as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
by Andrews & Kurth L.L.P. Certain legal matters with respect to the
Certificates will be passed upon for the Underwriters by Arter & Hadden. Hunton
& Williams will act as counsel for the Certificate Insurer.
S-68
<PAGE>
INDEX OF PRINCIPAL TERMS
Page
1933 Act.....................................................................S-3
Accrual Period...............................................................S-9
Actuarial Loans.............................................................S-37
Adjustable Rate Group.............................................S-2, S-5, S-21
Affected Areas..............................................................S-19
Authorized Officer..........................................................S-47
Available Funds.......................................................S-56, S-59
Available Funds Cap..........................................................S-7
Available Funds Cap Carry-Forward Amount...............................S-8, S-16
Available Funds Shortfall...................................................S-54
Base Servicing Fee..........................................................S-15
Beneficial Owner............................................................S-49
Beneficial Owners......................................................S-2, S-15
Book-Entry Certificates.....................................................S-49
Business Day.................................................................S-9
Cap Agreement...............................................................S-65
Cede........................................................................S-15
Cedel..................................................................S-2, S-15
Cedel Participants..........................................................S-51
Certificate Insurance Policy...........................................S-2, S-13
Certificate Insurer....................................................S-2, S-60
Certificate Insurer Default.................................................S-58
Certificateholder...........................................................S-59
Certificates............................................................S-1, S-4
Citibank....................................................................S-15
Class A Certificate Principal Balances......................................S-38
Class A Certificates....................................................S-1, S-4
Class A Distribution Amount.................................................S-12
Class A Interest Distribution Amount.........................................S-9
Class A Principal Distribution Amount...........................S-10, S-53, S-55
Class A Required Distribution Amount........................................S-11
Class A-1 Certificate Principal Balance.....................................S-38
Class A-1 Certificates..................................................S-1, S-4
Class A-2 Certificate Principal Balance.....................................S-38
Class A-2 Certificates..................................................S-1, S-4
Class A-3 Certificate Principal Balance.....................................S-38
Class A-3 Certificates..................................................S-1, S-4
Class A-4 Certificate Principal Balance.....................................S-38
Class A-4 Certificates..................................................S-1, S-4
Class A-4 Lockout Distribution..............................................S-58
Class A-4 Lockout Percentage..........................................S-12, S-58
Class A-4 Pro Rata Distribution Amount................................S-12, S-58
Class A-5 Certificate Principal Balance.....................................S-38
Class A-5 Certificates..................................................S-1, S-4
Class A-5 Formula Pass-Through Rate..........................................S-8
Class A-5 Regular Interests.................................................S-64
Class B Certificates.........................................................S-4
Class R Certificates.........................................................S-4
Clean-Up Call Date..........................................................S-16
Closing Date.................................................................S-4
CLTV........................................................................S-18
Commission...................................................................S-3
Cooperative.................................................................S-51
S-69
<PAGE>
CPR.........................................................................S-39
Cut-off Date.................................................................S-4
D&P.........................................................................S-66
Definitive Certificate......................................................S-50
DTC....................................................................S-2, S-15
DTC Participants............................................................S-51
EquiVantage Inc..............................................................S-4
ERISA.......................................................................S-65
Euroclear..............................................................S-2, S-15
Euroclear Operator..........................................................S-51
Euroclear Participants......................................................S-51
European Depositaries.......................................................S-50
European Depositories.......................................................S-15
Exemptions..................................................................S-65
FDIC........................................................................S-49
Final Determination.........................................................S-63
Final Order.................................................................S-59
Final Scheduled Payment Date................................................S-38
Final Scheduled Payment Dates................................................S-5
Financial Intermediary......................................................S-50
Fitch.......................................................................S-61
Fixed Rate Group..................................................S-2, S-5, S-21
Flood.......................................................................S-19
GE Capital..................................................................S-60
HEP.........................................................................S-39
Insured Distribution Amount.................................................S-13
Insured Payment.............................................................S-14
LIBOR..................................................................S-7, S-58
LIBOR Determination Date....................................................S-58
Liquidated Mortgage Loan....................................................S-55
Loan Balance................................................................S-55
Loan-to-Value Ratio.........................................................S-18
LTV.........................................................................S-18
Master Transfer Agreements..................................................S-62
Monthly Remittance Amount...................................................S-49
Moody's.....................................................................S-16
Morgan......................................................................S-15
Mortgage Loan File..........................................................S-63
Mortgage Loan Group...............................................S-2, S-5, S-21
Mortgage Loans...............................................................S-1
Mortgaged Properties.........................................................S-2
Mortgages....................................................................S-2
Mortgagor...................................................................S-37
Net Liquidation Proceeds....................................................S-55
Net Monthly Excess Cashflow.................................................S-54
Net Monthly Excess Spread...................................................S-53
Notes.......................................................................S-21
Notional Principal Contract Regulations.....................................S-65
original issue discount.....................................................S-64
Originators..................................................................S-4
Owner.................................................................S-49, S-50
Owners.................................................................S-2, S-49
Owners of Record.............................................................S-9
Participants................................................................S-49
Payment Date............................................................S-2, S-9
Percentage Interest.........................................................S-49
S-70
<PAGE>
Plan........................................................................S-65
Pooling and Servicing Agreement.........................................S-1, S-4
Preference Amount...........................................................S-59
Prepayment..................................................................S-37
Principal and Interest Account..............................................S-55
Property Value..............................................................S-18
PUD.........................................................................S-21
Purchase Option Period......................................................S-63
Realized Loss...............................................................S-10
Reference Banks.............................................................S-58
Reimbursement Amount........................................................S-54
Relevant Depositary.........................................................S-50
REMIC.......................................................................S-63
REMICs.......................................................................S-2
Remittance Date.............................................................S-55
Remittance Period...........................................................S-10
Reserve Interest Rate.......................................................S-58
Restricted Group............................................................S-66
Reuters Screen LIBO Page....................................................S-58
RTC.........................................................................S-46
RTC Lawsuit.................................................................S-46
Rules.......................................................................S-50
S&P.........................................................................S-16
Schedule of Mortgage Loans..................................................S-62
Servicer.....................................................................S-1
Servicing Fee...............................................................S-16
Specified Subordinated Amount.........................................S-39, S-53
Sponsor......................................................................S-1
Sponsor's Portfolio.........................................................S-20
Statistic Calculation Date...................................................S-5
Step-Up Payment Date.........................................................S-7
Structuring Assumptions.....................................................S-39
Subordinate Certificate Owners..............................................S-14
Subordinate Certificates.....................................................S-1
Subordinated Amount.........................................................S-53
Subordination Deficit.................................................S-11, S-56
Subordination Increase Amount...............................................S-54
Subordination Reduction Amount..............................................S-53
Substitution Amount.........................................................S-55
Termination Notice..........................................................S-63
Terms and Conditions........................................................S-51
Third-Party Servicing Portfolio.............................................S-20
Total Monthly Excess Cashflow...............................................S-54
Total Monthly Excess Spread.................................................S-53
Trust........................................................................S-1
Trust Estate................................................................S-62
Trustee......................................................................S-4
Trustee Fee.................................................................S-16
Underwriters.................................................................S-2
weighted average life.......................................................S-39
S-71
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered EquiVantage
Home Equity Loan Trust 1997-1 Class A Certificates (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of DTC, Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant,
I-1
<PAGE>
the purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the Relevant Depository, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following
month. Payment will then be made by the Relevant Depository to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and
the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depository, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). In the event that the Cedel Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
I-2
<PAGE>
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a
tax treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income. The term "Non-U.S. Person" means any person who is not a U.S.
Person, or (iv) a trust if (a) a court in the United States is able to exercise
primary supervision over the administration of the trust, and (b) one or more
United States fiduciaries have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
I-3
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
________________________________________________________________________________
Audited Financial Statements
December 31, 1995
Report of Independent Auditors...................................... 1
Balance Sheets...................................................... 2
Statements of Income................................................ 3
Statements of Stockholder's Equity.................................. 4
Statements of Cash Flows............................................ 5
Notes to Financial Statements....................................... 6
<PAGE>
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty
Insurance Company as of December 31, 1995 and 1994, and the related
statements of income, stockholder's equity, and cash flows for each of the
years in the three year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Financial Guaranty
Insurance Company as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the years in the three year period
then ended in conformity with generally accepted accounting principles.
As described in notes 6 and 2, respectively, in 1993, the Company changed its
methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
KPMG Peat Marwick LLP
January 19, 1996
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
________________________________________________________________________________
($ in Thousands, except per share amounts)
December 31, December 31,
Assets 1995 1994
____________ ____________
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995
and $1,954,177 in 1994) $2,141,584 $1,889,910
Short-term investments, at cost, which
approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated
depreciation ($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
__________ ___________
Total assets $2,580,302 $2,298,210
__________ ___________
__________ ___________
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
__________ ____________
Total liabilities 1,032,421 1,018,487
__________ ____________
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity
securities available-for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
__________ ____________
Total stockholder's equity 1,547,881 1,279,723
__________ ____________
Total liabilities and stockholder's equity $2,580,302 2,298,210
__________ ____________
__________ ____________
See accompanying notes to financial statements.
-2-
<PAGE>
Financial Guaranty Insurance
Company Statements of Income
________________________________________________________________________________
($ in Thousands)
For the Year Ended December 31,
______________________________________
1995 1994 1993
____ ____ ____
Revenues:
Gross premiums written $ 97,288 $ 161,940 $ 291,052
Ceded premiums (19,319) (46,477) (49,914)
_________ _________ _________
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned
premiums 27,309 53,364 (74,902)
_________ _________ __________
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
_________ _________ __________
Total revenues 256,438 284,553 301,595
_________ _________ __________
Expenses:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy
acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
_________ _________ __________
Total expenses 19,806 43,597 87,022
_________ _________ __________
Income before provision for Federal
income taxes 236,632 240,956 214,573
_________ _________ __________
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
_________ _________ __________
Total Federal income tax expense 48,754 51,225 52,221
_________ _________ __________
Net income before cumulative effect
of change in accounting principle 187,878 189,731 162,352
_________ _________ __________
Net cumulative effect of change in
accounting principle - - 3,008
_________ _________ __________
Net income $187,878 $189,731 $165,360
_________ _________ __________
_________ _________ __________
See accompanying notes to financial statements.
-3-
<PAGE>
Financial Guaranty Insurance
Company Statements of Stockholder's Equity
________________________________________________________________________________
($ in Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on
Additional Fixed Maturity Foreign
Common Paid-in Securities Available- Currency Retained
Stock Capital For-Sale, Net of Tax Adjustment Earnings
______ ___________ _____________________ ___________ ________
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $2,500 $324,639 $7,267 $(1,597) $618,615
Net income - - - - 165,360
Capital contribution - 21,872 - - -
Adjustment to common stock par value 12,500 (12,500) - - -
Unrealized gains on fixed maturity
securities previously held at market,
net of tax of ($713) - - (1,325) - -
Implementation of change in accounting
for adoption of SFAS 115, net of tax of
$45,643 - - 84,766 - -
Foreign currency translation adjustment - - - (668) -
_______ _________ ___________ ________ ________
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income - - - - 189,731
Unrealized losses on fixed maturity
securities available-for-sale, net of
tax of ($71,336) - - (132,481) - -
Foreign currency translation adjustment - - - 1,044 -
_________ _________ ____________ _________ ________
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income - - - - 187,878
Dividend paid - - - - (25,000)
Unrealized gains on fixed maturity
securities available for sale, net of
tax of 56,839 - - 105,558 - -
Foreign currency translation adjustment - - - (278) -
__________ _________ ____________ _________ _________
Balance, December 31, 1995 $15,000 $334,011 $63,785 $(1,499) $1,136,584
__________ _________ _____________ _________ __________
__________ _________ _____________ _________ __________
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
Financial Guaranty Insurance
Company Statements of Cash Flows
________________________________________________________________________________
($ in Thousands)
For the Year Ended December 31,
______________________________________
1995 1994 1993
____ ____ ____
Operating Activities:
Net income $187,878 $189,731 $165,360
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of change in
accounting principle, net of tax - - (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment
expense reserves (20,938) 2,648 51,264
Depreciation of property and
equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance
premiums 2,581 (7,437) (15,527)
Change in foreign currency
translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy
acquisition costs 12,279 22,015 22,250
Change in accrued investment
income, and prepaid expenses and
other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity
securities 1,922 5,112 8,976
Change in current income taxes
payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
________ ________ ________
Net cash provided by operating
activities 94,546 184,489 277,448
________ ________ ________
Investing Activities:
Sales and maturities of fixed
maturity securities 836,103 550,534 789,036
Purchases of fixed maturity
securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of
short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment,
net (750) (1,290) (985)
________ _________ __________
Net cash used in investing
activities (71,113) (184,150) (298,335)
________ _________ __________
Financing Activities:
Dividends paid (25,000) - -
Capital contribution - - 21,872
________ __________ __________
Net cash provided by financing
activities (25,000) - 21,872
________ __________ __________
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
________ __________ __________
Cash at end of year $ 199 $ 1,766 $ 1,427
________ __________ __________
________ __________ ___________
See accompanying notes to financial statements.
-5-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
________________________________________________________________________________
(1) Business
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 88% of the
business written since inception by the Company has been municipal bond
insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's
insurance policies do not provide for accelerated payment of the principal
of, or interest on, the bond insured in the case of a payment default. If
the issuer of a Company-insured bond defaults on its obligation to pay debt
service, the Company will make scheduled interest and principal payments as
due and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) Significant Accounting Policies
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1995 presentation. Significant
accounting policies are as follows:
Investments
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related accounting
treatment for each respective category. The Company has determined that its
fixed maturity securities portfolio should be classified as
available-for-sale. Under SFAS 115, securities held as available-for-sale
are recorded at fair value and unrealized holding gains/losses are recorded
as a separate component of stockholder's equity, net of applicable income
taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are
determined on the basis of specific identification.
-6-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
Premium Revenue Recognition
Premiums are earned over the period at risk in proportion to the amount of
coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related unearned
premiums, net of premium credits allowed against the premiums charged for
insurance of refunding issues and applicable acquisition costs, are earned
immediately. Unearned premiums represent the portion of premiums written
related to coverage yet to be provided on policies in force.
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees
involved in underwriting, marketing and policy issuance functions, rating
agency fees, state premium taxes and certain other underwriting expenses,
offset by ceding commission income on premiums ceded to reinsurers (see
Note 6). Net acquisition costs are deferred and amortized over the period
in which the related premiums are earned. Anticipated loss and loss
adjustment expenses are considered in determining the recoverability of
acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments
due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such
reserves amounted to $77.8 million and $98.7 million at December 31, 1995
and 1994, respectively. As of December 31, 1995 and 1994, such reserves
included $28.8 million and $71.0 million, respectively, established based
on an evaluation of the insured portfolio in light of current economic
conditions and other relevant factors. Loss and loss adjustment expenses
include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in
1994. The reserve for loss and loss adjustment expenses is necessarily
based upon estimates, however, in management's opinion the reserves for
loss and loss adjustment expenses is adequate. However, actual results
will likely differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included
in taxable income upon their release from the reserves or upon earlier
release of such amounts from such reserves to cover excess losses as
permitted by insurance regulators. The amounts deducted are allowed as
deductions from taxable income only to the extent that U.S. government
non-interest bearing tax and loss bonds are purchased and held in an amount
equal to the tax benefit attributable to such deductions.
-7-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income
over their estimated service lives. Office furniture and equipment are
depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated over
three years. Maintenance and repairs are charged to expense as incurred.
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing
at December 31, 1995 and 1994 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at
December 31, 1995 and 1994 was $1.5 million and $1.2 million, respectively,
net of tax, and is reported as a separate component of stockholder's
equity.
(3) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by
state insurance regulatory authorities. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related risk
rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as incurred
rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged directly
against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable income
for which income taxes are currently payable, while under GAAP taxes
are also provided for differences between the financial reporting and
the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments; and
(g) all fixed income investments are carried at amortized cost rather than
at fair value for securities classified as available-for-sale under
GAAP.
-8-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
Net Stockholder's Net Stockholder's Net Stockholder's
Income Equity Income Equity Income Equity
-------- ------------- -------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $187,878 $1,547,881 $189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve -- (386,564) -- (328,073) -- (252,542)
Non-admitted assets -- (5,731) -- (7,566) -- (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax -- (63,785) -- 41,773 -- (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance -- -- -- (266) -- --
Contingency reserve tax deduction (see Note 2) -- 78,196 -- 55,496 -- 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 -- 9,716
________ __________ ________ _______ ________ __________
Statutory-basis amount $166,906 $1,001,521 $179,348 $893,734 $185,145 $ 777,097
________ __________ ________ ________ ________ __________
________ __________ ________ ________ ________ __________
</TABLE>
-9-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
(4) Investments
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
____ __________ ___________ ___________ ________
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies $ 71,182 $ 1,696 - $ 72,878
Obligations of states and
political subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by
foreign governments 30,270 152 550 29,872
__________ _________ ________ ___________
Investments available-
for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
__________ _________ ________ ___________
Total $2,134,485 $100,306 $2,175 $2,232,616
__________ ________ ________ ___________
__________ ________ ________ ___________
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1995, by contractual maturity date, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
1995 Cost Value
____ _________ ________
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
__________ ___________
Total $2,134,485 $2,232,616
__________ __________
__________ __________
-10-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1994 Cost Gains Losses Value
____ __________ ___________ __________ __________
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and
political subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by
foreign governments 103,666 400 (4,765) 99,301
__________ _________ _________ __________
Investments available-for-
sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
__________ _________ ________ ___________
Total $2,029,851 $26,217 $(90,484) $1,965,584
__________ _________ ________ ___________
__________ _________ ________ ___________
In 1995, 1994 and 1993, proceeds from sales of investments in fixed maturity
securities available-for-sale carried at fair value were $836.1 million,
$550.5 million, and $789.0 million, respectively. For 1995, 1994 and 1993
gross gains of $36.3 million, $18.2 million and $36.1 million respectively,
and gross losses of $5.5 million, $12.3 million and $1.0 million
respectively, were realized on such sales.
Net investment income of the Company is derived from the following sources
(in thousands):
Year Ended December 31,
__________________________________
1995 1994 1993
________ _________ __________
Income from fixed maturity securities $112,684 $108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
________ ________ __________
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
________ ________ __________
Net investment income $120,398 $109,828 $ 99,920
________ ________ __________
________ ________ __________
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
(5) Income Taxes
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax
sharing agreement with GE Capital, taxes are allocated to the Company and
the Parent based upon their respective contributions to consolidated net
income. The Company's effective federal corporate tax rate (20.6 percent
in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the
corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the Company
for 1995, 1994 and 1993 is comprised of the following (in thousands):
Year Ended December 31,
_______________________
1995 1994 1993
____ ______ _____
Current tax expense $28,913 $43,484 $59,505
Deferred tax expense 19,841 7,741 (7,284)
_______ _______ _______
Federal income tax expense $48,754 $51,225 $52,221
_______ _______ _______
_______ _______ _______
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
Year Ended December 31,
_________________________________
1995 1994 1993
_____ _______ ________
Income taxes computed on income
before provision for federal
income taxes, at the statutory
rate $82,821 $84,334 $75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
________ _______ _______
Provision for income taxes $48,754 $51,225 $52,221
________ _______ _______
________ _______ _______
-12-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995 and 1994
are presented below (in thousands):
1995 1994
______ ________
Deferred tax assets:
Unrealized losses on fixed
maturity securities, available-
for-sale - $22,493
Loss reserves $8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
______ ________
Total gross deferred tax assets 18,434 52,439
Deferred tax liabilities:
Unrealized gains on fixed
maturity securities, available-
for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and
loss bonds 9,454 9,454
Other 7,810 9,126
_______ __________
Total gross deferred tax
liabilities 117,605 75,079
_______ __________
Net deferred tax liability $ 99,171 $22,640
________ __________
________ __________
Based upon the level of historical taxable income, projections of
future taxable income over the periods in which the deferred tax assets
are deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it
will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1995 and 1994. The
company anticipates that the related deferred tax asset will be
realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 million, respectively.
-13-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
(6) Reinsurance
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a
facultative basis. This process serves to limit the Company's exposure on
risks underwritten. In the event that any or all of the reinsuring
companies were unable to meet their obligations, the Company would be
liable for such defaulted amounts. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral under reinsurance agreements in the form of
letters of credit and trust agreements in various amounts with various
reinsurers totaling $33.7 million that can be drawn on in the event of
default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent a
payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial statements,
an initial adjustment of $4.6 million, before applicable income taxes, has
been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $1.1 million, $0.3 million
and $9.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
-14-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
Year Ended December 31,
________________________________
1995 1994 1993
______ ________ ________
Balance at January 1, $98,746 $96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
_______ _______ _______
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
_______ ________ ________
Total Incurred (8,426) 3,646 42,894
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
_______ _________ _________
Total Paid (5,712) (1,302) (670)
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
_______ _________ __________
Balance at December 31, $77,808 $98,746 $96,098
_______ ________ ________
_______ ________ ________
The changes in incurred portfolio reserves principally relate to business
written in prior years. The changes are based upon an evaluation of the
insured portfolio in light of current economic conditions and other
relevant factors.
-15-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
(8) Related Party Transactions
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the management
of the Company's investment portfolio; and telecommunication service
charges. Approximately $3.2 million, $3.2 million and $1.0 million in
expenses were incurred in 1995, 1994 and 1993, respectively, related to
such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides
first loss protection in the event of default. Gross premiums written on
these issues amounted to $1.3 million in 1995, $2.5 million in 1994, and
$3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written in 1995 and 1994 and 2 percent in 1993).
(9) Compensation Plans
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans.
Expenses incurred by the Company under compensation plans and bonuses
amounted to $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and
1993, respectively, before deduction for related tax benefits.
(10) Dividends
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus
after such dividend may not be less than the minimum required paid-in
capital, which was $2.1 million in 1995 and 1994, and (b) dividends may not
exceed the lesser of 10 percent of its surplus or 100 percent of adjusted
net investment income, as defined by New York insurance law, for the 12
month period ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State Insurance Department.
At December 31, 1995 and 1994, the amount of the Company's surplus
available for dividends was approximately $100.2 million and $89.3 million,
respectively.
During 1995, the company paid dividends of $25 million. No dividends were
paid during 1994 or 1993.
-16-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
(11) Financial Instruments
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities Purchased:
The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
1995 1994
___________________ ___________________
Carrying Fair Carrying Fair
amount Value amount Value
________ _____ ________ ______
Financial Assets
Cash
On hand and in demand
accounts $ 199 $ 199 $ 1,766 $1,766
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves. Estimated
fair values of these guaranties are based on amounts currently charged to
enter into similar agreements (net of applicable ceding commissions),
discounted cash flows considering contractual revenues to be received
adjusted for expected prepayments, the present value of future obligations
and estimated losses, and current interest rates. The estimated fair
values of such financial guaranties range between $412.8 million and $456.2
million compared to a carrying value of $540.6 million as of December 31,
1995 and between $518.1 million and $565.9 million compared to a carrying
value of $585.1 million as of December 31, 1994.
-17-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade quality.
The Company has established and maintains its own underwriting standards
that are based on those aspects of credit that the Company deems important
for the particular category of obligations considered for insurance.
Credit criteria include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to
make payment prior to any payment by the Company. The types and extent of
collateral pledged varies, but may include residential and commercial
mortgages, corporate debt, government debt and consumer receivables.
As of December 31, 1995, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $98.7 billion, net
of reinsurance of $20.7 billion. The Company's insured portfolio as of
December 31, 1995 was broadly diversified by geography and bond market
sector with no single debt issuer representing more than 1% of the
Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1995, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
____________
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
_________
Total $98,660.3
_________
_________
-18-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
________________________________________________________________________________
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1995 by state, net of reinsurance, was as follows
(in millions):
Net
Principal
Outstanding
___________
California $ 10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
__________
Sub-total 59,518.2
Other states and International 39,142.1
__________
Total $98,660.3
__________
__________
(12) Commitments
Total rent expense was $2.2 million, $2.6 million and $2.4 million in 1995,
1994 and 1993, respectively. For each of the next five years and in the
aggregate as of December 31, 1995, the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one
year approximate (in thousands):
Year Amount
____ ______
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
________
Total minimum future rental
payments $16,844
_______
_______
-19-
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- --------------------------------------------------------------------------------
UNAUDITED INTERIM FINANCIAL STATEMENTS
September 30, 1996
Balance Sheets..................................................... 1
Statements of Income............................................... 2
Statements of Cash Flows........................................... 3
Notes to Unaudited Interim Financial Statements.................... 4
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
- --------------------------------------------------------------------------------
($ in Thousands)
SEPTEMBER DECEMBER
30, 31,
1996 1995
---------------- --------------
(UNAUDITED)
Assets
Fixed maturity securities, available
for sale, at fair value (amortized
cost of $2,153,856 in 1996
and $2,043,453 in 1995)............ $2,172,841 $2,141,584
Short-term investments, at cost, which
approximates market................ 147,460 91,032
Cash................................. 997 199
Accrued investment income............ 33,825 37,347
Reinsurance receivable............... 7,418 7,672
Deferred policy acquisition costs.... 93,676 94,868
Property, plant and equipment net of
accumulated depreciation of $14,704
in 1996 and $12,861 in 1995........ 5,032 6,314
Prepaid reinsurance premiums......... 159,506 162,087
Prepaid expenses and other assets.... 28,581 39,199
---------------- --------------
Total assets......................... $2,649,336 $2,580,302
---------------- --------------
---------------- --------------
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums.................... $685,364 $727,535
Losses and loss adjustment expenses.. 72,127 77,808
Ceded reinsurance payable............ 12,507 1,942
Accounts payable and accrued expenses 48,382 32,811
Due to parent........................ 260 1,647
Current federal income taxes payable. 78,818 51,296
Deferred federal income
taxes payable...................... 74,195 99,171
Payable for securities purchased..... 45,796 40,211
---------------- --------------
Total liabilities.................... 1,017,449 1,032,421
---------------- --------------
---------------- --------------
Stockholder's Equity:
Common stock, par value 1,500 per share
at December 31, 1995; 10,000 shares
authorized, issued and outstanding. 15,000 15,000
Additional paid-in capital........... 334,011 334,011
Net unrealized gains on fixed maturity
securities available for sale,
net of tax......................... 12,340 63,785
Foreign currency translation
adjustment......................... (2,296) (1,499)
Retained earnings.................... 1,272,832 1,136,584
---------------- --------------
Total stockholder's equity........... 1,631,887 1,547,881
---------------- --------------
Total liabilities and
stockholder's equity............... $2,649,336 $2,580,302
---------------- --------------
---------------- --------------
<PAGE>
SEE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS
1
<PAGE>
Financial Guaranty Insurance
Company Statements Of Income
- --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Revenues:
Gross premiums written................................................ $ 65,875 $ 66,151
Ceded premiums........................................................ (14,178) (14,430)
---------- ----------
Net premiums written.................................................. 51,697 51,721
Decrease in net unearned premiums..................................... 39,589 29,428
---------- ----------
Net premiums earned................................................... 91,286 81,149
Net investment income................................................. 92,957 89,716
Net realized gains.................................................... 11,132 19,574
---------- ----------
Total revenues...................................................... 195,375 190,439
Expenses:
Losses and loss adjustment expenses................................... (2,078) 1,191
Policy acquisition costs.............................................. 13,056 9,013
Other underwriting expenses........................................... 10,582 14,925
---------- ----------
Total expenses...................................................... 21,560 25,129
---------- ----------
Income before provision for federal income taxes.................... 173,815 165,310
Provision for federal income taxes...................................... 37,566 33,323
---------- ----------
Net income.......................................................... $ 136,249 $ 131,987
---------- ----------
---------- ----------
</TABLE>
<PAGE>
SEE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS
2
<PAGE>
Financial Guaranty Insurance
Company Statements Of Cash Flow
($ in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating activities:
Operating activities:
Net income......................................................... $ 136,249 $ 131,987
Adjustments to reconcile net income to net cash provided by
operating activities:.............................................
Provision for deferred income taxes................................ 3,155 14,917
Amortization of fixed maturity securities.......................... 606 2,064
Policy acquisition costs deferred.................................. (11,864) (14,213)
Amortization of deferred policy acquisition costs.................. 13,056 8,787
Depreciation of fixed assets....................................... 1,843 1,686
Change in reinsurance receivable................................... 254 4,574
Change in prepaid reinsurance premiums............................. 2,581 2,930
Foreign currency translation adjustment............................ (1,226) (923)
Change in accrued investment income, prepaid expenses and other
assets........................................................... 14,140 (969)
Change in unearned premiums........................................ (42,171) (32,359)
Change in losses and loss adjustment expense reserves.............. (5,681) (6,439)
Change in other liabilities........................................ 24,749 (6,673)
Change in current income taxes payable............................. 27,522 (4,294)
Net realized gains on investments.................................. (11,132) (19,574)
---------- ---------
Net cash provided by operating activities............................ 152,081 81,501
---------- ---------
Investing activities:
Sales or maturities of fixed maturity securities................... 633,347 622,658
Purchases of fixed maturity securities............................. (727,641) (651,424)
Sales or maturities (purchases) of short-term investments, net..... (56,428) (46,053)
Purchases of property and equipment, net........................... (561) (449)
---------- ---------
Net cash used for investing activities............................. (151,283) (75,268)
---------- ---------
Increase in cash................................................... 798 6,233
Cash at beginning of period........................................ 199 1,766
---------- ---------
Cash at end of period.............................................. $ 997 $ 7,999
---------- ---------
---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS
3
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(1) BASIS OF PRESENTATION
The interim financial statements of Financial Guaranty Insurance Company
(the Company) in this report reflect all adjustments necessary, in the
opinion of management, for a fair statement of (a) results of operations
for the nine months ended September 30, 1996 and 1995, (b) the financial
position at September 30, 1996 and December 31, 1995, and (c) cash flows
for the nine months ended September 30, 1996 and 1995.
These interim financial statements should be read in conjunction with the
financial statements and related notes included in the 1995 audited
financial statements. The 1995 financial statements have been reclassified
to conform to the 1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The following are the significant ways in
which statutory basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related risk
rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as incurred
rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory requirements
for the security of all policyholders, regardless of whether loss
contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to taxable income
for which income taxes are currently payable, while under GAAP taxes are
also provided for differences between the financial reporting and tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets, while
under GAAP they are recorded as federal income tax payments; and
(g) all fixed income investments are carried at amortized cost, rather than
at fair value for securities classified as "Available for Sale" under
GAAP.
4
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
The following is a reconciliation of the net income and stockholder's equity
of Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
1996 1995
------------------------ ------------------------
<CAPTION>
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
GAAP basis amount............................................ $ 136,249 $1,631,887 $ 131,987 $1,487,346
Premium revenue recognition.................................. (6,742) (173,669) (15,432) (159,804)
Deferral of acquisition costs................................ 1,192 (93,676) (5,426) (96,354)
Contingency reserve.......................................... -- (428,798) -- (372,683)
Non-admitted assets.......................................... -- (4,314) -- (6,084)
Case-basis losses incurred and salvage recoverable........... (3,854) (3,906) 1,586 (2,514)
Portfolio loss reserves...................................... -- 24,000 (10,900) 35,200
Deferral of income tax....................................... 3,155 67,550 14,917 59,728
Unrealized gains on fixed maturity securities held at fair
value, net of taxes........................................ -- (12,340) -- (34,463)
Profit commission............................................ 1,234 (4,510) 5,228 (3,613)
Contingency reserve tax deduction............................ -- 85,087 -- 78,196
Provision for unauthorized reinsurance....................... -- -- -- (266)
Allocation of tax benefits due to Parent's net operating loss
to the Company............................................. (2) 10,289 118 9,772
---------- ----------- ---------- -----------
Statutory basis amount....................................... $ 131,232 $1,097,600 $ 122,078 $ 994,461
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
5
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 1996 and 1995
(Unaudited)
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
- Statutory surplus after dividends may not be less than the minimum
required paid-in capital, which was $2,100,000 in 1996.
- Dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined therein, for the
twelve month period ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State Insurance Department.
The amount of the Company's surplus available for dividends at September 30,
1996 is approximately $109.8 million.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (21.6 percent and 20.2
percent for the nine months ended September 30, 1996 and 1995, respectively)
is less than the statutory corporate tax rate (35 percent in 1996 and 1995)
on ordinary income due to permanent differences between financial and
taxable income, principally tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting Standards No. 113
("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts", adopted in 1993, the Company reports assets
and liabilities relating to reinsured contracts gross of the effects of
reinsurance. Net premiums earned are shown net of premiums ceded of $16.8
million and $17.1 million, respectively, for the nine months ended
September 30, 1996 and 1995.
6
<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
<TABLE>
<CAPTION>
Caption Page
<S> <C>
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...................................................28
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
<CAPTION>
Caption Page
<S> <C>
THE POOLING AND SERVICING AGREEMENT...........................................55
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield................................55
Evidence as to Compliance.................................................55
Removal and Resignation of the Servicer...................................55
Rights upon Event of Default .............................................57
Amendment.................................................................57
Termination; Retirement of Securities.....................................58
The Trustee...............................................................58
YIELD CONSIDERATIONS..........................................................59
MATURITY AND PREPAYMENT CONSIDERATIONS........................................61
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.................................................85
LEGAL INVESTMENT MATTERS......................................................85
SMMEA.....................................................................85
FFIEC Policy Statement....................................................85
General...................................................................86
USE OF PROCEEDS...............................................................86
METHODS OF DISTRIBUTION.......................................................86
LEGAL MATTERS.................................................................87
FINANCIAL INFORMATION.........................................................87
RATING........................................................................87
INDEX OF PRINCIPAL DEFINITIONS................................................88
</TABLE>
5
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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
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
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.
11
<PAGE>
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
12
<PAGE>
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.
13
<PAGE>
Legal Investment Not all of the Mortgage Loans in a particular Mortgage
Pool may represent first liens. Accordingly, as
disclosed in the related Prospectus Supplement, certain
classes of Securities offered hereby and by the related
Prospectus Supplement may not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") and,
if so, will not be legal investments for certain types
of institutional investors under SMMEA.
Institutions whose investment activities are subject
to legal investment laws and regulations or to review
by certain regulatory authorities may be subject to
additional restrictions on investment in certain
classes of Securities. Any such institution should
consult its own legal advisors in determining whether
and to what extent a class of Securities constitutes
legal investments for such investors. See "Legal
Investment Matters" herein.
ERISA Considerations A fiduciary of an employee benefit plan and certain
other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh
plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or
arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (each
such entity, a "Plan") should carefully review with
its legal advisors whether the purchase or holding of
Securities could give rise to a transaction that is
prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. Investors are
advised to consult their counsel and to review "ERISA
Considerations" herein.
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
14
<PAGE>
circumstances described in the related Prospectus
Supplement. See "Description of the Securities - Form
of Securities" herein.
Ratings Each class of Fixed-Income Securities offered pursuant
to the related Prospectus Supplement will be rated in
one of the four highest rating categories by one or
more "national statistical rating organizations," as
defined in the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and commonly referred to
as "Rating Agencies." Such ratings will address, in
the opinion of such Rating Agencies, the likelihood
that the related Trust will be able to make timely
payment of all amounts due on the related Fixed-Income
Securities in accordance with the terms thereof. Such
ratings will neither address any prepayment or yield
considerations applicable to any Securities nor
constitute a recommendation to buy, sell or hold any
Securities. 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.
15
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity
There can be no assurance that a secondary market for the Securities of any
series or class will develop or, if it does develop, that it will provide
Securityholders with liquidity of investment or that it will continue for the
life of the Securities of any series. The Prospectus Supplement for any series
of Securities may indicate that an underwriter specified therein intends to
establish a secondary market in such Securities; however, no underwriter will be
obligated to do so. Unless otherwise specified in the related Prospectus
Supplement, the Securities will not be listed on any securities exchange.
Limited Obligations
The Securities will not represent an interest in or obligation, either
recourse or non-recourse (except for certain non-recourse debt described 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
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Mortgage Loans may be applied by the related Trustee to the acquisition of
additional Mortgage Loans during a specified period (rather than used to
distribute payments of principal to Securityholders during such period) with
the result that the related securities possess an interest-only period, also
commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon
the occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in
the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality or the Sponsor, the Servicer, any
Sub-Servicer, any 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
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corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participating
organizations ("Participants") and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("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 300, 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
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by a trust where the Mortgage Note is executed on behalf of the trust, a
deficiency judgment against the trust following foreclosure or sale under a
deed of trust, even if obtainable under applicable law, may be of little
value to the mortgagee or beneficiary if there are no trust assets against
which such deficiency judgment may be executed. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however, in some
of these states the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of
the election requirement, in those states permitting such election, is that
lenders will usually proceed against the security first rather than bringing
a personal action against the borrower. Finally, in certain other states,
statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure to the excess of the outstanding debt over
the fair value of the property at the time of the public sale. The purpose
of these statutes is generally to prevent a beneficiary or mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and, on certain types of loans such as
those secured by second liens and investor-owned 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 except to the extent of
accrued but unrecognized interest and market discount and will be long-term or
short-term depending on whether the Security has been held for more than one
year.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and
certain Grantor Trust Fractional Interest Securities will be treated as having
original issue discount by virtue of the coupon stripping rules in section 1286
of the Code. In very general terms, (i) original issue discount is treated as a
form of interest and must be included in a Holder's income as it accrues
(regardless of the Holder's regular method of accounting) using a constant yield
method; (ii) market discount is treated as ordinary income and must be included
in a Holder's income as principal payments are made on the Security (or upon a
sale of a Security); and (iii) if a Holder so elects, premium may be amortized
over the life of the Security and offset against inclusions of interest income.
These tax consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the Securities was sold. The issue price also includes
any accrued interest attributable to the period between the beginning of the
first Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price
at maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25 percent of the stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a Security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Settlement Date until the date
on which each such distribution is expected to be made under the assumption that
the Mortgage Loans prepay at the rate specified in the applicable Prospectus
Supplement (the Prepayment Assumption) by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
Security's stated redemption price at maturity. If original issue discount is
treated as zero
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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 having
authority to control all substantial decisions of the trust. This exemption is
applicable provided (a) the Holder is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the Security, (b) the
Holder signs a statement under penalties of perjury that certifies that such
Holder is not a U.S. Person, and provides the name and address of such Holder,
and (c) the last U.S. Person in the chain of payment to the Holder receives such
statement from such Holder or a financial institution holding on its behalf and
does not have actual knowledge that 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.
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REMIC Residual Securities
Amounts distributed to a Holder of a Residual Security that is a not a U.S.
Person generally will be treated as interest for purposes of applying the 30
percent (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and Regular Securities,
as described above, but only to the extent that the obligations directly
underlying the REMIC Trust that issued the Residual Security (e.g., Mortgage
Loans or regular interests in another REMIC) were issued after July 18, 1984.
In no case will any portion of REMIC income that constitutes an excess inclusion
be entitled to any exemption from the withholding tax or a reduced treaty rate
for withholding. See "Taxation of Holders of Residual Securities - Excess
Inclusions" above.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described herein under
"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
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interest in the Securities. Therefore, Plans should not acquire or hold
Securities in reliance upon the availability of any exception under the DOL
Regulations.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Estate and cause the Sponsor, the
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Sponsor, the Servicer, any Sub-Servicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of Plan assets; or
(ii) has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute
Plan assets, then any party exercising management or discretionary control
regarding those assets may be deemed to be a Plan "fiduciary," and thus subject
to the fiduciary requirements of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
Prohibited Transaction Class Exemption
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of "mortgage pools" (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;
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provided that the Securities described in clauses (i) and (ii) evidence the
beneficial ownership of a specified portion of both future interest payments
and future principal payments with respect to the Mortgage Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities that differ as to timing, sequential
order, rate or amount of distributions of principal or interest or both, or as
to which distributions of principal or interest or both on any class may be made
upon the occurrence of specified events, in accordance with a schedule or
formula, or on the basis of collections from designated portions of the Mortgage
Pool; or (c) Securities evidencing an interest in a Trust Estate as to which two
or more REMIC elections have been made; or (d) a series including other types of
multiple classes. Accordingly, until further clarification by the DOL, Plans
should not acquire or hold Securities representing interests described in this
paragraph in reliance upon the availability of PTCE 83-1 without first
consulting with their counsel regarding the application of PTCE 83-1 to the
proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of
one percent of the aggregate principal balance of all covered pooled mortgages,
or the principal balance of the largest covered mortgage, must be maintained;
and (3) the amount of the payment retained by the pool sponsor together with
other funds inuring to its benefit must be limited to not more than adequate
consideration for forming the mortgage pools plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also
imposes additional specific conditions for certain types of transactions
involving an investing Plan and for situations in which the Parties in Interest
or Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the Trustee
in respect of that series is affiliated with the Sponsor. If the credit
enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of one percent of the aggregate principal
balance of the Mortgage Loans or the principal balance of the largest Mortgage
Loan, then the Sponsor has been advised that the second general condition
referred to above will be satisfied. The Sponsor will not receive total
compensation for forming and providing services to the Mortgage Pools that will
be more than adequate consideration. Each Plan fiduciary responsible for making
the investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute "mortgage pool
pass-through certificates" for purposes of applying PTCE 83-1, (ii) the second
and third general conditions will be satisfied, and (iii) the specific
conditions, not discussed herein, of PTCE 83-1 have been satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor, the
DOL did not have under its consideration interests in pools of the exact nature
described herein. There are other class and individual prohibited transaction
exemptions issued by the DOL that could apply to a Plan's acquisition or holding
of Securities. There can be no assurance that any of those exemptions will
apply with respect to any particular Plan that acquires or holds Securities or,
even if all of the conditions specified therein were satisfied, that the
exemption would apply to all transactions involving the Trust Estate. The
applicable Prospectus Supplement under "ERISA Considerations" may contain
additional information regarding the application of PTCE 83-1, or other
prohibited transaction exemptions that may be available, with respect to the
series offered thereby.
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
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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 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.
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General
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own
legal advisors in determining whether and to what extent the Securities
constitute legal investments for such investors and comply with any other
applicable requirements.
USE OF PROCEEDS
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
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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.
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......................................................................87
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
Due Date......................................................................39
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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 Participants.....................................................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
Mortgage Pool Insurance Policy................................................50
Mortgage Rate.................................................................22
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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
Senior Securities..........................................................9, 35
Servicer.......................................................................2
Servicing Advance.........................................................44, 47
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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
91
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SPONSOR
OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE SPONSOR, THE SERVICER OR THE CERTIFICATE INSURER SINCE SUCH
DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information................................................. S-3
Reports to the Certificate Holders.................................... S-3
Summary of Prospectus Supplement...................................... S-4
Risk Factors.......................................................... S-18
Sponsor's Mortgage Loan Program....................................... S-19
The Mortgage Loan Groups.............................................. S-21
Prepayment and Yield Considerations................................... S-37
Use of Proceeds....................................................... S-46
The Sponsor, The Servicer and The Sub-Servicer........................ S-46
The Originators....................................................... S-48
Description of the Certificates....................................... S-49
The Certificate Insurance Policy...................................... S-59
The Certificate Insurer............................................... S-60
The Pooling and Servicing Agreement................................... S-62
Certain Federal Income Tax Consequences............................... S-64
ERISA Considerations.................................................. S-65
Ratings............................................................... S-67
Legal Investment Considerations....................................... S-67
Underwriting.......................................................... S-67
Experts............................................................... S-68
Certain Legal Matters................................................. S-68
Index of Principal Terms.............................................. S-69
Appendix I Global Clearance, Settlement and Tax Documentation
Procedures........................................................... I-1
Appendix A -- Audited Financial Statements (Certificate Insurer)...... A-1
Appendix B -- Unaudited Financial Statements (Certificate Insurer).... B-1
PROSPECTUS
Prospectus Supplement................................................. 3
Available Information................................................. 3
Incorporation of Certain Documents by Reference....................... 3
Reports to Securityholders............................................ 4
Summary of Prospectus................................................. 6
Risk Factors.......................................................... 16
The Trusts............................................................ 21
The Mortgage Pools.................................................... 25
Mortgage Loan Program................................................. 28
Description of the Securities......................................... 34
Subordination......................................................... 47
Description of Credit Enhancement..................................... 49
Hazard Insurance; Claims Thereunder................................... 54
The Sponsor........................................................... 55
The Servicer.......................................................... 55
The Pooling and Servicing Agreement................................... 55
Yield Considerations.................................................. 59
Maturity and Prepayment Considerations................................ 61
Certain Legal Aspects of Mortgage Loans and Related Matters........... 62
Certain Federal Income Tax Consequences............................... 69
State Tax Considerations.............................................. 82
ERISA Considerations.................................................. 82
Legal Investment Matters.............................................. 85
Use of Proceeds....................................................... 86
Methods of Distribution............................................... 86
Legal Matters......................................................... 87
Financial Information................................................. 87
Rating................................................................ 87
Index of Principal Definitions........................................ 88
</TABLE>
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UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
$85,000,000
EQUIVANTAGE HOME EQUITY LOAN TRUST 1997-1
$29,400,000
CLASS A-1 FIXED RATE CERTIFICATES
6.650% PASS-THROUGH RATE
$19,900,000
CLASS A-2 FIXED RATE CERTIFICATES
6.975% PASS-THROUGH RATE
$13,700,000
CLASS A-3 FIXED RATE CERTIFICATES
7.550% PASS-THROUGH RATE
$7,000,000
CLASS A-4 FIXED RATE CERTIFICATES
7.275% PASS-THROUGH RATE
$15,000,000
CLASS A-5 ADJUSTABLE RATE CERTIFICATES
EQUIVANTAGE ACCEPTANCE CORP.
SPONSOR OF THE TRUST
EQUIVANTAGE INC.
SERVICER
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[LOGO]
PRUDENTIAL SECURITIES INCORPORATED
SALOMON BROTHERS INC
March 14, 1997
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