PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 11, 1996)
$240,000,000
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
$190,000,000 ADJUSTABLE RATE CLASS A-1 CERTIFICATES
$ 50,000,000 6.80%* CLASS A-2 CERTIFICATES
*SUBJECT TO INCREASE TO 7.30% AS DESCRIBED HEREIN.
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1996-4
------------------------------------
SOUTHERN PACIFIC FUNDING CORPORATION
SELLER
------------------------------------
The Series 1996-4 Mortgage Loan Asset-Backed Pass-Through Certificates
(the "Certificates") will include the following two senior classes (the "Class A
Certificates"): (i) Class A-1 Certificates and (ii) Class A-2 Certificates. In
addition to the Class A Certificates, the Series 1996-4 Mortgage Loan
Asset-Backed Pass-Through Certificates will include the Class I S Certificates
(the "Group I Subordinate Certificates"), the Class II S Certificates (the
"Group II Subordinate Certificates"; and, together with the Group I Subordinate
Certificates, the "Subordinate Certificates") and the Class R Certificates (the
"Residual Certificates"). Only the Class A Certificates are offered hereby. The
Pass-Through Rate (as defined herein) on the Class A-1 Certificates is
adjustable and is calculated as described herein. The Pass-Through Rate on the
Class A-2 Certificates will be the rate set forth above, subject to increase as
described herein. Interest distributions on the Class A Certificates will be
payable monthly at one-twelfth the annual rate.
The Company has caused MBIA Insurance Corporation (the "Certificate
Insurer") to issue two certificate guaranty insurance policies (the "Certificate
Insurance Policies") for the benefit of the Class A Certificateholders pursuant
to which it will guarantee certain payments to the Class A Certificateholders as
described herein.
(CONTINUED ON FOLLOWING PAGE)
[insert MBIA logo]
--------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE CERTIFICATE
INSURANCE POLICIES ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A
CERTIFICATES. THE CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE CERTIFICATE INSURER, THE MASTER
SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER THE
CLASS A CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, THE MASTER
SERVICER OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 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.
--------------------------
There is currently no secondary market for the Class A Certificates.
Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and Prudential
Securities Incorporated (collectively, the "Underwriters") intend to make a
secondary market in the Class A Certificates, but are not obligated to do so.
There can be no assurance that a secondary market for the Class A Certificates
will develop or, if it does develop, that it will continue. The Class A
Certificates will not be listed on any securities exchange.
The Class A Certificates will be purchased from the Company by the
Underwriters and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Class A Certificates, before deducting expenses payable by the Company, will be
equal to approximately 99.66% of the aggregate initial principal balance of the
Class A Certificates, plus accrued interest on the Class A-2 Certificates from
December 1, 1996.
The Class A Certificates are offered by the Underwriters subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the Class A Certificates will be made only
in book-entry form through the facilities of The Depository Trust Company, Cedel
Bank, societe anonyme, and the Euroclear System as further discussed herein, on
or about December 13, 1996, against payment therefor in immediately available
funds. The Class A Certificates will be offered in Europe and the United States
of America.
MORGAN STANLEY & CO. INCORPORATED
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
DECEMBER 11, 1996
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Certificates will each evidence a beneficial ownership interest in
one of two loan groups (each, a "Loan Group") comprising a trust fund (the
"Trust Fund") consisting primarily of certain first lien and second lien
mortgage loans, with terms to maturity of approximately 30 years (the "Mortgage
Loans"), to be deposited by Southern Pacific Secured Assets Corp. (the
"Company") into the Trust Fund for the benefit of the Certificateholders and any
funds on deposit in the Interest Coverage Accounts and the Pre-Funding Accounts
(each as defined herein). The separate Loan Groups are referred to herein as the
"Group I Loans" and "Group II Loans." The Group I Loans are conventional,
adjustable-rate, one- to four-family, first lien mortgage loans. The Group II
Loans are conventional, fixed-rate, one- to four-family, first lien and second
lien mortgage loans. Additional Group I Loans and Group II Loans are intended to
be purchased by the Trust Fund from the Company on or before January 15, 1997,
from funds on deposit in the Pre-Funding Accounts. On the Delivery Date (as
defined herein), the Company will pay to the Trustee approximately
$48,162,020.73 and $11,837,831.36 for deposit in the Group I and Group II
Pre-Funding Account, respectively. On the Delivery Date, the Company will also
pay to the Trustee for deposit in the Interest Coverage Accounts an amount as
required by the Certificate Insurer and specified in the Pooling and Servicing
Agreement. The interest rate (the "Mortgage Rate") on each Group I Loan (i) with
an Index of Six-Month LIBOR (each as defined herein) will be subject to
semi-annual adjustment (in the case of certain of the Group I Loans, after an
initial period of two years or three years from origination), or, with respect
to 0.11% of the Initial Group I Loans, adjustment every three years, and (ii)
with an Index of One-Year CMT (as defined herein) will be subject to annual
adjustment, in each case based on the sum of the related Index and the related
Gross Margin (as defined herein), subject to certain periodic and lifetime rate
limitations (as described herein). The Mortgage Rate on each Group II Loan will
be fixed. The Index for the Group I Loans will be based on either (i) six-month
London interbank offered rates for United States dollar deposits ("Six-Month
LIBOR") or (ii) the weekly average yield on U.S. Treasury securities adjusted to
a constant maturity of one year ("One-Year CMT"), each as described herein.
Certain characteristics of the Mortgage Loans are described herein under
"Description of the Mortgage Pool." All distributions (other than
Cross-Collateralization Payments as described herein) and losses with respect to
a Loan Group will be allocated solely among the Certificates related to such
Loan Group. The rights of the holders of the Group I Subordinate Certificates to
receive distributions with respect to the Group I Loans will be subordinate to
the rights of the holders of the Class A-1 Certificates to the extent described
herein and in the Prospectus. The rights of the holders of the Group II
Subordinate Certificates to receive distributions with respect to the Group II
Loans will be subordinate to the rights of the holders of the Class A-2
Certificates to the extent described herein and in the Prospectus.
It is a condition of the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's Ratings Services ("S&P"), Duff & Phelps
Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc.
("Moody's").
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"), as further described herein. The interests of beneficial owners of the
Class A Certificates will be represented by book entries on the records of DTC
and the participating members of DTC. Persons acquiring beneficial ownership
interests in the Class A Certificates may elect to hold such interests through
DTC in the United States, or Cedel or Euroclear (each as defined herein) in
Europe. Definitive certificates will be available for the Class A Certificates
only under the limited circumstances described herein. See "Description of the
Certificates--Book-Entry Registration of the Class A Certificates" herein.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made in connection with the Trust Fund (exclusive of
the Interest Coverage Accounts and the Pre-Funding Accounts) for federal income
tax purposes. The Class A Certificates and the Subordinate Certificates will
represent ownership of "regular interests" in the REMIC and the Class R
Certificates will constitute the sole class of "residual interests" in the
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
Distributions on the Class A Certificates, will be made on the 25th day
of each month or, if such day is not a business day, then on the next business
day, commencing in January 1997 (each, a "Distribution Date"). As described
herein, interest payable with respect to each Distribution Date (i) on the Class
A-1 Certificates, will accrue on the basis of a 360-day year and the actual
number of days elapsed during the period commencing on the Distribution Date
immediately preceding the month on which such Distribution Date occurs and
ending on the calendar day immediately preceding such Distribution Date, except
with respect to the first Distribution Date, which has an accrual period from
December 13, 1996 to January 24, 1997 and (ii) on the Class A-2 Certificates
will accrue on the basis of a 30-day month, and will be based on the Certificate
Principal Balance thereof and the then-applicable Pass-Through Rate thereof, as
reduced by certain interest shortfalls. Distributions in respect of principal of
the Class A Certificates will be made as described herein under "Description of
the Certificates--Class A Principal Distribution Amount."
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-22 OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE 12 OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
If purchased at a price other than par, the yield to maturity on the
Class A Certificates will be sensitive to the rate and timing of principal
payments (including prepayments, defaults and liquidations) on the Mortgage
Loans. The Mortgage Loans generally may be prepaid in full or in part at any
time; however, a prepayment may subject the related Mortgagor to a prepayment
charge with respect to the majority of the Mortgage Loans in each Loan Group.
The yield to investors on the Class A Certificates will be adversely affected by
any shortfalls in interest collected on the Mortgage Loans due to prepayments,
liquidations or otherwise, to the extent not otherwise covered as described
herein. See "Summary--Special Prepayment Considerations" and "--Special Yield
Considerations" herein, "Certain Yield and Prepayment Considerations" herein and
"Yield Considerations" in the Prospectus.
--------------------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND
ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED NOVEMBER 11, 1996, OF WHICH
THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER 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
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. 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.
S-2
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT Page
----
SUMMARY ...................................................................S-3
RISK FACTORS...............................................................S-22
DESCRIPTION OF THE MORTGAGE POOL...........................................S-24
DESCRIPTION OF THE CERTIFICATES............................................S-46
MBIA INSURANCE CORPORATION.................................................S-61
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS................................S-63
POOLING AND SERVICING AGREEMENT............................................S-70
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................S-74
METHOD OF DISTRIBUTION.....................................................S-76
LEGAL OPINIONS.............................................................S-77
RATINGS ..................................................................S-77
LEGAL INVESTMENT...........................................................S-78
ERISA CONSIDERATIONS.......................................................S-78
EXPERTS ..................................................................S-81
APPENDIX A - UNDERWRITING GUIDELINES
APPLICABLE TO THE MORTGAGE LOANS...................................A-1
PROSPECTUS
SUMMARY OF PROSPECTUS........................................................ 4
RISK FACTORS.................................................................12
THE MORTGAGE POOLS.......................................................... 15
SERVICING OF MORTGAGE LOANS................................................. 24
DESCRIPTION OF THE CERTIFICATES..............................................31
DESCRIPTION OF CREDIT ENHANCEMENT............................................43
PURCHASE OBLIGATIONS.........................................................50
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER..............50
THE COMPANY..................................................................53
IMPERIAL CREDIT INDUSTRIES, INC..............................................53
THE POOLING AGREEMENT........................................................54
YIELD CONSIDERATIONS.........................................................59
MATURITY AND PREPAYMENT CONSIDERATIONS.......................................61
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................62
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................73
STATE AND OTHER TAX CONSEQUENCES.............................................96
ERISA CONSIDERATIONS.........................................................96
LEGAL INVESTMENT MATTERS.....................................................99
USE OF PROCEEDS.............................................................100
METHODS OF DISTRIBUTION.....................................................100
LEGAL MATTERS...............................................................101
FINANCIAL INFORMATION.......................................................101
RATING......................................................................101
INDEX OF PRINCIPAL DEFINITIONS..............................................103
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities................. Mortgage Loan Asset-Backed Pass-Through
Certificates, Series 1996-4.
Company............................. Southern Pacific Secured Assets Corp. (the
"Company"). See "The Company" in the
Prospectus.
Master Servicer..................... Advanta Mortgage Corp. USA ("Advanta" or
the "Master Servicer"). See "Pooling and
Servicing Agreement--The Master Servicer"
herein.
Seller ............................. Southern Pacific Funding Corporation, an
affiliate of the Company ("SPFC" or the
"Seller"). See "Description of the
Mortgage Pool" herein.
Trustee............................. Norwest Bank Minnesota, N.A., a national
banking association (the "Trustee").
Statistical Reference Date.......... November 1, 1996. The statistical
information contained herein concerning
the Initial Mortgage Loans (unless
otherwise stated) is based on the
principal balance of the Initial Mortgage
Loans as of the Statistical Reference
Date. The Depositor does not expect that
such information would be materially
different as of the Cut-off Date.
Cut-off Date........................ December 1, 1996.
Delivery Date....................... On or about December 13, 1996.
Denominations....................... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of The Depository Trust
Company ("DTC") and its Participants (as
defined in the Prospectus). The Class A
Certificates will be issued in minimum
denominations of $25,000 and integral
multiples of $1 in excess thereof.
Certificate Registration............ The Class A Certificates will be
represented by one or more certificates
registered in the name of Cede & Co., as
nominee of DTC (Class A Certificates so
S-4
<PAGE>
registered, "Book-Entry Certificates"). No
person acquiring an interest in the
Book-Entry Certificates (a "Beneficial
Owner") will be entitled to receive a
Class A Certificate in fully registered,
certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. The
interests of Beneficial Owners of the
Book-Entry Certificates will be
represented by book entries on the records
of DTC and participating members of DTC.
Beneficial Owners may elect to hold their
interests in the Class A Certificates
through DTC in the United States, or Cedel
Bank, societe anonyme ("Cedel"), or the
Euroclear System ("Euroclear") in Europe.
Transfers within DTC, Cedel or Euroclear,
as the case may be, will be in accordance
with the usual rules and operating
procedures of the relevant system.
Cross-market transfers between persons
holding directly or indirectly through
DTC, on the one hand, and counterparties
holding directly or indirectly through
Cedel or Euroclear, on the other, will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"),
the relevant depositaries of Cedel and
Euroclear, respectively, and each a
participating member of DTC. All
references herein to Class A Certificates
and Class A Certificateholders reflect the
rights of Beneficial Owners only as such
rights may be exercised through DTC and
its participating organizations, for so
long as such Certificates remain
Book-Entry Certificates. See "Risk
Factors--Book-Entry Certificates" and
"Description of the
Certificates--Book-Entry Registration of
the Class A Certificates".
The Mortgage Pool................... The Mortgage Pool will consist of two
groups (each a "Loan Group") of mortgage
loans (the "Mortgage Loans"). The separate
Loan Groups are referred to herein as the
"Group I Loans" and "Group II Loans." The
Group I Loans are conventional,
adjustable-rate, one- to four-family
mortgage loans. The Group II Loans are
conventional, fixed-rate, one- to four-
family mortgage loans. The Initial Group I
Loans (as defined herein) have an initial
aggregate principal balance as of the
Statistical Reference Date of
$141,819,115.52. The Initial Group II
Loans (as defined herein) have an initial
aggregate principal
S-5
<PAGE>
balance as of the Statistical Reference
Date of $38,182,471.55. The Group I Loans
are secured by first liens, and the Group
II Loans are secured by first liens and
second liens, on fee simple interests in
one- to four-family residential real
properties (each, a "Mortgaged Property").
The Initial Group I Loans had approximate
individual principal balances at
origination of at least $20,000 but not
more than $750,000 with an average
principal balance at origination of
approximately $122,633. The Initial Group
II Loans had approximate individual
principal balances at origination of at
least $12,000 but not more than $500,000
with an average principal balance at
origination of approximately $71,952.
Approximately 99.94% of the Initial Group
I Mortgage Loans have terms to maturity
from the date of origination or
modification of 30 years and approximately
0.06% of the Initial Group I Mortgage
Loans have terms to maturity from the date
of origination or modification of 15
years. Approximately 83.87% of the Initial
Group II Mortgage Loans have terms to
maturity from the date of origination or
modification of 30 years and 16.13% of the
Initial Group II Mortgage Loans have terms
to maturity from the date of origination
or modification of 15 years or less. The
Initial Group I Loans have a weighted
average remaining term to stated maturity
of approximately 359 months as of the
Statistical Reference Date. Approximately
15.31% of the Initial Group I Loans (by
aggregate principal balance as of the
Statistical Reference Date) are refinance
mortgage loans. The Initial Group II Loans
have a weighted average remaining term to
stated maturity of approximately 330
months as of the Statistical Reference
Date. Approximately 11.87% of the Initial
Group II Loans (by aggregate principal
balance as of the Statistical Reference
Date) are refinance mortgage loans. None
of the Initial Group I Loans or Initial
Group II Loans were thirty or more days
delinquent in their Monthly Payments (such
Mortgage Loans, "Delinquent Mortgage
Loans") as of the Cut-off Date.
Prospective investors in the Class A
Certificates should be aware, however,
that only approximately 74.05% and 66.80%
of the Initial Group I Loans and Initial
Group II Loans, respectively (by aggregate
principal balance as of the
S-6
<PAGE>
Statistical Reference Date), had a first
Monthly Payment due on or before November
1, 1996, and therefore, the remaining
Initial Group I Loans and Initial Group II
Loans could not have been Delinquent
Mortgage Loans as of the Cut-off Date.
Approximately 3.64% of the Initial Group
II Loans (by aggregate principal balance
as of the Statistical Reference Date) will
be secured by second liens on the related
Mortgaged Property. Approximately 4.27% of
the Initial Group II Loans (by aggregate
principal balance as of the Statistical
Reference Date) will be Balloon Loans (as
defined herein). Each of the Mortgage
Loans will have been originated by the
Seller or acquired by the Seller as
described herein. For a further
description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
The Mortgage Rate (as defined herein) on
each Group I Loan will be subject to
adjustment, commencing (i) with respect to
approximately 57.66% of the Initial Group
I Loans, approximately six months after
the date of origination, (ii) with respect
to approximately 42.17% of the Initial
Group I Loans, approximately two years
after origination (each such Group I Loan,
a "2/28 Loan") and (iii) with respect to
approximately 0.17% of the Initial Group I
Loans, approximately three years after
origination (each such Group I Loan, a
"3/27 Loan"), on the date (the "Adjustment
Date") specified in the related Mortgage
Note to a rate equal to the sum (rounded
as described herein) of the related Index
as described below and the Gross Margin
(as defined herein) set forth in the
related Mortgage Note, subject to the
limitations described herein. The amount
of the monthly payment on each Group I
Loan (i) with an Index of Six-Month LIBOR,
will be adjusted semi-annually (except
with respect to approximately 0.11% of the
Initial Group I Loans, which will adjust
every three years) or (ii) with an Index
of One-Year CMT, will be adjusted
annually, in each case on the first day of
the month following the month in which the
Adjustment Date occurs to the amount
necessary to pay interest at the then
applicable Mortgage Rate and to fully
amortize the outstanding principal balance
of such Mortgage Loan over its remaining
term to stated maturity. As of the
S-7
<PAGE>
Statistical Reference Date, the Initial
Group I Loans will bear interest at
Mortgage Rates of at least 6.99% per annum
but no more than 15.00% per annum, with a
weighted average Mortgage Rate of
approximately 10.37% per annum as of the
Statistical Reference Date. The Group I
Loans will have different Adjustment
Dates, Gross Margins, Periodic Rate Caps,
Lifetime Rate Caps and Lifetime Rate
Floors, each as described herein.
The Mortgage Rate on each Group II Loan is
fixed. As of the Statistical Reference
Date, the Initial Group II Loans will bear
interest at Mortgage Rates of at least
8.75% per annum but no more than 15.75%
per annum, with a weighted average
Mortgage Rate of approximately 11.91% per
annum as of the Statistical Reference
Date.
Pursuant to the Pooling and Servicing
Agreement, the Trust Fund will be
obligated to purchase from the Company on
or before January 15, 1997, additional
Group I Loans and Group II Loans (the
"Group I Subsequent Mortgage Loans" and
"Group II Subsequent Mortgage Loans,"
respectively), subject to certain
conditions described herein. See
"Description of the Mortgage Pool" herein.
The Mortgage Loans were underwritten in
accordance with the underwriting standards
described in "Description of the Mortgage
Pool--Underwriting Standards" and Appendix
A to this Prospectus Supplement. See also
"Risk Factors--Underwriting Standards" in
this Prospectus Supplement.
For a further description of the Mortgage
Loans, see "Description of the Mortgage
Pool" herein.
Pre-Funding Accounts................ On the Delivery Date, the Company will pay
to the Trustee approximately
$48,162,020.73 (the "Group I Original
Pre-Funded Amount") and $11,837,831.36
(the "Group II Original Pre-Funded
Amount"; and together with the Group I
Original Pre-Funded Amount, the "Original
Pre-Funded Amounts") for deposit in the
Pre-Funding Accounts to provide the Trust
Fund with sufficient funds to purchase
Subsequent Mortgage Loans for the Group I
Loans
S-8
<PAGE>
and Group II Loans. Each Original
Pre-Funded Amount will be reduced during
the related Funding Period (as defined
herein) by the amount thereof used to
purchase Subsequent Mortgage Loans for the
Group I Loans and Group II Loans in
accordance with the Pooling and Servicing
Agreement (on any date of determination,
the related Original Pre-Funded Amount as
so reduced, the related "Pre-Funded
Amount"). See "Description of the Mortgage
Pool--Conveyance of Subsequent Mortgage
Loans and the Pre-Funding Accounts"
herein.
Interest Coverage Accounts.......... On the Delivery Date, the Company will pay
to the Trustee for deposit in the Interest
Coverage Accounts an amount as required by
the Certificate Insurer and specified in
the Pooling and Servicing Agreement. Funds
on deposit in the Interest Coverage
Accounts will be applied by the Trustee to
cover shortfalls in the Group I and Group
II Class A Interest Distribution Amount
(each as defined herein) attributable to
the pre-funding feature during the related
Funding Period. See "Description of the
Certificates--Interest Coverage Account"
herein.
The Index........................... The Index applicable with respect to the
Group I Loans shall be based upon either
(i) the average of the interbank offered
rates for six-month United States dollar
deposits in the London market ("SixMonth
LIBOR") as published in The Wall Street
Journal and as most recently available as
of the first business day forty-five,
thirty or five days prior to the
Adjustment Date, as specified in the
related Mortgage Note or (ii) the weekly
average yield on U.S. Treasury securities
adjusted to a constant maturity of one
year ("One-Year CMT") as published by the
Federal Reserve Board in Statistical
Release H.15(519) and most recently
available as of the first business day
forty-five days prior to the Adjustment
Date, as specified in the related Mortgage
Note.
In the event that the Index specified in a
Mortgage Note is no longer available, an
index reasonably acceptable to the Trustee
that is based on comparable information
will be selected by the Master Servicer.
See "Description of the Mortgage Pool"
herein.
S-9
<PAGE>
The Class A Certificates............ The Class A Certificates will each
evidence a beneficial ownership interest
in a trust fund (the "Trust Fund")
consisting primarily of the Mortgage Pool
and any amounts on deposit in the Interest
Coverage Accounts and the Pre-Funding
Accounts. The Class A Certificates will be
issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off
Date, among the Company, the Master
Servicer and the Trustee (the "Pooling and
Servicing Agreement"). The Class A
Certificates will have the following
approximate Certificate Principal Balances
as of the Delivery Date:
$190,000,000 Class A-1 Certificates
$50,000,000 Class A-2 Certificates
For a description of the allocation of
interest and principal distributions to
the Class A Certificates, see
"Summary--Interest Distributions" and
"--Principal Distributions" below, and
"Description of the Certificates--Class A
Interest Distribution Amount" and "--Class
A Principal Distribution Amount" herein.
The Class A Certificates will be entitled
to the benefit of two certificate guaranty
insurance policies (the "Certificate
Insurance Policies") to be issued by MBIA
Insurance Corporation (the "Certificate
Insurer"), which will insure the payment
of (i) on each Distribution Date, an
amount equal to (a) the related Class A
Interest Distribution Amount (as defined
herein) minus the related Available Funds
(as defined herein) and (b) the related
Subordination Deficit (as defined herein)
(to the extent not covered, with respect
to the Class A-2 Certificates, by Cross-
Collateralization Payments) and (ii) the
unpaid related Preference Amount (as
defined herein). The Certificate Insurance
Policies do not insure the payment of the
Group I Class A Available Funds Cap
Carry-Forward Amount (as defined herein).
See "Description of the Certificates."
Pass-Through Rate on the
Class A Certificates.............. The Pass-Through Rate on the Class A-1
Certificates is adjustable and is
calculated as follows: beginning
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on the Distribution Date in January 1997,
and on each Distribution Date thereafter,
the Pass-Through Rate applicable to the
Class A-1 Certificates will be adjusted to
equal the lesser of (i) (a) with respect
to any Distribution Date which occurs on
or prior to the date on which the
aggregate Principal Balance of the
Mortgage Loans is less than 10% of the sum
of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date and
the Original Pre-Funded Amounts, One-Month
LIBOR (as defined herein) plus 0.215%, or
(b) with respect to any Distribution Date
thereafter, One-Month LIBOR plus 0.43% and
(ii) the Group I Class A Available Funds
Pass-Through Rate.
The "Group I Class A Available Funds
Pass-Through Rate," as of any Distribution
Date, is equal to (i) the weighted average
of the Mortgage Rates of the Group I
Loans, minus (ii) the sum of the Servicing
Fee Rate and the rates per annum at which
the Trustee's Fee and Premium Amount (each
as defined herein) accrue and minus (iii)
commencing on the seventh Distribution
Date, 0.50% per annum.
The "Class A-1 Formula Pass-Through Rate"
for a Distribution Date is the lesser of
(x) the rate determined by clause (i) of
the definition of PassThrough Rate for the
Class A-1 Certificates on such
Distribution Date and (y) the weighted
average of Net Lifetime Rate Caps of the
Group I Loans. The Net Lifetime Rate Cap
on each Group I Loan is equal to the
related Lifetime Rate Cap minus the sum of
the Servicing Fee Rate and the rates per
annum at which the Trustee's Fee and the
Premium Amount accrue.
The Pooling and Servicing Agreement
provides that if the Pass-Through Rate on
the Class A-1 Certificates is less than
the Class A-1 Formula PassThrough Rate and
any resulting shortfall in interest is not
paid on such Distribution Date from any
available Net Monthly Excess Cashflow, as
defined herein, then the amount of any
such shortfall will be carried forward and
paid to the extent of available funds, as
described herein, to the Holders of the
Class A-1 Certificates on future
Distribution Dates and shall accrue
interest at the applicable Class A-1
Formula
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<PAGE>
Pass-Through Rate, until paid (such
shortfall, together with such accrued
interest, the "Group I Class A Available
Funds Cap Carry-Forward Amount"). The
Certificate Insurance Policies do not
cover the Group I Class A Available Funds
Cap Carry-Forward Amount, nor do the
ratings assigned to the Class A-1
Certificates address the payment of the
Group I Class A Available Funds Cap
CarryForward Amount.
The Pass-Through Rate with respect to the
Class A-2 Certificates is equal to (i)
with respect to any Distribution Date
which occurs on or prior to the date on
which the aggregate Principal Balance of
the Mortgage Loans is less than 10% of the
sum of the aggregate Principal Balance of
the Mortgage Loans as of the Cut-off Date
and the Original Pre-Funded Amounts, 6.80%
per annum, and (ii) with respect to any
Distribution Date thereafter, 7.30% per
annum. See "Description of the
Certificates--Class A Interest
Distribution Amounts" herein.
See "Description of the
Certificates--Class A Interest
Distribution Amount" and "--Calculation of
One- Month LIBOR" herein.
Interest Distributions.............. On each Distribution Date, the holders of
the Class A Certificates will be entitled
to receive, to the extent of amounts
available for distribution as described
herein, interest distributions in an
amount equal to the sum of (i) interest
accrued for the related Accrual Period (as
defined herein) on the Certificate
Principal Balance thereof immediately
prior to such Distribution Date at the
then-applicable Pass-Through Rate (based
on a 360-day year and the actual number of
days elapsed, with respect to the Class
A-1 Certificates, and a 30-day month, with
respect to the Class A-2 Certificates),
subject to reduction only in the event of
shortfalls caused by the Relief Act (as
defined in the Prospectus and allocated as
described herein) or the failure of the
Master Servicer to cover Prepayment
Interest Shortfalls to the extent
described herein and (ii) the Group I
Class A Carry-Forward Amount or Group II
Class A Carry-Forward Amount (each as
defined herein), as applicable, allocable
to interest. The aggregate amount of
interest allocable
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to the Class A-1 Certificates and Class
A-2 Certificates (the related "Class A
Interest Distribution Amount") will be
allocable to the related Class A
Certificates on a pro rata basis. See
"Description of the Certificates--Priority
of Payment" and "--Class A Interest
Distribution Amount" herein.
Any Prepayment Interest Shortfalls (as
defined herein) resulting from full or
partial prepayments in any calendar month
will be offset by the Master Servicer on
the Distribution Date in the following
calendar month to the extent such
Prepayment Interest Shortfalls do not
exceed the Servicing Fee payable to the
Master Servicer with respect to such
Distribution Date. An amount equal to the
Class A Certificates' pro rata share,
based on the amount of interest payable on
each such class, of any Prepayment
Interest Shortfalls not so covered by the
Master Servicer will be made available by
the Certificate Insurer for distribution
to the Class A Certificateholders. See
"Pooling and Servicing
Agreement--Servicing and Other
Compensation and Payment of Expenses" and
"Description of the Certificates--Class A
Interest Distribution Amount" herein.
Principal Distributions............. Holders of the Class A-1 Certificates and
Class A-2 Certificates will be entitled to
receive on each Distribution Date, to the
extent of amounts available for
distribution as described herein remaining
after interest on the Class A-1
Certificates and Class A-2 Certificates,
respectively, is distributed, an amount
(the related "Class A Principal
Distribution Amount") equal to the sum of
(i) the portion of any Group I Class A
Carry-Forward Amount or Group II Class A
Carry-Forward Amount, as applicable, which
relates to a shortfall in a distribution
of a related Subordination Deficit, (ii)
all scheduled installments of principal in
respect of the Mortgage Loans in the
related Loan Group received or advanced
during the related Due Period, together
with all unscheduled recoveries of
principal on such Mortgage Loans received
by the Master Servicer during the prior
calendar month, (iii) the Principal
Balance of each Mortgage Loan in the
related Loan Group that was repurchased by
either the Seller or by the Company,
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<PAGE>
(iv) any amounts delivered by the Company
on the Master Servicer Remittance Date (as
defined herein) in connection with a
substitution of a Mortgage Loan in the
related Loan Group, (v) the net
Liquidation Proceeds (as defined in the
Prospectus) collected by the Master
Servicer of all Mortgage Loans in the
related Loan Group during the prior
calendar month (to the extent such net
Liquidation Proceeds are related to
principal), (vi) the amount of any related
Subordination Deficit for such
Distribution Date, (vii) the proceeds
received by the Trustee of any termination
of the related Loan Group (to the extent
such proceeds are related to principal),
(viii) the amount of any related
Subordination Increase Amount (as defined
herein) for such Distribution Date and
(ix) with respect to the Class A-1
Certificates and Class A-2 Certificates,
with respect to the Distribution Date
occurring in January 25, 1997, any amounts
in the related Pre-Funding Account after
giving effect to any purchase of related
Subsequent Mortgage Loans; MINUS (x) the
amount of any related Subordination
Reduction Amount (as defined herein) for
such Distribution Date.
In no event will any Class A Principal
Distribution Amount with respect to any
Distribution Date be less than zero or
greater than the Certificate Principal
Balance of the related Class A
Certificates.
See "Description of the
Certificates--Priority of Payment" and
"--Class A Principal Distribution Amount"
herein.
Credit Enhancement.................. The credit enhancement provided for the
benefit of the Class A Certificateholders
consists solely of (a) the
overcollateralization mechanics which
utilize the internal cash flows of the
Mortgage Loans in the related Loan Group
(and, to the extent of Cross-
Collateralization Payments payable to the
Class A-2 Certificates as described
herein, cash flows on the Mortgage Loans
in Loan Group I) and (b) the related
Certificate Insurance Policy.
OVERCOLLATERALIZATION. The subordination
provisions of the Trust Fund result in a
limited acceleration of the Class A
Certificates relative to the amortization
of
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<PAGE>
the Mortgage Loans in the related Loan
Group, generally in the early months of
the transaction. The accelerated
amortization is achieved by the
application of certain excess interest to
the payment of the Certificate Principal
Balance of the related Class A
Certificates. This acceleration feature
creates overcollateralization which equals
the excess of the aggregate Principal
Balances of the Mortgage Loans in the
related Loan Group and the related
Pre-Funded Amount over the Certificate
Principal Balance of the related Class A
Certificates. Once the required level of
overcollateralization is reached, and
subject to the provisions described in the
next paragraph, the acceleration feature
will cease, unless necessary to maintain
the required level of
overcollateralization.
The Pooling and Servicing Agreement
provides that, subject to certain trigger
tests, the required level of
overcollateralization with respect to each
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 to reduce the actual level of
overcollateralization to its required
level. See "Description of the
Certificates--Overcol- lateralization
Provisions."
THE CERTIFICATE INSURANCE POLICIES. The
Class A Certificateholders will have the
benefit of the related Certificate
Insurance Policy, as discussed more fully
below. See "Description of the
Certificates--The Certificate Guaranty
Insurance Policies" herein.
Certificate Insurer................. MBIA Insurance Corporation (the
"Certificate Insurer"). See "MBIA
Insurance Corporation" herein.
Certificate Guaranty
Insurance Policies................ The Certificate Insurer will issue the
Certificate Insurance Policies as a means
of providing additional credit enhancement
to the Class A Certificates. Under the
Certificate Insurance Policies, the
Certificate Insurer will pay the Trustee,
for the benefit of the holders of the
related Class A Certificates, as further
described herein, an amount that will
insure the
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<PAGE>
payment of (i) on each Distribution Date,
an amount equal to (a) the related Class A
Interest Distribution Amount minus the
related Available Funds and (b) the
related Subordination Deficit (to the
extent not covered, with respect to the
Class A-2 Certificates, by
Cross-Collateralization Payments) and (ii)
the related unpaid Preference Amount. The
Certificate Insurance Policies do not
insure the payment of the Group I Class A
Available Funds Cap Carry-Forward Amount.
A payment by the Certificate Insurer under
a Certificate Insurance Policy is referred
to herein as an "Insured Payment." See
"Description of the Certificates--The
Certificate Guaranty Insurance Policies"
herein.
Cross-Collateralization............. In the event that on any Distribution Date
after giving effect to distributions
pertaining to a particular Loan Group and
its related Certificates (except for any
payment to be made as principal from
proceeds of the related Certificate
Insurance Policy), either a Reimbursement
Amount with respect to either Loan Group
exists or a Subordination Deficit exists
with respect to Loan Group II or the
Subordinated Amount with respect to Loan
Group II would be less than the related
Required Subordinated Amount (such
difference, a "Cross-Collateralized
Subordination Shortfall"), the Class A-2
Certificates or the Certificate Insurer,
as the case may be, will be entitled to
receive an additional payment (a
"CrossCollateralization Payment") in
respect of principal to the extent of such
Subordination Deficit or
CrossCollateralized Subordination
Shortfall or as reimbursement of the
Reimbursement Amount, as the case may be,
out of funds then on deposit in the
Certificate Account for the other Loan
Group that is otherwise payable on such
Distribution Date to the Subordinate
Certificates related to such other Loan
Group.
Mandatory Prepayments
on the Group I and
Group II Class A
Certificates...................... The Class A-1 Certificates and Class A-2
Certificates will be prepaid in part on
the January 25, 1997 Distribution Date in
the event that any amount remains on
deposit in the related Pre-Funding
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<PAGE>
Account on such Distribution Date after
the purchase by the Trust Fund of the
related Subsequent Mortgage Loans, if any.
Although no assurance can be given, it is
anticipated by the Company that the
principal amount of the related Subsequent
Mortgage Loans purchased by the Trust Fund
will require the application of
substantially all of the related Original
Pre-Funded Amount (as defined herein) and
that there should be no material amount of
principal prepaid to the Class A-1
Certificateholders and Class A-2
Certificateholders from the related
Pre-Funding Account. However, it is
unlikely that the Company will be able to
deliver Subsequent Mortgage Loans with an
aggregate principal balance identical to
the related Original Pre-Funded Amount.
See "Description of the
Certificates--Mandatory Prepayments on
Class A-1 Certificates and Class A-2
Certificates" herein.
Advances............................ The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest on the Mortgage Loans, subject to
the limitations described herein. See
"Description of the
Certificates--Advances" herein and in the
Prospectus.
Optional Termination................ At its option, on any Distribution Date
when the aggregate Principal Balance of
the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date
and the aggregate principal balance of the
Subsequent Mortgage Loans as of the
related Subsequent Cut-off Date (as
defined herein), the holder of a majority
percentage interest of the Class R
Certificates (or the Master Servicer (or
the Certificate Insurer, if Advanta is
removed as Master Servicer) if the
Principal Balance of the Mortgage Loans is
less than 5% of such sum) may purchase
from the Trust Fund all remaining Mortgage
Loans and other assets thereof at the
price described herein, and thereby effect
early retirement of the related
Certificates. See "Pooling and Servicing
Agreement--Termination" herein and "The
Pooling Agreement--Termination; Retirement
of Certificates" in the Prospectus.
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<PAGE>
Special Prepayment
Considerations.................... The rate and timing of principal payments
on the Class A Certificates will depend,
among other things, on the rate and timing
of principal payments (including
prepayments, defaults, liquidations and
purchases of the Mortgage Loans in the
related Loan Group due to a breach of a
representation or warranty) on the related
Mortgage Loans. As is the case with
mortgage-backed securities generally, the
Class A Certificates are subject to
substantial inherent cash-flow
uncertainties because the Mortgage Loans
in the related Loan Group may be prepaid
at any time; however, a prepayment may
subject the related Mortgagor to a
prepayment charge with respect to the
majority of the Mortgage Loans in each
Loan Group. Generally, when prevailing
interest rates increase, prepayment rates
on mortgage loans tend to decrease,
resulting in a slower return of principal
to investors at a time when reinvestment
at such higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates decline, prepayment rates
on mortgage loans tend to increase,
resulting in a faster return of principal
to investors at a time when reinvestment
at comparable yields may not be possible.
See "Description of the
Certificates--Class A Principal
Distribution Amount" and "Certain Yield
and Prepayment Considerations" herein, and
"Maturity and Prepayment Considerations"
in the Prospectus.
Special Yield
Considerations................... The yield to maturity on the Class A
Certificates will depend on, among other
things, the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of the Mortgage
Loans in the related Loan Group due to a
breach of a representation or warranty) on
the Mortgage Loans in the related Loan
Group and the allocation thereof to reduce
the Certificate Principal Balance thereof.
The yield to maturity on the Class A
Certificates will also depend on the
related Pass-Through Rate and the purchase
price for such Certificates.
If the Class A Certificates are purchased
at a premium and principal distributions
thereon occur at
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<PAGE>
a rate faster than anticipated at the time
of purchase, the investor's actual yield
to maturity will be lower than that
assumed at the time of purchase.
Conversely, if the Class A Certificates
are purchased at a discount and principal
distributions thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed
at the time of purchase.
The Class A-1 Certificates were structured
assuming, among other things, a prepayment
rate equal to 25% CPR (as defined herein)
and corresponding weighted average life as
described herein. The Class A-2
Certificates were structured assuming,
among other things, a prepayment rate
equal to 115% of the Prepayment Assumption
(as defined herein) and corresponding
weighted average lives as described
herein. The prepayment, yield and other
assumptions to be used for pricing
purposes for the Class A Certificates may
vary as determined at the time of sale.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences..................... A real estate mortgage investment conduit
("REMIC") election will be made with
respect to the Trust Fund (exclusive of
the Interest Coverage Accounts and the
Pre-Funding Accounts) for federal income
tax purposes. Upon the issuance of the
Class A Certificates, Thacher Proffitt &
Wood, counsel to the Company, will deliver
its opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund (exclusive of the Interest Coverage
Accounts and the Pre-Funding Accounts)
will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue
Code of 1986 (the "Code").
For federal income tax purposes, the Class
R Certificates will be the sole class of
"residual interests" in the REMIC and the
Class A Certificates and the Subordinate
Certificates will represent ownership of
"regular interests" in the REMIC and
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<PAGE>
will generally be treated as representing
ownership of debt instruments of the
REMIC.
For federal income tax reporting purposes,
the Class A Certificates will not be
treated as having been issued with
original issue discount. The prepayment
assumption that will be used in
determining the rate of accrual of
original issue discount, market discount
and premium, if any, for federal income
tax purposes will be a rate equal to 25%
CPR, with respect to the Class A-1
Certificates, and 115% of the Prepayment
Assumption, with respect to the Class A-2
Certificates. No representation is made
that the Mortgage Loans will prepay at
these rates or at any other rates.
For further information regarding the
federal income tax consequences of
investing in the Class A Certificates, see
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
Legal Investment.................... The Class A-1 Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so
long as they are rated in at least the
second highest rating category by one or
more nationally recognized statistical
rating agencies. The Class A-2
Certificates will not constitute "mortgage
related securities" for purposes of SMMEA
because the Group II Loans include
Mortgage Loans that are secured by
subordinate liens on the related Mortgaged
Properties. Institutions whose investment
activities are subject to legal investment
laws and regulations, regulatory capital
requirements or review by regulatory
authorities may be subject to restrictions
on investment in the Class A Certificates
and should consult with their legal
advisors. See "Legal Investment" herein
and "Legal Investment Matters" in the
Prospectus.
Ratings............................. It is a condition to the issuance of the
Class A Certificates that they be rated
"AAA" by Standard & Poor's Ratings
Services ("S&P") and Duff & Phelps Credit
Rating Co. ("DCR") and "Aaa" by Moody's
Investors Service, Inc. ("Moody's"). A
security rating is not a recommendation to
buy, sell or hold
S-20
<PAGE>
securities and may be subject to revision
or withdrawal at any time by the assigning
rating organization. A security rating
does not address the frequency of
prepayments of Mortgage Loans, or the
corresponding effect on yield to
investors. Also, the ratings issued by
S&P, DCR and Moody's on payment of
principal and interest do not cover the
payment of the Group I Class A Available
Funds Cap Carry-Forward Amount. See
"Certain Yield and Prepayment
Considerations" and "Ratings" herein and
"Yield Considerations" and "Rating" in the
Prospectus.
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<PAGE>
RISK FACTORS
Prospective Class A Certificateholders should consider, among other
things, the items discussed under "Risk Factors" in the Prospectus and the
following factors in connection with the purchase of the Certificates.
UNDERWRITING STANDARDS
The Mortgage Loans were underwritten by Southern Pacific Funding
Corporation ("SPFC" or the "Seller") in accordance with its underwriting
standards described in "Description of the Mortgage Pool--Underwriting" below
and in Appendix A to this Prospectus Supplement which are primarily intended to
provide single family mortgage loans for non-conforming credits. A
"non-conforming credit" means a mortgage loan which is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet the FNMA or
FHLMC underwriting guidelines, including mortgagors whose creditworthiness and
repayment ability do not satisfy such FNMA or FHLMC underwriting guidelines and
mortgagors who may have a record of credit write-offs, outstanding judgments,
prior bankruptcies and other credit items that do not satisfy such FNMA or FHLMC
underwriting guidelines. ACCORDINGLY, MORTGAGE LOANS UNDERWRITTEN UNDER THE
SELLER'S NON-CONFORMING CREDIT UNDERWRITING STANDARDS ARE LIKELY TO EXPERIENCE
RATES OF DELINQUENCY, FORECLOSURE AND LOSS THAT ARE HIGHER, AND MAY BE
SUBSTANTIALLY HIGHER, THAN MORTGAGE LOANS ORIGINATED IN ACCORDANCE WITH THE FNMA
OR FHLMC UNDERWRITING GUIDELINES.
Under the Seller's non-conforming credit underwriting standards, the
critical factors in underwriting a Mortgage Loan are the income and employment
history of the prospective mortgagor, the creditworthiness of the prospective
mortgagor, an assessment of the value of the related Mortgaged Property and the
adequacy of such property as collateral in relation to the amount of such
Mortgage Loan. Therefore, changes in values of the Mortgaged Properties may have
a greater effect on the delinquency, foreclosure and loss experience of the
related Mortgage Loans than on mortgage loans originated in accordance with the
FNMA or FHLMC credit underwriting guidelines. No assurance can be given that the
values of the Mortgaged Properties in the related Loan Group have remained or
will remain at the levels in effect on the dates of origination of the related
Mortgage Loans. If the values of the Mortgaged Properties in Loan Group I and
Loan Group II decline after the dates of origination of the related Mortgage
Loans, then the rates of delinquencies, foreclosures and losses on the Group I
Loans and Group II Loans may increase and such increase may be substantial.
The mortgage loan programs of SPFC described in "Description of the
Mortgage Pool--Underwriting" in this Prospectus Supplement and in Appendix A to
this Prospectus Supplement were recently implemented and have produced a
relatively low total volume of mortgage loans. Because all of the Mortgage Loans
being sold to the Trust Fund were underwritten in accordance with these
programs, SPFC has limited historical delinquency, foreclosure or loss
experience with respect to its own loan programs that may be referenced for
purposes of estimating the future delinquency, foreclosure or loss experience on
mortgage loans similar to those originated by them included in Loan Group I or
Loan Group II. See "Description of the Mortgage Pool--Delinquency and
Foreclosure Experience" herein.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
None of the Initial Group I Loans or Initial Group II Loans were thirty
or more days delinquent in their Monthly Payments (such Mortgage Loans,
"Delinquent Mortgage Loans") as of the Cut-off Date. Prospective investors in
the Class A Certificates should be aware, however, that only approximately
74.05% and 66.80% of the Initial Group I Loans and Initial Group II Loans,
respectively (by aggregate principal balance as of the Statistical Reference
Date), had a first Monthly Payment due on or before
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<PAGE>
November 1, 1996, and therefore, the remaining Initial Group I Loans and Initial
Group II Loans could not have been Delinquent Mortgage Loans as of the Cut-off
Date.
SECOND LIENS
Approximately 3.64% of the Initial Group II Loans (by aggregate
outstanding principal balance as of the Statistical Reference Date) are secured
by second liens on the related Mortgaged Properties. Group II Loans secured by
second mortgages will be entitled to proceeds that remain from the sale of the
related Mortgaged Property after any related senior mortgage loans and prior
statutory liens have been satisfied and, if such were satisfied by the Master
Servicer, after the Master Servicer has been reimbursed. In the event that such
proceeds are insufficient to satisfy such loans and prior liens in the aggregate
and the Certificate Insurer is unable to perform its obligations under the
related Certificate Insurance Policy, the Class A-2 Certificates may bear (i)
the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is not
realized upon. See "The Mortgage Pool--The Mortgage Loans" in the Prospectus. In
addition, the rate of default of second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties.
RISK OF MORTGAGE LOAN YIELD REDUCING PASS-THROUGH RATES ON THE CLASS A-1
CERTIFICATES
The Pass-Through Rate on the Class A-1 Certificates is generally
expected to be based upon clause (i) of the definition thereof, which is
primarily based upon the value of One-Month LIBOR (as defined herein) as
adjusted every month, while the Mortgage Rates on the Group I Loans adjust
semi-annually or annually (except with respect to approximately 0.11% of the
Initial Group I Loans, which will adjust every three years) based upon different
indices, either Six-Month LIBOR or One-Year CMT, as described under "Description
of the Mortgage Pool--Mortgage Rate Adjustment" herein. However, clause (ii) of
the definition of the Pass-Through Rate on the Class A-1 Certificates limits the
PassThrough Rate on the Class A-1 Certificates to the Group I Class A Available
Funds Pass-Through Rate, which is generally based upon the Mortgage Rates on the
Group I Loans, which are subject to Six-Month LIBOR or One-Year CMT. As a
result, the interest paid to the Class A-1 Certificates may be less than would
be determined using clause (i) of the related definition of Pass-Through Rate.
In particular, because the Mortgage Rates on the Group I Loans adjust less
frequently, the Pass-Through Rate on the Class A-1 Certificates may be
determined by the Group I Class A Available Funds Pass-Through Rate for extended
periods in a rising interest rate environment. In addition, with respect to the
Class A-1 Certificates, One-Month LIBOR, Six-Month LIBOR and One-Year CMT may
respond to different economic and market factors, and there is not necessarily
any correlation between them. Thus, it is possible, for example, that One-Month
LIBOR may rise during periods in which Six-Month LIBOR or One-Year CMT is stable
or is falling or that, even if One-Month LIBOR, Six-Month LIBOR and OneYear CMT
all rise during the same period, One-Month LIBOR may rise much more rapidly than
SixMonth LIBOR and One-Year CMT. In addition, the Mortgage Rates on the Group I
Loans are subject to the Periodic Rate Caps and to specified Lifetime Rate Caps
and Lifetime Rate Floors, and the Mortgage Rates on the 2/28 Loans and 3/27
Loans, which represent 42.17% and 0.17% of the Initial Group I Loans,
respectively (by aggregate outstanding principal balance as of the Statistical
Reference Date), will not have a first Adjustment Date until two years and three
years, respectively, from the origination of each such 2/28 Loan and 3/27 Loan.
THE SUBSEQUENT MORTGAGE LOANS
Subsequent Mortgage Loans may have characteristics different from those
of the related Initial Mortgage Loans. However, each Subsequent Mortgage Loan
must satisfy the eligibility criteria referred to herein under "Description of
the Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Accounts" at the time of its conveyance to the Trust Fund and be underwritten in
accordance
S-23
<PAGE>
with the criteria set forth herein under "Description of the Mortgage
Pool--Underwriting" and Appendix A to this Prospectus Supplement.
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Pre-Funding Accounts have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
Fund by the end of the related Funding Period, the Holders of the related Class
A Certificates will receive, as described herein, on the Distribution Date
occurring in January 25, 1997, any amounts in the related Pre-Funding Account
after giving effect to any purchase of related Subsequent Mortgage Loans.
Although no assurances can be given, the Company intends that the principal
amount of Subsequent Mortgage Loans sold to the Trust Fund will require the
application of substantially all amounts on deposit in the Pre-Funding Accounts
and that there will be no material principal payment to the related Class A
Certificateholders on such Distribution Date.
BOOK-ENTRY CERTIFICATES
Issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in the Book-Entry Certificates will be effected only
through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
DTC, Cedel or Euroclear systems, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
such Certificates.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Book-Entry Certificates since
such distributions will be forwarded by the Trustee to DTC, and DTC will credit
such distributions to the accounts of its Participants (as defined herein) which
will thereafter credit them to the accounts of Beneficial Owners either directly
or indirectly through indirect participants.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the mortgage loans included in the Trust Fund as of the Delivery
Date (with respect to Loan Group I and Loan Group II, the "Initial Group I
Loans" and "Initial Group II Loans," respectively) and does not include mortgage
loans purchased by the Trust Fund after the Delivery Date (the "Subsequent
Mortgage Loans"). In addition, such statistical information is dated as of the
Statistical Reference Date, and not as of the Cut-off Date, so such information
will vary slightly from the final initial Mortgage Pool.
With respect to Loan Group I and Loan Group II, Subsequent Mortgage
Loans are intended to be purchased by the Trust Fund from the Company from time
to time on or before January 15, 1997, from funds on deposit in the Pre-Funding
Accounts. The Subsequent Mortgage Loans, if available, will be purchased by the
Company, and sold by the Company to the Trust Fund to become part of the related
Loan Group. The Pooling and Servicing Agreement will provide that the Group I
Loans and Group II Loans, following the conveyance of the Subsequent Mortgage
Loans, must conform in the aggregate for each such Loan Group as determined
separately to certain specified characteristics described below under
"--Conveyance of Subsequent Mortgage Loans and the Pre-Funding Accounts." In the
sole discretion of
S-24
<PAGE>
the Certificate Insurer, Subsequent Mortgage Loans with characteristics varying
from those described herein may be purchased by the Trust Fund; provided,
however, that the addition of such Group I Loans and Group II Loans will not
materially affect the aggregate characteristics of the entire related Loan
Group.
The Mortgage Loans underlying the Certificates consist of the "Group I
Loans," which had an aggregate outstanding principal balance as of the
Statistical Reference Date of $141,819,115.52 and the "Group II Loans," which
had an aggregate outstanding principal balance as of the Statistical Reference
Date of $38,182,471.55 (each such group of Mortgage Loans, "Loan Group I" or
"Loan Group II," respectively, or a "Loan Group"). The Group I Loans will
consist of conventional, adjustable rate, monthly payment, first lien mortgage
loans with terms to maturity of approximately 30 years from the date of
origination or modification. The Group II Loans will generally consist of
conventional, fixed-rate, monthly payment, first lien mortgage loans (except
that approximately 3.64% of the Initial Group II Loans are second lien
mortgages). Approximately 83.87% of the Initial Group II Mortgage Loans have
terms to maturity from the date of origination or modification of 30 years and
approximately 16.13% of the Initial Group II Mortgage Loans have terms to
maturity from the date of origination or modification of 15 years or less. The
Mortgage Loans will be originated or acquired by the Seller, substantially in
accordance with the underwriting criteria described herein under
"--Underwriting" below and in Appendix A. The Company will acquire the Group I
Loans and Group II Loans to be included in Mortgage Pool from SPFC, an affiliate
of the Company. SPFC in turn either originated such Mortgage Loans or acquired
them pursuant to various mortgage loan purchase agreements. The Seller will make
certain representations and warranties with respect to the Mortgage Loans and,
as more particularly described in the Prospectus, will have certain repurchase
or substitution obligations in connection with a breach of any such
representation or warranty, as well as in connection with an omission or defect
in respect of certain constituent documents required to be delivered with
respect to the Mortgage Loans, in any event if such breach, omission or defect
cannot be cured and it materially and adversely affects the interests of
Certificateholders. See "Description of the Mortgage Pool--Representations by
Sellers" and "Description of the Certificates--Assignment of Trust Fund Assets"
in the Prospectus and "--The Seller" below. The Mortgage Loans will have been
originated or acquired by the Seller in accordance with the underwriting
criteria described herein. See "--Underwriting" below and Appendix A to this
Prospectus Supplement.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Company will assign the representations and warranties made by the Seller to the
Trustee for the benefit of the Certificateholders and the Certificate Insurer.
Each Mortgage Loan will contain a customary "due-on-sale" clause. See
"Certain Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions"
in the Prospectus.
Approximately 59.51% and 76.72% of the Initial Group I Loans and
Initial Group II Loans, respectively, provide for payment of a prepayment
charge. Generally, each such Mortgage Loan provides for payment of a prepayment
charge for certain partial prepayments and all prepayments in full made within
approximately three or five years of the origination of such Mortgage Loan, in
an amount equal to six months' advance interest on the amount of the prepayment
that, when added to all other amounts prepaid during the twelve-month period
immediately preceding the date of the prepayment, exceeds twenty percent of the
original principal amount of the Mortgage Loan. The Seller will be entitled to
all prepayment charges received on the Mortgage Loans and such amounts will not
be available for distribution on the Certificates.
None of the Mortgage Loans are covered by a primary mortgage insurance
policy. See "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder" in
the Prospectus.
S-25
<PAGE>
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate (as defined herein) on each Group I Loan will be
subject to adjustment, commencing (i) with respect to approximately 57.66% of
the Initial Group I Loans, approximately six months after the date of
origination, (ii) with respect to approximately 42.17% of the Initial Group I
Loans, approximately two years after origination (each such Group I Loan, a
"2/28 Loan") and (iii) with respect to approximately 0.17% of the Initial Group
I Loans, approximately three years after origination (each such Group I Loan, a
"3/27 Loan"). The Mortgage Rate on each Group I Loan (i) with an Index of
Six-Month LIBOR, will adjust semi-annually (except with respect to approximately
0.11% of the Initial Group I Loans, which will adjust every three years) or (ii)
with an Index of One-Year CMT, will adjust annually, in each case on the first
day of the months specified in the related Mortgage Note (each such date, an
"Adjustment Date") to a rate equal to the sum, generally rounded to the nearest
one-eighth of one percentage point (12.5 basis points), of (i) the related Index
plus (ii) a fixed percentage (the "Gross Margin"), which is generally subject to
a maximum increase or decrease in the Mortgage Rate on any Adjustment Date (the
"Periodic Rate Cap") of 1.00% with respect to approximately 56.87% of the
Initial Group I Loans and 1.50% with respect to approximately 42.59% of the
Initial Group I Loans (which percentage includes the initial 2/28 Loans, which
loans have a Periodic Rate Cap of 1.50% for the first Adjustment Date and for
each Adjustment Date thereafter, and 3/27 Loans, which loans have a Periodic
Rate Cap of 3.00% for the first Adjustment Date and 1.50% for each Adjustment
Date thereafter), each by aggregate Principal Balance as of the Statistical
Reference Date and to specified maximum and minimum lifetime Mortgage Rates
("Lifetime Rate Caps" and "Lifetime Rate Floors," respectively). The Mortgage
Loans were generally originated with an initial Mortgage Rate below the sum of
the current Index and the Gross Margin. The Index applicable with respect to the
Group I Loans is based upon either (i) the average of the interbank offered
rates for six-month United States dollar deposits in the London market
("Six-Month LIBOR") as published in The Wall Street Journal and as most recently
available as of the first business day forty-five, thirty or five days prior to
the Adjustment Date, as specified in the related Mortgage Note or (ii) the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of one year ("One-Year CMT") as published by the Federal Reserve Board in
Statistical Release H.15(519) and most recently available as of the first
business day forty-five days prior to the Adjustment Date, as specified in the
related Mortgage Note. The Index for all of the Initial Group I Loans will be
Six-Month LIBOR. Subsequent Mortgage Loans in Loan Group I will have an Index
based on either Six-Month LIBOR or One-Year CMT. Due to the application of the
Periodic Rate Caps, Lifetime Rate Caps and Lifetime Rate Floors, the Mortgage
Rate on any Group I Loan as adjusted on any related Adjustment Date, may not
equal the sum of the related Index and the Gross Margin. The Mortgage Rate on
each Group II Loan is fixed. The Due Date is generally the first day of the
month of all of the Mortgage Loans. Four Initial Group II Loans, comprising
approximately 0.27% of the Initial Group II Loans, by aggregate Principal
Balance as of the Statistical Reference Date, have a first Due Date that is not
the first day of the month.
Approximately 0.25% of the Initial Group I Loans, including all Initial
Group I Loans that are 2/28 Loans and 3/27 Loans, will not have reached their
first Adjustment Date on or before the Statistical Reference Date. The initial
Mortgage Rate with respect to such Mortgage Loans is generally lower than the
rate that would have been produced if the applicable Gross Margin had been added
to the Index in effect at origination. Group I Loans that have not reached their
first Adjustment Date are, therefore, more likely to be subject to the Periodic
Rate Cap on their first Adjustment Date.
MORTGAGE LOAN CHARACTERISTICS
GROUP I LOANS
The Initial Group I Loans will consist of Mortgage Loans with an
aggregate Principal Balance outstanding as of the Statistical Reference Date,
after deducting payments of principal due on or prior to
S-26
<PAGE>
such date, of $141,819,115.52. All percentages of the Initial Group I Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate principal balance as of the Statistical Reference Date.
Approximately 99.94% of the Initial Group I Loans have original terms
to stated maturity of approximately 30 years and approximately 0.06% of the
Initial Group I Loans have terms to stated maturity of approximately 15 years.
All of the Group I Loans are secured by first liens.
Effective with the first payment due on a Group I Loan after each
related Adjustment Date, the Monthly Payment will be adjusted to an amount that
will fully amortize the outstanding principal balance of the Mortgage Loan over
its remaining term. The weighted average number of months from the Statistical
Reference Date to the next Adjustment Date for the Initial Group I Loans is
approximately 11 months.
As of the Statistical Reference Date, each Initial Group I Loan will
have an unpaid principal balance of not less than $19,993.99 or more than
$750,000.00 and the average unpaid principal balance of the Initial Group I
Loans will be approximately $122,574.86. The latest stated maturity date of any
of the Initial Group I Loans will be December 1, 2026; however, the actual date
on which any Mortgage Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal. Based on information
supplied by the mortgagors in connection with their loan applications at
origination, approximately 89.36% of the Initial Group I Loans will be secured
by Mortgaged Properties which are owner occupied primary residences,
approximately 1.08% of the Initial Group I Loans will be secured by Mortgaged
Properties which are second homes and approximately 9.56% of the Initial Group I
Loans will be secured by Mortgaged Properties which are non-owner occupied
properties. No Initial Group I Loan provides for negative amortization or
deferred interest.
Set forth below is a description of certain additional characteristics
of the Initial Group I Loans as of the Statistical Reference Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
S-27
<PAGE>
<TABLE>
INITIAL MORTGAGE RATES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
INITIAL MORTGAGE RATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- --------------- ----------------------- ------------------------
<C> <C> <C> <C> <C>
6.751% - 7.000% 3 $531,405.29 0.37%
7.501% - 7.750% 3 279,795.83 0.20
7.751% - 8.000% 6 1,798,965.14 1.27
8.001% - 8.250% 15 1,991,065.87 1.40
8.251% - 8.500% 20 2,473,679.43 1.74
8.501% - 8.750% 40 5,527,657.79 3.90
8.751% - 9.000% 58 7,514,741.69 5.30
9.001% - 9.250% 47 6,772,571.79 4.78
9.251% - 9.500% 90 10,704,458.34 7.55
9.501% - 9.750% 79 11,684,064.76 8.24
9.751% - 10.000% 123 14,624,289.00 10.31
10.001% - 10.250% 59 8,857,775.45 6.25
10.251% - 10.500% 105 12,930,183.86 9.12
10.501% - 10.750% 82 11,183,003.25 7.89
10.751% - 11.000% 84 8,569,285.59 6.04
11.001% - 11.250% 45 6,166,195.66 4.35
11.251% - 11.500% 55 6,313,298.81 4.45
11.501% - 11.750% 57 6,681,785.61 4.71
11.751% - 12.000% 38 3,779,546.47 2.67
12.001% - 12.250% 34 3,389,102.82 2.39
12.251% - 12.500% 24 1,862,819.06 1.31
12.501% - 12.750% 26 2,436,460.47 1.72
12.751% - 13.000% 18 1,136,836.19 0.80
13.001% - 13.250% 17 2,051,080.20 1.45
13.251% - 13.500% 7 549,307.55 0.39
13.501% - 13.750% 7 770,551.14 0.54
13.751% - 14.000% 8 852,360.57 0.60
14.001% - 14.250% 1 60,079.47 0.04
14.251% - 14.500% 5 305,954.81 0.22
14.501% - 15.000% 1 20,793.61 0.01
- --------- ----
TOTAL . . . . . . . 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
The weighted average Initial Mortgage Rate of the Initial Group I Loans
will be approximately 10.37% per annum.
S-28
<PAGE>
<TABLE>
NEXT INTEREST ADJUSTMENT DATE
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
NEXT INTEREST ADJUSTMENT DATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
December 1996 2 $153,792.66 0.11%
January 1997 4 681,193.79 0.48
February 1997 43 5,757,783.09 4.06
March 1997 158 24,040,830.55 16.95
April 1997 204 25,232,073.53 17.79
May 1997 187 25,723,788.00 18.14
June 1997 1 184,800.00 0.13
July 1998 14 1,548,038.35 1.09
August 1998 23 2,795,690.49 1.97
September 1998 120 12,206,184.39 8.61
October 1998 198 22,078,044.51 15.57
November 1998 200 21,128,560.00 14.90
December 1998 1 48,600.00 0.03
September 1999 1 159,865.00 0.11
October 1999 1 79,871.16 0.06
----- -------------- ------
TOTAL.................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
The weighted average remaining months to the next interest Adjustment
Date of the Initial Group I Loans will be approximately 13 months.
<TABLE>
GROSS MARGIN
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- ----------------------- ---------------------
<S> <C> <C> <C>
4.501% - 4.750% 4 $744,406.16 0.52%
4.751% - 5.000% 160 17,646,442.33 12.44
5.001% - 5.250% 62 7,365,611.78 5.19
5.251% - 5.500% 259 35,683,604.84 25.16
5.501% - 5.750% 144 15,675,432.77 11.05
5.751% - 6.000% 221 26,277,826.70 18.53
6.001% - 6.250% 91 12,094,443.30 8.53
6.251% - 6.500% 92 10,617,177.76 7.49
6.501% - 6.750% 43 6,173,471.27 4.35
6.751% - 7.000% 29 3,730,881.48 2.63
7.001% - 7.250% 14 1,494,967.93 1.05
7.251% - 7.500% 4 361,390.46 0.25
7.501% - 7.750% 8 1,226,717.71 0.86
7.751% - 8.000% 8 610,696.71 0.43
8.001% - 8.250% 2 99,274.90 0.07
8.251% - 8.500% 8 892,877.02 0.63
8.501% - 8.750% 3 396,044.87 0.28
8.751% - 9.000% 2 131,465.89 0.09
9.001% - 9.250% 1 83,941.97 0.06
9.251% - 9.500% 2 512,439.67 0.36
----- -------------- ------
TOTAL............................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
The weighted average Gross Margin of the Initial Group I Loans will be
approximately 5.79% per annum.
S-29
<PAGE>
<TABLE>
LIFETIME RATE CAP
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LIFETIME RATE CAP GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
12.501% - 13.000% 1 $64,768.59 0.05%
13.501% - 14.000% 4 891,163.40 0.63
14.501% - 15.000% 17 3,083,078.65 2.17
15.001% - 15.500% 49 6,581,775.61 4.64
15.501% - 16.000% 106 13,915,247.59 9.81
16.001% - 16.500% 130 16,108,001.95 11.36
16.501% - 17.000% 191 24,871,576.63 17.54
17.001% - 17.500% 160 21,340,348.75 15.05
17.501% - 18.000% 161 18,984,132.64 13.39
18.001% - 18.500% 100 12,451,424.72 8.78
18.501% - 19.000% 95 10,524,036.63 7.42
19.001% - 19.500% 57 5,154,470.49 3.63
19.501% - 20.000% 41 3,331,920.97 2.35
20.001% - 20.500% 24 2,578,629.30 1.82
20.501% - 21.000% 14 1,551,711.71 1.09
21.001% - 21.500% 6 366,034.28 0.26
21.501% - 22.000% 1 20,793.61 0.01
- ---------
TOTAL...................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
The weighted average Lifetime Rate Cap of the Initial Group I Loans
will be approximately 17.31% per annum.
S-30
<PAGE>
<TABLE>
LIFETIME RATE FLOOR
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LIFETIME RATE FLOOR GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ----------------- ------------------------ ----------------------
<S> <C> <C> <C>
6.501% - 7.000% 3 $531,405.29 0.37%
7.001% - 7.500% 1 242,360.67 0.17
7.501% - 8.000% 11 2,281,261.24 1.61
8.001% - 8.500% 35 4,464,745.30 3.15
8.501% - 9.000% 96 12,737,711.01 8.98
9.001% - 9.500% 135 17,274,529.86 12.18
9.501% - 10.000% 203 26,370,681.56 18.59
10.001% - 10.500% 164 21,787,959.31 15.36
10.501% - 11.000% 166 19,752,288.84 13.93
11.001% - 11.500% 100 12,479,494.47 8.80
11.501% - 12.000% 95 10,461,332.08 7.38
12.001% - 12.500% 58 5,251,921.88 3.70
12.501% - 13.000% 44 3,573,296.66 2.52
13.001% - 13.500% 24 2,600,387.75 1.83
13.501% - 14.000% 15 1,622,911.71 1.14
14.001% - 14.500% 6 366,034.28 0.26
14.501% - 15.000% 1 20,793.61 0.01
--- ------------- ------
TOTAL................ 1,157 141,819,115.52 100.00%
===== ============== =======
</TABLE>
The weighted average Lifetime Rate Floor of the Initial Group I Loans
(other than the Initial Group I Loans which have a Lifetime Rate Floor of 0.00%)
will be approximately 10.37% per annum.
<TABLE>
REMAINING MONTHS TO STATED MATURITY
<CAPTION>
PERCENTAGE OF
REMAINING MONTHS STATISTICAL REFERENCE DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATED MATURITY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C>
170 - 179 1 $82,559.51 0.06%
180 - 349 1 93,910.62 0.07
350 - 359 766 94,556,897.39 66.67
360 - 369 389 47,085,748.00 33.20
--- -------------- ------
TOTAL................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
The weighted average remaining term to stated maturity of the Initial
Group I Loans will be approximately 359 months.
S-31
<PAGE>
<TABLE>
YEARS OF ORIGINATION
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
YEARS OF ORIGINATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C>
1995 1 $ 81,200.00 0.06%
1996 1,156 141,737,915.52 99.94
-------- --------------------- -----
TOTAL.................................... 1,157 141,819,115.52 100.00%
========== ========================= =======
</TABLE>
The earliest month and year of origination of any Initial Group I Loan
is October 1995 and the latest month and year of origination will be November
1996.
<TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
5.01% - 10.00% 1 $247,313.20 0.17%
20.01% - 25.00% 1 41,953.93 0.03
25.01% - 30.00% 5 876,276.53 0.62
30.01% - 35.00% 4 224,791.99 0.16
35.01% - 40.00% 13 749,467.33 0.53
40.01% - 45.00% 11 910,797.48 0.64
45.01% - 50.00% 20 2,323,256.29 1.64
50.01% - 55.00% 45 4,072,060.97 2.87
55.01% - 60.00% 62 7,042,325.92 4.97
60.01% - 65.00% 137 16,527,117.83 11.65
65.01% - 70.00% 186 23,615,315.14 16.65
70.01% - 75.00% 215 26,625,457.90 18.77
75.01% - 80.00% 251 33,004,314.99 23.27
80.01% - 85.00% 167 21,014,902.22 14.82
85.01% - 90.00% 36 4,165,493.48 2.94
90.01% - 95.00% 1 242,360.67 0.17
95.01% - 100.00% 2 135,909.65 0.10
---- ------------- ------
TOTAL................................ 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group I Loans were approximately 7.18% and 100.00%, respectively, and
the weighted average Loan-to-Value Ratio at origination of the Initial Group I
Loans was approximately 73.00%.
S-32
<PAGE>
<TABLE>
MORTGAGE LOAN PROGRAM
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ --------------- ----------------------- ---------------------
<S> <C> <C> <C>
Full Documentation 713 $77,424,258.94 54.59%
Alternate Documentation 8 624,523.11 0.44
No Income Qualification 9 928,976.13 0.66
Quick Documentation 73 9,645,665.09 6.80
Reduced Documentation 88 16,296,418.47 11.49
Stated Income 266 36,899,273.78 26.02
--- ------------- -----
TOTAL...................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
See "--Underwriting" below and Appendix A to the Prospectus Supplement
for a description of the Seller's mortgage loan documentation programs.
<TABLE>
Original Mortgage Loan Principal Balances
<CAPTION>
PERCENTAGE OF
ORIGINAL STATISTICAL REFERENCE DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
$0.01 - $25,000.00 14 $318,763.18 0.22%
$25,000.01 - $50,000.00 161 6,551,347.62 4.62
$50,000.01 - $75,000.00 264 16,656,673.82 11.75
$75,000.01 - $100,000.00 220 19,331,781.26 13.63
$100,000.01 - $125,000.00 153 16,882,665.01 11.90
$125,000.01 - $150,000.00 85 11,675,810.59 8.23
$150,000.01 - $175,000.00 64 10,256,214.82 7.23
$175,000.01 - $200,000.00 49 9,287,168.48 6.55
$200,000.01 - $225,000.00 31 6,547,994.58 4.62
$225,000.01 - $250,000.00 19 4,534,377.48 3.20
$250,000.01 - $275,000.00 12 3,120,259.12 2.20
$275,000.01 - $300,000.00 9 2,542,705.71 1.79
$300,000.01 - $325,000.00 4 1,268,651.09 0.89
$325,000.01 - $350,000.00 13 4,418,017.53 3.12
$350,000.01 - $375,000.00 6 2,187,712.07 1.54
$375,000.01 - $400,000.00 9 3,525,637.11 2.49
$400,000.01 - $425,000.00 5 2,070,416.20 1.46
$425,000.01 - $450,000.00 6 2,635,803.79 1.86
$450,000.01 - $475,000.00 3 1,397,966.66 0.99
$475,000.01 - $500,000.00 14 6,878,983.72 4.85
$500,000.01 - $525,000.00 4 2,044,070.64 1.44
$525,000.01 - $550,000.00 1 550,000.00 0.39
$550,000.01 $575,000.00 2 1,132,303.81 0.80
$575,000.01 - $600,000.00 2 1,194,871.22 0.84
$625,000.01 - $650,000.00 3 1,926,420.01 1.36
$675,000.01 - $700,000.00 2 1,382,500.00 0.97
$725,000.01 - $750,000.00 2 1,500,000.00 1.06
- ------------ ----
Total.......................... 1,157 $141,819,115.52 100.00%
===== =============== ======
</TABLE>
The average original principal balance of the Initial Group I Loans will be
approximately $122,632.58.
S-33
<PAGE>
<TABLE>
PROPERTY TYPES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family 998 $123,600,700.31 87.15%
2-4 Family 82 8,825,375.24 6.22
Condominium 62 6,267,215.43 4.42
PUD 11 2,382,667.54 1.68
Townhouse 2 182,378.50 0.13
Other 2 560,778.50 0.40
- ---------- ----
TOTAL................................. 1,157 141,819,115.52 100.00%
===== ============== =======
</TABLE>
<TABLE>
RISK CATEGORIES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CLASSIFICATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
A 90 $10,236,855.01 7.22%
A- 577 79,790,256.09 56.26
B 277 30,926,195.41 21.81
C 126 13,048,093.87 9.20
D 87 7,817,715.14 5.51
-- ------------ ----
Total.................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
See "--Underwriting" below and Appendix A to this Prospectus Supplement
for a description of the Seller's risk classifications.
S-34
<PAGE>
<TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ------------- ----------------- -----------------
<S> <C> <C> <C>
California 256 $37,701,189.80 26.58%
Colorado 94 12,865,820.48 9.07
Oregon 103 10,575,567.59 7.46
Washington 104 10,211,005.51 7.20
Illinois 39 6,893,596.29 4.86
Florida 42 5,873,650.98 4.14
Maryland 37 5,844,220.48 4.12
Massachusetts 40 4,792,293.13 3.38
Other (Less than 3%) 442 47,061,771.26 33.19
--- ------------- -----
TOTAL.................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
No more than approximately 1.24% of the Initial Group I Loans will be
secured by Mortgaged Properties located in any one zip code.
<TABLE>
PURPOSES OF GROUP I LOANS
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ------------- ----------------- -----------------
<S> <C> <C> <C>
Refinance (Equity Take-Out) 616 $76,604,532.57 54.02%
Purchase 371 43,497,945.42 30.67
Refinance (Rate/Term) 170 21,716,637.53 15.31
--- ------------- -----
TOTAL.................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term"
refinance purposes (not for "equity take-out"), substantially all of the
proceeds are used to pay in full the principal balance of a previous mortgage
loan of the mortgagor with respect to a Mortgaged Property and to pay
origination and closing costs associated with such refinancing. Mortgage Loans
made for "equity take out" refinance purposes involve the use of the proceeds to
pay in full the principal balance of such previous mortgage loan and related
costs except that a portion of the proceeds are generally retained by the
mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial.
S-35
<PAGE>
<TABLE>
OCCUPANCY STATUS
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Investment 154 $13,563,957.93 9.56%
Primary 996 126,727,493.52 89.36
Second Homes 7 1,527,664.07 1.08
- ------------ ----
TOTAL.................................... 1,157 $141,819,115.52 100.00%
===== =============== =======
</TABLE>
GROUP II LOANS
The Initial Group II Loans will consist of Mortgage Loans with an
aggregate Principal Balance outstanding as of the Statistical Reference Date,
after deducting payments of principal due on or prior to such date, of
$38,182,471.55. All percentages of the Initial Group II Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Statistical Reference Date.
Approximately 83.87% of the Initial Group II Loans have original terms
to stated maturity of approximately 30 years.
Approximately 96.36% and 3.64% of the Initial Group II Loans are
secured by first liens and second liens, respectively.
21 Initial Group II Loans, representing approximately 4.27% of the
Initial Group II Loans, are balloon payment mortgage loans. Each such Group II
Loan amortizes over 360 months, but the final payment (the "Balloon Payment") on
each such Mortgage Loan is due and payable on the 180th month. The amount of the
Balloon Payment on each such Group II Loan is substantially in excess of the
amount of the scheduled monthly payment on such Group II Loan for the period
prior to the Due Date of such Balloon Payment.
As of the Statistical Reference Date, each Initial Group II Loan will
have an unpaid principal balance of not less than $11,956.83 or more than
$499,790.38 and the average unpaid principal balance of the Initial Group II
Loans will be approximately $71,906.73. The latest stated maturity date of any
of the Initial Group II Loans will be November 1, 2026; however, the actual date
on which any Mortgage Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal. Based on information
supplied by the mortgagors in connection with their loan applications at
origination, approximately 83.75% of the Initial Group II Loans will be secured
by Mortgaged Properties which are owner occupied primary residences,
approximately 0.16% of the Initial Group II Loans will be secured by Mortgaged
Properties which are second homes and approximately 16.09% of the Initial Group
II Loans will be secured by Mortgaged Properties which are non-owner occupied
properties. No Initial Group II Loan provides for negative amortization or
deferred interest.
Set forth below is a description of certain additional characteristics
of the Group II Loans as of the Statistical Reference Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
S-36
<PAGE>
<TABLE>
MORTGAGE RATES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- ---------------- ------------------------- -----------------------
<S> <C> <C> <C>
8.501% - 8.750% 1 $55,000.32 0.14%
8.751% - 9.000% 1 297,000.00 0.78
9.251% - 9.500% 6 428,310.18 1.12
9.501% - 9.750% 3 179,531.59 0.47
9.751% - 10.000% 16 1,275,045.40 3.34
10.001% - 10.250% 12 1,137,123.91 2.98
10.251% - 10.500% 28 2,367,552.08 6.20
10.501% - 10.750% 20 1,183,429.82 3.10
10.751% - 11.000% 42 3,074,053.92 8.05
11.001% - 11.250% 38 2,865,489.76 7.50
11.251% - 11.500% 43 3,420,551.85 8.96
11.501% - 11.750% 36 2,888,847.73 7.57
11.751% - 12.000% 53 3,504,589.47 9.18
12.001% - 12.250% 29 2,487,711.06 6.52
12.251% - 12.500% 29 1,918,261.97 5.02
12.501% - 12.750% 31 1,770,867.85 4.64
12.751% - 13.000% 32 1,916,309,35 5.02
13.001% - 13.250% 14 1,404,390.59 3.68
13.251% - 13.500% 27 2,062,403.53 5.40
13.501% - 13.750% 15 997,809.69 2.61
13.751% - 14.000% 20 822,477.85 2.15
14.001% - 14.250% 6 322,080.12 0.84
14.251% - 14.500% 5 167,342.00 0.44
14.501% - 14.750% 9 931,928.57 2.44
14.751% - 15.000% 3 92,281.48 0.24
15.001% - 15.250% 4 264,155.41 0.69
15.251% - 15.500% 5 238,941.39 0.63
15.501% - 15.750% 3 108,984.66 0.29
--- ------------ ----
TOTAL.................. 531 $38,182,471.55 100.00%
=== ============== ======
</TABLE>
The weighted average Mortgage Rate of the Initial Group II Loans will
be approximately 11.91% per annum.
S-37
<PAGE>
<TABLE>
REMAINING MONTHS TO STATED MATURITY
<CAPTION>
PERCENTAGE OF
REMAINING MONTHS STATISTICAL REFERENCE DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATED MATURITY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ---------------- ------------------------------------- -----------------------
<S> <C> <C> <C>
110 - 119 4 $75,064.93 0.20%
120 - 129 2 65,999.80 0.17
130 - 179 74 4,411,816.59 11.55
180 - 189 27 1,493,645.83 3.91
190 - 239 3 113,140.99 0.30
240 - 339 1 142,942.33 0.37
340 - 359 304 23,531,536.08 61.63
360 - 369 116 8,348,325.00 21.86
--- ------------ -----
TOTAL............... 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
The weighted average remaining term to stated maturity of the Initial
Group II Loans will be approximately 330 months.
<TABLE>
YEARS OF ORIGINATION
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
YEARS OF ORIGINATION GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ---------------- ------------------------- ---------------------
<S> <C> <C> <C>
1994 1 $142,942.33 0.37%
1995 1 35,700.00 0.09
1996 529 38,003,829.22 99.53
--- ------------- -----
TOTAL................................... 531 $38,182,471.55 100.00%
=== ============== ======
</TABLE>
The earliest month and year of origination of any Initial Group II Loan
is December 1994 and the latest month and year of origination is October 1996.
S-38
<PAGE>
<TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ---------------- -------------------- ----------------------
<S> <C> <C> <C>
15.01% - 20.00% 2 $77,972.57 0.20%
20.01% - 25.00% 1 24,953.09 0.07
25.01% - 30.00% 1 59,975.77 0.16
30.01% - 35.00% 5 168,863.79 0.44
35.01% - 40.00% 6 313,313.95 0.82
40.01% - 45.00% 9 431,580.94 1.13
45.01% - 50.00% 15 716,090.10 1.88
50.01% - 55.00% 17 989,699.27 2.59
55.01% - 60.00% 40 2,568,290.37 6.73
60.01% - 65.00% 69 4,625,861.75 12.12
65.01% - 70.00% 90 5,796,760.92 15.18
70.01% - 75.00% 83 7,303,456.00 19.13
75.01% - 80.00% 112 8,932,046.59 23.39
80.01% - 85.00% 55 4,173,235.33 10.93
85.01% - 90.00% 25 1,857,428.78 4.86
90.01% - 95.00% 1 142,942.33 0.37
- ---------- ----
TOTAL.......................... 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
- -------------------
(1)The Loan-to-Value Ratio of Group II Loans secured by second liens includes
the outstanding principal balance of the related Senior Liens. See "The Mortgage
Pools--The Mortgage Loans" in the Prospectus.
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group II Loans were approximately 18.12% and 95.00%, respectively, and
the weighted average Loan-to-Value Ratio at origination of the Initial Group II
Loans was approximately 72.33%.
<TABLE>
MORTGAGE LOAN PROGRAM
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ---------------- ----------------------- ---------------------
<S> <C> <C> <C>
Full Documentation 355 $23,946,020.78 62.71%
Alternate Documentation 5 465,755.95 1.22
No Income Qualification 14 1,364,768.74 3.57
Quick Documentation 40 2,717,292.86 7.12
Reduced Documentation 21 2,163,363.76 5.67
Stated Income 96 7,525,269.46 19.71
-- ------------ -----
TOTAL..................................... 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
See "--Underwriting" below and Appendix A to the Prospectus Supplement
for a description of the Seller's mortgage loan documentation programs.
S-39
<PAGE>
<TABLE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<CAPTION>
PERCENTAGE OF
ORIGINAL STATISTICAL REFERENCE DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ---------------- ----------------------- ---------------------
<S> <C> <C> <C>
$0.01 - $25,000.00 29 $616,310.04 1.61%
$25,000.01 - $50,000.00 176 6,977,390.68 18.27
$50,000.01 - $75,000.00 157 9,614,882.20 25.18
$75,000.01 - $100,000.00 78 6,828,900.95 17.88
$100,000.01 - $125,000.00 35 3,919,338.00 10.26
$125,000.01 - $150,000.00 24 3,247,364.12 8.50
$150,000.01 - $175,000.00 13 2,102,213.51 5.51
$175,000.01 - $200,000.00 8 1,483,863.66 3.89
$200,000.01 - $225,000.00 5 1,060,932.55 2.78
$275,000.01 - $300,000.00 2 579,514.57 1.52
$350,000.01 - $375,000.00 1 371,042.03 0.97
$375,000.01 - $400,000.00 1 386,250.00 1.01
$475,000.01 - $500,000.00 2 994,469.24 2.60
-- ---------- ----
TOTAL.......................... 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
The average original principal balance of the Initial Group II Loans
will be approximately $71,952.
<TABLE>
PROPERTY TYPE
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
Single-Family 460 $32,912,171.03 86.20%
2-4 Family 56 4,086,706.45 10.70
Condominium 10 788,320.85 2.06
PUD 1 35,391,95 0.09
Townhouse 2 148,946.21 0.39
Other 2 210,935.06 0.55
-- ---------- ----
TOTAL............................. 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
S-40
<PAGE>
<TABLE>
RISK CATEGORIES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CLASSIFICATION GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
A or better 60 $3,484,013.06 9.12%
A- 268 20,894,292.33 54.72
B 131 8,977,712.94 23.51
C 47 3,377,717.46 8.85
D 25 1,448,735.76 3.79
-- ------------ ----
TOTAL............................. 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
See "--Underwriting" below and Appendix A to this Prospectus Supplement
for a description of the Seller's risk classifications.
<TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
California 110 $8,761,453.70 22.95%
Oregon 54 4,685,490.85 12.27
Washington 50 3,119,549.33 8.17
Florida 32 2,761,372.09 7.23
Virginia 20 1,703,285.53 4.46
Ohio 21 1,463,096.92 3.83
New York 14 1,440,105.39 3.77
Indiana 25 1,369,711,26 3.59
Other (Less than 3%) 205 12,878,406.48 33.73
--- ------------- -----
TOTAL............................. 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
No more than approximately 1.31% of the Initial Group II Loans will be
secured by Mortgaged Properties located in any one zip code.
S-41
<PAGE>
<TABLE>
PURPOSES OF GROUP II LOANS
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
Purchase 109 $8,282,724.18 21.69%
Refinance (Rate/Term) 54 4,530,923.00 11.87
Refinance (Equity Take-Out) 368 25,368,824.37 66.44
--- --------------- -----
TOTAL................................... 531 $38,182,471.55 100.00%
=== ============== =======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term"
refinance purposes (not for "equity take-out"), substantially all of the
proceeds are used to pay in full the principal balance of a previous mortgage
loan of the mortgagor with respect to a Mortgaged Property and to pay
origination and closing costs associated with such refinancing. Mortgage Loans
made for "equity take out" refinance purposes involve the use of the proceeds to
pay in full the principal balance of such previous mortgage loan and related
costs except that a portion of the proceeds are generally retained by the
mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial.
<TABLE>
OCCUPANCY STATUS
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ---------------- -------------------------- ---------------------
<S> <C> <C> <C>
Investment 105 $6,142,268.20 16.09%
Primary 424 31,977,958.09 83.75
Second Homes 2 62,245.26 0.16
--- ------------- -----
TOTAL................................... 531 $38,182,471.55 100.00%
=== ============== ======
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNTS
With respect to Loan Group I and Loan Group II, under the Pooling and
Servicing Agreement, following the initial issuance of the Certificates, the
Trust Fund will be obligated to purchase from the Company during the Funding
Period, subject to the availability thereof, additional Mortgage Loans (the
"Subsequent Mortgage Loans") secured by first and second liens on one- to
four-family residential properties. Each Subsequent Mortgage Loan will have been
underwritten in accordance with the criteria set forth herein under "Description
of the Mortgage Pool--Underwriting" and Appendix A to this Prospectus
Supplement. Subsequent Mortgage Loans will be transferred to the Trust Fund
pursuant to subsequent transfer instruments (the "Subsequent Transfer
Instruments") between the Company and the Trust Fund. In connection with the
purchase of Subsequent Mortgage Loans on such dates of transfer (the "Subsequent
Transfer Dates"), the Trust Fund will be required to pay to the Company from
amounts on deposit in one of the Pre-Funding Accounts (as defined below) a cash
purchase price of 100% of the principal balance thereof. The Company will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the related Subsequent Mortgage Loans purchased
on such date. The amount paid from each Pre-Funding Account on each Subsequent
Transfer Date will not
S-42
<PAGE>
include accrued interest on the related Subsequent Mortgage Loans. Following
each Subsequent Transfer Date, the aggregate principal balance of the Mortgage
Loans in the related Loan Group will increase by an amount equal to the
aggregate principal balance of the related Subsequent Mortgage Loans so
purchased and the amount in the related Pre-Funding Account will decrease
accordingly.
Two accounts (each, a "Pre-Funding Account") will be established by the
Trustee and funded by the Company with approximately $48,162,020.73 with respect
to Loan Group I (the "Original Group I Pre-Funded Amount") and $11,837,831.36
with respect to Loan Group II (the "Original Group II PreFunded Amount") on the
Delivery Date to provide the Trust Fund with sufficient funds to purchase
Subsequent Mortgage Loans. The related Original Pre-Funded Amount will be
reduced during the Funding Period by the amount used to purchase Subsequent
Mortgage Loans for a related Loan Group in accordance with the Pooling and
Servicing Agreement (on any date of determination, the related Original
Pre-Funded Amount as so reduced, the "Pre-Funded Amount"). During the period
(the "Funding Period"), determined separately for Loan Group I and Loan Group
II, from the Delivery Date until the earliest of (i) the date on which the
amount on deposit in the related Pre-Funding Account is less than $10,000 or
(ii) January 25, 1997, the related Pre-Funded Amount will be maintained in the
related Pre-Funding Account.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
such Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Pooling and
Servicing Agreement; (b) the Company will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of the
Certificateholders or the Certificate Insurer; (c) the Company will deliver
certain opinions of counsel acceptable to the Certificate Insurer with respect
to the validity of the conveyance of such Subsequent Mortgage Loans; (d) as of
the respective Subsequent Cutoff Date the Subsequent Mortgage Loans will satisfy
the following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more
days contractually delinquent as of the related Subsequent Cut-off Date; (ii)
the remaining stated term to maturity of such Subsequent Mortgage Loan will not
exceed 360 months; (iii) such Subsequent Mortgage Loan may not provide for
negative amortization; (iv) such Subsequent Mortgage Loan will be underwritten
in accordance with the criteria set forth under "Description of the Mortgage
Pool--Underwriting" herein and Appendix A to this Prospectus Supplement; (v)
such Subsequent Mortgage Loan will not have a Loan-to-Value Ratio (or Combined
Loan-to-Value Ratio in the case of second lien Mortgage Loans) greater than
100%; and (vi) such Subsequent Mortgage Loans will have as of the end of the
Funding Period, a weighted average term since origination not in excess of 6
months. In addition, following the purchase of any Subsequent Mortgage Loan by
the Trust Fund, the Group I Loans and Group II Loans (including the related
Subsequent Mortgage Loans) will, as determined separately for each Loan Group:
(i) have a weighted average original term to stated maturity of not more than
360 months; (ii) have a weighted average Loan-to-Value Ratio (or weighted
average Combined Loan-to-Value Ratio in the case of second lien Mortgage Loans)
of not more than 73.0% with respect to Loan Group I, and 72.3% with respect to
Loan Group II, each by aggregate principal balance of the related Mortgage
Loans; (iii) have no related Mortgage Loan with a principal balance in excess of
$750,000; (iv) have a weighted average Gross Margin not less than 5.79% with
respect to the Group I Loans; and (v) not have a concentration of second lien
Mortgage Loans in excess of 3.64% with respect to Loan Group II, by aggregate
principal balance of the related Mortgage Loans. In addition, the Trustee shall
not agree to any Subsequent Transfer without a signed certification from the
Certificate Insurer that the Subsequent Mortgage Loans meet the above criteria
plus any additional criteria in the Insurance Agreement. In the sole discretion
of the Certificate Insurer, Subsequent Mortgage Loans with characteristics
varying from those set forth above may be purchased by the Trust Fund; provided,
however, that the addition of such Mortgage Loans will not materially affect the
aggregate characteristics of the entire related Loan Group.
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THE SELLER
SPFC is a California corporation. SPFC's residential lending division
underwrites first and second lien mortgage loans secured by one- to four-family
residences. SPFC acquires mortgage loans through a network of branch offices and
approved mortgage brokers. SPFC also acquires mortgage loans from other
financial institutions in accordance with the underwriting standards described
below under "Description of the Mortgage Pool--Underwriting" and Appendix A to
this Prospectus Supplement. SPFC began originating and acquiring mortgage loans
as of May 1, 1995. SPFC is a publicly-traded company based in Lake Oswego,
Oregon, with assets as of September 30, 1996 in excess of $241 million.
During the nine-month period ending September 30, 1996, SPFC originated
or purchased 4,286 loans, with a principal balance of approximately $490
million. In the years ended December 31, 1995 and 1994, SPFC originated or
purchased 3,313 and 1,624 loans, respectively, with a principal balance of
approximately $288 million and $190 million, respectively.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SELLER
The following table sets forth the combined delinquency and foreclosure
experience of: (1) loans held for sale or securitization included in the
Seller's servicing portfolio and (2) securitized loans originated by the Seller
but serviced by an affiliate of the Seller or by a third party for the periods
indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1994 1995 AS OF JUNE 30, 1996
----------------------------- -------------------------------- ----------------------------
% OF LOANS % OF LOANS % OF LOANS
IN SERVICING IN SERVICING IN SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------------ -------------- --------------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans Serviced................... $ 68,721 100.0% $ 270,193 100.0% $ 441,926 100.0%
30-59 days delinquent............ 321 0.5 3,072 1.1 6,403 1.5
60-89 days delinquent............ 199 0.3 1,896 0.7 2,805 0.6
90 days or more delinquent....... 383 0.5 4,396 1.6 7,069 1.6
Total delinquencies.............. $ 903 1.3% $ 9,364 3.4% $ 16,276 3.7%
======== =========== ========== ==== ========= ====
Delinquent loans in foreclosure $ 383 0.5% $ 4,883 1.8% $ 5,064 1.1%
Total real estate owned.......... ___ ____ 141 ____ _____ ___
</TABLE>
As of June 30, 1996, statements to certificateholders prepared by the
trustee for each of the four securitizations in which loans originated and
purchased by the Seller were included reported no losses; however, the Seller's
loans securitized and sold in the secondary market and included in these
securitizations have been outstanding for a relatively short period of time and
consequently the delinquencies, foreclosures and loss experience to date are not
indicative of results to be experienced in the future. The Seller believes that
over time its delinquency and loan loss experience will increase as its loan
portfolio matures.
UNDERWRITING
THE STANDARD NON-CONFORMING PROGRAM
All of the Mortgage Loans were underwritten by SPFC in accordance with
the "Standard NonConforming Program" which does not meet the credit underwriting
standards of FNMA or FHLMC. This program is described in detail in Appendix A to
this Prospectus Supplement. SPFC's current single family
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mortgage loan volume is generally originated based on loan packages submitted
through a mortgage broker network. Such loan packages, which generally contain
relevant credit, property and underwriting information on the loan request, are
compiled by the applicable mortgage broker and submitted to SPFC for approval
and funding. The mortgage broker receives as compensation all or a portion of
the loan origination fee charged to the mortgagor at the time the loan is made.
As part of their quality control procedures, SPFC accepts loan packages
submitted by preapproved mortgage brokers. In connection with the approval
process, they require that the mortgage broker be licensed by the appropriate
state agencies, as required, and review a package of documents consisting of,
among other things, an application, resumes of key personnel, narrative of the
company, organizational documentation and financial statements. At least
annually, SPFC reviews the performance of each of its respective mortgage
brokers for poor processing, misrepresentation, fraud or delinquency, and
substandard mortgage brokers are terminated.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least two credit
reports on each applicant from national credit reporting companies are required.
The report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgments.
Mortgaged properties are appraised by licensed appraisers. SPFC does
not approve all appraisers but instead relies on the mortgage brokers to
evaluate the appraiser's experience and ability; however, in the event that a
mortgage broker uses an appraiser who has not been approved by SPFC, the related
appraisal will be reviewed by an approved appraiser of SPFC for conformance with
its guidelines. SPFC requires the appraiser to address neighborhood conditions,
site and zoning status and condition and valuation of improvements. Following
each appraisal, the appraiser prepares a report which includes a reproduction
cost analysis (when appropriate) based on the current cost of constructing a
similar home and a market value analysis based on recent sales of comparable
homes in the area. All appraisals are required to conform to the Uniform
Standards of Professional Appraisal Practice and FIRREA and must be on forms
acceptable to FNMA and FHLMC. Every appraisal is reviewed by a non-affiliated
appraisal review firm, or by another review appraiser acceptable to SPFC before
the mortgage loan is made.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Statistical Reference Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Class A Certificates, Mortgage Loans may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Company deems
such removal necessary or appropriate. A limited number of other mortgage loans
may be added to the Mortgage Pool prior to the issuance of the Class A
Certificates. The Company believes that the information set forth herein will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Class A Certificates are issued although the
range of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Class A Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K. In addition, a Current Report on Form 8-K will be filed following each
purchase of Subsequent Mortgage Loans.
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1996-4 Mortgage Loan Asset-Backed Pass-Through Certificates,
(the "Certificates") will include the following two senior classes (the "Class A
Certificates"): (i) Class A-1 Certificates (the "Class A-1 Certificates") and
(ii) Class A-2 Certificates (the "Class A-2 Certificates"). In addition to the
Class A Certificates, the Series 1996-4 Mortgage Loan Asset-Backed Pass-Through
Certificates will include the Class I S Certificates (the "Group I Subordinate
Certificates"), the Class II S Certificates (the "Group II Subordinate
Certificates"; and together with the Group I Subordinate Certificates, the
"Subordinate Certificates") and the Class R Certificates (the "Residual
Certificates"). Only the Class A Certificates are offered hereby. The
Pass-Through Rate (as defined herein) on the Class A-1 Certificates is
adjustable and is calculated as described under "--Class A Interest Distribution
Amounts" below. The Pass-Through Rate on the Class A-2 Certificates is fixed at
6.80% per annum, subject to increase as described herein. Interest distributions
on the Class A Certificates will be payable monthly at one-twelfth the annual
rate.
The Certificates will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Certificate Accounts; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; (iv) the
Trustee's rights with respect to the Mortgage Loans under all insurance policies
(including the Certificate Insurance Policies) required to be maintained
pursuant to the Pooling and Servicing Agreement and any proceeds thereof; (v)
liquidation proceeds; (vi) released mortgaged property proceeds; and (vii)
amounts on deposit in the Interest Coverage Accounts and the Pre-Funding
Accounts.
Distributions on the Class A Certificates will be made on the 25th day
of each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in January 1997, to
Certificateholders of record on the immediately preceding Record Date. The
record date (the "Record Date") for each Distribution Date will be the close of
business on the last day of the month immediately preceding the related
Distribution Date.
The Class A Certificates will be issued, maintained and transferred on
the book-entry records of The Depository Trust Company ("DTC") and its
Participants (as defined in the Prospectus). The Class A Certificates will be
issued in minimum denominations of $25,000 and integral multiples of $1 in
excess thereof.
The Class A Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC (Class A Certificates
so registered, "Book-Entry Certificates"). The Company has been informed by DTC
that DTC's nominee will be Cede & Co. ("Cede"). No person acquiring an interest
in the Class A Certificates (a "Beneficial Owner") will be entitled to receive a
certificate representing such person's interest (a "Definitive Certificate"),
except as set forth below under "--Book-Entry Registration of the Class A
Certificates--Definitive Certificates." Unless and until Definitive Certificates
are issued for the Class A Certificates under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the Class A Certificates shall refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the Class
A Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Class A Certificates, for
distribution to Beneficial Owners by DTC in accordance with DTC procedures.
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<PAGE>
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
GENERAL. Beneficial Owners that are not Participants or Intermediaries
(as defined in the Prospectus) but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Class A Certificates
may do so only through Participants and Intermediaries. In addition, Beneficial
Owners will receive all distributions of principal of and interest on the
related Class A Certificates from the Paying Agent (as defined in the
Prospectus) through DTC and Participants. Accordingly, Beneficial Owners may
experience delays in their receipt of payments. Unless and until Definitive
Certificates are issued for the related Class A Certificates, it is anticipated
that the only registered Certificateholder of such Class A Certificates will be
Cede, as nominee of DTC. Beneficial Owners will not be recognized by the Trustee
or the Master Servicer as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, and Beneficial Owners will be permitted to
receive information furnished to Certificateholders and to exercise the rights
of Certificateholders only indirectly through DTC, its Participants and
Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Class A Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such Class A Certificates.
Participants and Intermediaries with which Beneficial Owners have accounts with
respect to such Class A Certificates similarly are 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 physical certificates evidencing their interests in the Class A
Certificates, the Rules provide a mechanism by which Beneficial Owners, through
their Participants and Intermediaries, will receive distributions and will be
able to transfer their interests in the Class A Certificates.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee or Cedel or Euroclear,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Class A
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates--Form of Certificates."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Certificates-Form of Certificates,"
the Trustee is required to notify, through DTC, Participants who have ownership
of Class A Certificates as indicated on the records of DTC of the availability
of Definitive Certificates for their Class A Certificates. Upon surrender by DTC
of the definitive certificates representing the Class A Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Class A Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Beneficial Owners, and thereafter the
Trustee and the Master Servicer will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and the Class A Certificates,
see "Description of the Certificates--Form of Certificates" in the Prospectus.
BOOK-ENTRY FACILITIES. Beneficial Owners may elect to hold their
interests in the Book-Entry Certificates through DTC in the United States or
through Cedel or Euroclear in Europe, if they are participants of such systems,
or indirectly through organizations which are participants in such systems. The
Book-Entry Certificates of each class will be issued in one or more certificates
which equal the
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aggregate Certificate Principal Balance of such class 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 Guaranty will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries").
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 Participants or Cedel Participants (each as defined below) on such
business day. Cash received in Cedel or Euroclear as a result of sales of
securities by or through a Cedel Participant or Euroclear Participant to a
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 settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences--REMICS--Backup Withholding with Respect to REMIC
Certificates" and "--Foreign Investors in REMIC Certificates" in the Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants, 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 its
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 participating 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
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<PAGE>
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 32 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.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Beneficial Owners of the Book-Entry
Certificates that it represents and to each Intermediary for which it acts as
agent. Each such 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
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. "Certain Federal Income
Tax Consequences--REMICS--Backup Withholding with Respect to REMIC Certificates"
and "--Foreign Investors in REMIC Certificates" in the Prospectus. Since
transactions in the Book-Entry Certificates will be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants
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<PAGE>
and certain banks, the ability of a Beneficial Owner to pledge Class A
Certificates to persons or entities that do not participate in the DTC, Cedel or
Euroclear systems, or otherwise to take actions in respect of such Certificates,
may be limited due to lack of a physical certificate representing such
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.
DTC has advised the Company and 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 Agreement only at
the direction of one or more Participants to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Intermediaries whose holdings include such Book-Entry Certificates. Cedel or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the 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 Certificates which conflict
with actions taken with respect to other Certificates.
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.
MULTIPLE LOAN GROUP STRUCTURE
The Mortgage Loans in the Trust Fund consist of the Group I Loans and
Group II Loans, as described above under "Description of the Mortgage Pool." All
distributions (other than CrossCollateralization Payments) and losses with
respect to the Group I Loans will be allocated solely among the Class A-1
Certificates, the Class I S Certificates and the Class R Certificates. All
distributions and losses with respect to the Group II Loans (other than
Cross-Collateralization Payments payable to the Certificate Insurer) will be
allocated solely among the Class A-2 Certificates and the Class II S
Certificates.
OVERCOLLATERALIZATION PROVISIONS AND SUPPORT FEATURES
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Pooling
and Servicing Agreement requires that, on each Distribution Date, the Net
Monthly Excess Cashflow with respect to each Loan Group, if any, be applied on
such Distribution Date as an accelerated payment of principal on the related
Class A Certificates, but only to the limited extent hereafter described. The
"Net Monthly Excess Cashflow" for any Distribution Date is equal to (x) the
amount on deposit in the Certificate Account on such Distribution Date with
respect to the Mortgage Loans in the related Loan Group, other than the related
Insured Payments and the Trustee's Fee and Premium Amount payable on such
Distribution Date (such amount, the related "Available Funds" for such
Distribution Date) minus (y) the sum of (i) the sum of the related Class A
Interest Distribution Amount and the related Class A Principal Distribution
Amount (calculated for this purpose without regard to any Subordination Increase
Amount, Subordination Reduction Amount or portion thereof included therein) and
(ii) any related Reimbursement Amount (as defined herein) owed to the
Certificate Insurer. This application has the effect of accelerating the
amortization of the related Class A Certificates relative to the amortization of
the Mortgage Loans in the related Loan Group.
With respect to any Distribution Date, the excess, if any, of (x) the
sum of the aggregate Principal Balances of the Mortgage Loans in the related
Loan Group as of the close of business on the last day of the related Due Period
(as defined herein) and the amount of funds in the related Pre-Funding
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Account as of such Distribution Date over (y) the Certificate Principal Balance
of the related Class A Certificates as of such Distribution Date (and following
the making of all distributions on such Distribution Date) is the "Subordinated
Amount" as of such Distribution Date. The Pooling and Servicing Agreement
requires that the Net Monthly Excess Cashflows will be applied as an accelerated
payment of principal on the related Class A Certificates until the related
Subordinated Amount has increased to the level equal to the related Required
Subordinated Amount for such Distribution Date. Any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal is a
"Subordination Increase Amount." The required level of the Subordinated Amount
with respect to a Distribution Date is the "Required Subordinated Amount" with
respect to such Distribution Date. Initially, the Required Subordinated Amount
will be set at an amount equal to a percentage, specified in the Pooling and
Servicing Agreement, of the aggregate Principal Balances of the related Mortgage
Loans in the related Loan Group as of the Cut-off Date and the related Original
Pre-Funded Amount. The Pooling and Servicing Agreement generally provides that
the Required Subordinated Amounts may, over time, decrease, or increase, subject
to certain floors, caps and triggers.
In the event that the Required Subordinated Amount is permitted to
decrease or "step down" on a Distribution Date in the future, the Pooling and
Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the Holders of the related Class A Certificates on
such Distribution Date shall be distributed to the Holders of the related Group
I or Group II Subordinate Certificates on such Distribution Date, or applied to
the payment of any Group I Class A Available Funds Cap Carry-Forward Amount.
This has the effect of decelerating the amortization of the Class A Certificates
relative to the amortization of the Mortgage Loans in the related Loan Group,
and of reducing the related Subordinated Amount. With respect to any
Distribution Date, the difference, if any, between (a) the related Subordinated
Amount that would apply on such Distribution Date after taking into account all
distributions to be made on such Distribution Date (exclusive of any reductions
thereto attributable to Subordination Reduction Amounts (as described below) on
such Distribution Date) and (b) the related Required Subordinated Amount for
such Distribution Date is the related "Excess Subordinated Amount" with respect
to such Distribution Date. With respect to any Distribution Date, an amount
equal to the lesser of (a) the related Excess Subordinated Amount and (b) the
principal collections received by the Master Servicer with respect to the prior
Due Period is the related "Subordination Reduction Amount." In addition, due to
the cash flow structure of the Certificates as described below, Subordination
Reduction Amounts may result even prior to the occurrence of any decrease or
"step down" in the related Required Subordinated Amount. This is because the
Holders of the related Class A Certificates will generally be entitled to
receive 100% of collected principal, even though the Certificate Principal
Balances of the related Class A Certificates will, following the accelerated
amortization resulting from the application of the related Net Monthly Excess
Cashflow, represent less than 100% of the related Mortgage Loan's principal
balance. In the absence of the provisions relating to Subordination Reduction
Amounts, the foregoing may otherwise increase the Subordinated Amounts above
their Required Subordinated Amount requirements even without the application of
any Net Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to Mortgage Loans in the related Loan Group during the period beginning on the
second day of the calendar month preceding the calendar month in which such
Distribution Date occurs, and ending on the first day of the calendar month in
which such Distribution Date occurs (the "Due Period") will be distributed to
the Holders of the related Class A Certificates on such Distribution Date. If
any Mortgage Loan became a Liquidated Mortgage Loan (as defined below) during
such Due Period, the net Liquidation Proceeds (as defined in the Prospectus)
related thereto and allocated to principal may be less than the Principal
Balance of the related Mortgage Loan; the amount of any such insufficiency is a
"Liquidated Loan Loss." A "Liquidated Mortgage Loan" is, in general, a defaulted
Mortgage Loan as to which the Master 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
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judgment). In addition, the Pooling and Servicing Agreement provides that the
principal balance of any Mortgage Loan after it becomes a Liquidated Mortgage
Loan shall equal zero. The Pooling and Servicing Agreement does not contain any
rule which requires that the amount of any Liquidated Loan Loss be distributed
to the Holders of the related Class A Certificates on the Distribution Date
which immediately follows the event of loss; I.E., the Pooling and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Liquidated Loan Loss will reduce the Subordinated Amount, which,
to the extent that such reduction causes the Subordinated Amount to be less than
the related Required Subordinated Amount applicable to the related Distribution
Date, will require the payment of a Subordination Increase Amount on such
Distribution Date (or, if insufficient funds are available on such Distribution
Date, on subsequent Distribution Dates, until the Subordinated Amount equals the
related Required Subordinated Amount). The effect of the foregoing is to
allocate losses to the Holders of the related Group I or Group II Subordinate
Certificates by reducing, or eliminating entirely, payments of Net Monthly
Excess Cashflow and of Subordination Reduction Amounts which such Holders would
otherwise receive.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICIES. The
Pooling and Servicing Agreement defines a "Subordination Deficit" with respect
to a Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the related Class A Certificates as of such
Distribution Date, and following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the related Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans in the related Loan Group as of the
close of business on the preceding Due Date and the amount of funds in the
related Pre-Funding Account on such Distribution Date. The Pooling and Servicing
Agreement requires the Trustee to make a claim for an Insured Payment under the
related Certificate Insurance Policy not later than the second Business Day
prior to any Distribution Date as to which the Trustee has determined that a
Subordination Deficit will occur with respect to a Loan Group for the purpose of
applying the proceeds of such Insured Payment as a payment of principal to the
Holders of the related Class A Certificates on such Distribution Date. Investors
in the Class A Certificates should realize that, under extreme loss or
delinquency scenarios, they may temporarily receive no distributions of
principal.
CROSS-COLLATERALIZATION FEATURE. In the event that on any Distribution
Date after giving effect to distributions pertaining to a particular Loan Group
and its related Certificates (except for any payment to be made as principal
from proceeds of the related Certificate Insurance Policy), either a
Reimbursement Amount exists with respect to either Loan Group or a Subordination
Deficit exists with respect to Loan Group II or the Subordinated Amount with
respect to Loan Group II would be less than the related Required Subordinated
Amount (such difference, a "Cross-Collateralized Subordination Shortfall"), the
Class A-2 Certificates or the Certificate Insurer, as the case may be, will be
entitled to receive an additional payment (a "Cross-Collateralization Payment")
in respect of principal to the extent of such Subordination Deficit or
Cross-Collateralized Subordination Shortfall or as reimbursement of the
Reimbursement Amount, as the case may be, out of funds then on deposit in the
Certificate Account for the other Loan Group that are otherwise payable on such
Distribution Date to the Subordinate Certificates related to such other Loan
Group.
PRIORITY OF PAYMENT
On each Distribution Date, the Trustee shall make the following
distributions, to the extent of funds on deposit in the related Certificate
Account with respect to each Loan Group and the amount of Insured Payments and
Cross-Collateralization Payments (if applicable) to be made on such Distribution
Date, as distributed separately with respect to the Group I and Group II
Certificates:
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(a) to the Certificate Insurer, the Premium Amount (as
defined herein) with respect to such Loan Group;
(b) to the Trustee, an amount equal to the Trustee's Fees
then due to it with respect to such Loan Group;
(c) to the Certificate Insurer the lesser of (x) an
amount equal to (i) the amount then on deposit in the
related Certificate Account remaining after the
foregoing distributions minus (ii) the Insured
Distribution Amount for such Distribution Date and
(y) the amount of all Insured Payments and other
payments made by the Certificate Insurer pursuant to
the related Certificate Insurance Policy (together
with interest thereon at the Pass-Through Rate for
the related Class A Certificates) which have not been
previously repaid (the "Reimbursement Amount") as of
such Distribution Date;
(d) from amounts then on deposit in the related
Certificate Account (including any Insured Payments),
to the related Class A Certificateholders an amount
equal to the related Class A Interest Distribution
Amount (as described below), distributed on a pro
rata basis to the related Class A Certificateholders
as described below;
(e) from amounts then on deposit in the related
Certificate Account (including any related Insured
Payments), to the related Class A Certificateholders
an amount equal to the related Class A Principal
Distribution Amount (as described below) to the
extent not covered by payments to be made pursuant to
clause (f) below with respect to a Subordination
Deficit allocated as described below;
(f) from amounts then on deposit in the Certificate
Account related to the Group I Loans, to the Class
A-2 Certificateholders, an amount equal to the
CrossCollateralization Payments required to be made
on such Certificates on such Distribution Date;
(g) from amounts then on deposit in the Certificate
Accounts related to the Group I Loans and the Group
II Loans, to the Certificate Insurer, an amount equal
to the Cross-Collateralization Payments required to
be made to the Certificate Insurer from such
Certificate Account on such Distribution Date, to the
extent the Certificate Insurer has not been
reimbursed pursuant to clause (c) above;
(h) to the Class A-1 Certificates, an amount equal to the
lesser of (i) any amount then remaining in the
related Certificate Account after the applications
described in clauses (a) through (g) above and (ii)
the aggregate Group I Class A Available Funds Cap
Carry-Forward Amount for such Distribution Date shall
be paid to the Class A-1 Certificateholders on
account of the Group I Class A Available Funds Cap
Carry-Forward Amount, if any; and
(i) from amounts then on deposit in the related
Certificate Account, to the Holders of the related
Group I or Group II Subordinate Certificates, the
amount remaining on such Distribution Date, if any.
CLASS A INTEREST DISTRIBUTION AMOUNTS
On each Distribution Date, holders of each class of Class A
Certificates will be entitled to receive interest distributions in an amount
equal to the sum of (a) interest accrued for the related Accrual Period
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(as defined below) on the related Certificate Principal Balance thereof
immediately prior to such Distribution Date at the then-applicable related
Pass-Through Rate (to the extent of the amounts remaining for distributions
after payments under clauses (a) through (c) under "--Priority of Payment"
above), as reduced by shortfalls caused by the Relief Act (as defined in the
Prospectus) or the failure of the Master Servicer to cover Prepayment Interest
Shortfalls to the extent described herein, with all such reductions allocated
among the related Class A Certificates in proportion to their respective amounts
of related Class A Interest Distribution Amount (as defined below) which would
have resulted absent such reductions and (b) the Group I Class A Carry-Forward
Amount or Group II Class A Carry-Forward Amount, as applicable, allocable to
interest. The aggregate amount of interest allocable to the Class A-1
Certificates and Class A-2 Certificates as determined separately (the related
"Class A Interest Distribution Amount") will be allocable to the related Class A
Certificates on a pro rata basis in proportion to the amount of interest payable
thereon. The Class A Interest Distribution Amount with respect to the Class A-1
Certificates is calculated on the basis of a 360-day year and the actual number
of days elapsed; provided that, for any Distribution Date for which clause (ii)
of the related definition of Pass-Through Rate is applicable, the Class A
Interest Distribution Amount will be calculated on the basis of a 30-day month.
The Class A Interest Distribution Amount with respect to the Class A-2
Certificates is calculated on the basis of a 360-day year and a 30-day month.
With respect to any Distribution Date and the Class A-1 Certificates
and Class A-2 Certificates, the sum of the related Class A Interest Distribution
Amount and the amount of the related Subordination Deficit, if any, with respect
to such Distribution Date is the related "Insured Distribution Amount" for such
Distribution Date.
For each Distribution Date, (i) with respect to the Class A-1
Certificates, the "Accrual Period" is the period commencing on the Distribution
Date immediately preceding the month on which such Distribution Date occurs and
ending on the calendar day immediately preceding such Distribution Date, except
with respect to the first Distribution Date, which has an accrual period from
December 13, 1996 to January 24, 1997 and (ii) with respect to the Class A-2
Certificates, the "Accrual Period" is the previous calendar month.
With respect to the Class A-1 Certificates, the "Group I Class A
Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the related Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Holders of the Class A-1 Certificates on such Distribution
Date in respect thereof (including, without limitation, amounts paid under a
Certificate Insurance Policy) and (b) 30 days' interest on such amount at the
Pass-Through Rate applicable to the Class A-1 Certificates for such Distribution
Date. The Group I Class A Carry-Forward Amount does not include any Group I
Class A Available Funds Cap Carry-Forward Amount.
The "Class A-1 Formula Pass-Through Rate" for a Distribution Date is
the lesser of (x) the rate determined by clause (i) of the definition of
Pass-Through Rate for the Class A-1 Certificates on such Distribution Date and
(y) the weighted average of Net Lifetime Rate Caps of the Group I Loans. The Net
Lifetime Rate Cap on each Group I Loan is equal to the related Lifetime Rate Cap
minus the sum of the Servicing Fee Rate and the rates per annum at which the
Trustee's Fee and the Premium Amount accrue.
The Pooling and Servicing Agreement provides that if the Pass-Through
Rate on the Class A-1 Certificates is less than the Class A-1 Formula
Pass-Through Rate and any resulting shortfall in interest is not paid on such
Distribution Date from any available Net Monthly Excess Cashflow, as described
below, then the amount of any such shortfall will be carried forward and be paid
to the extent of available funds, as described herein, to the Holders of the
Class A-1 Certificates on future Distribution Dates and shall accrue interest at
the applicable Class A-1 Formula Pass-Through Rate, until paid (such shortfall,
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together with such accrued interest, the "Group I Class A Available Funds Cap
Carry-Forward Amount"). The Certificate Insurance Policy does not cover the
Group I Class A Available Funds Cap Carry-Forward Amount, nor do the ratings
assigned to the Class A-1 Certificates address the payment of the Group I Class
A Available Funds Cap Carry-Forward Amount.
With respect to the Class A-2 Certificates, the "Group II Class A
Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the related Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Holders of the Class A-2 Certificates on such Distribution
Date in respect thereof (including, without limitation, amounts paid under a
Certificate Insurance Policy) and (b) 30 days' interest on such amount at the
Pass-Through Rate applicable to the Class A-2 Certificates for such Distribution
Date.
The "Prepayment Interest Shortfall" for any Distribution Date is equal
to the aggregate shortfall, if any, in collections of interest (minus the
related Servicing Fee) resulting from Mortgagor prepayments on the Mortgage
Loans during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loans as of the Due Date in the month of prepayment.
However, with respect to any Distribution Date, any Prepayment Interest
Shortfalls resulting from full or partial prepayments during the preceding
calendar month will be offset by the Master Servicer, but only to the extent
such Prepayment Interest Shortfalls do not exceed an amount equal to the
Servicing Fee payable to the Master Servicer in respect of its servicing
activities with respect to such Distribution Date. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" herein. An
amount equal to the Class A Certificates' pro rata share, based on the amount of
interest payable on each such class, of any Prepayment Interest Shortfalls not
so covered by the Master Servicer will be made available by the Certificate
Insurer for distribution to the Class A Certificateholders.
The Pass-Through Rate on the Class A-1 Certificates is adjustable and
is calculated as follows: beginning on the Distribution Date in January 1997,
and on each Distribution Date thereafter, the Pass-Through Rate on the Class A-1
Certificates will be adjusted to equal the lesser of (i) (a) with respect to any
Distribution Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is less than 10% of the sum of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date and the
Original Pre-Funded Amounts, One-Month LIBOR (as defined in "Description of the
Certificates--Calculation of One-Month LIBOR" below) plus 0.215% or (b) with
respect to any Distribution Date thereafter, One-Month LIBOR plus 0.43% and (ii)
the Group I Class A Available Funds Pass-Through Rate.
The "Group I Class A Available Funds Pass-Through Rate," as of any
Distribution Date, is equal to (i) the weighted average of the Mortgage Rates of
the Group I Loans, minus (ii) the sum of the Servicing Fee Rate and the rates
per annum at which the Trustee's Fee and Premium Amount accrue and minus (iii)
commencing on the seventh Distribution Date, 0.50% per annum.
The Pass-Through Rate with respect to the Class A-2 Certificates is
equal to (i) with respect to any Distribution Date which occurs on or prior to
the date on which the aggregate Principal Balance of the Mortgage Loans is less
than 10% of the sum of the aggregate Principal Balance of the Mortgage Loans as
of the Cut-off Date and the Original Pre-Funded Amounts, 6.80% per annum, and
(ii) with respect to any Distribution Date thereafter, 7.30% per annum.
As described herein, the Class A Interest Distribution Amounts
allocable to the Class A Certificates is based on the Certificate Principal
Balances thereof immediately prior to the related Distribution Date. The
Certificate Principal Balance of any Class A Certificate as of any date of
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determination is equal to the initial Certificate Principal Balance thereof,
reduced as described herein with respect to such Certificate.
On any Distribution Date, the amount of the premium (the "Premium
Amount") payable to the Certificate Insurer is equal to one-twelfth of the
product of a percentage specified in an exhibit to the Pooling and Servicing
Agreement and the Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
With respect to the first Distribution Date, on the Delivery Date, and,
with respect to each Distribution Date thereafter, on the second LIBOR Business
Day preceding such Distribution Date (each such date, an "Interest Determination
Date"), One-Month LIBOR shall be established by the Trustee and as to any
Accrual Period, One-Month LIBOR with respect to the Class A-1 Certificates will
equal the rate for United States dollar deposits for one month which appears on
the Telerate Screen Page 3750 as of 11:00 A.M., London time, on such Interest
Determination Date. "Telerate Screen Page 3750" means the display designated as
page 3750 on the Telerate Service (or such other page as may replace page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page as
may replace that page on that service, or if such service is no longer offered,
such other service for displaying One-Month LIBOR or comparable rates as may be
selected by the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee) as of 11:00 A.M., London time, on the Interest
Determination Date, to prime banks in the London interbank market for a period
of one month in amounts approximately equal to the aggregate Certificate
Principal Balance of the Class A-1 Certificates. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Trustee, as of
11:00 A.M., New York City time, on the Interest Determination Date, for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the Class
A-1 Certificates. If no such quotations can be obtained, the rate will be
One-Month LIBOR for the prior Distribution Date. "LIBOR Business Day" means any
day other than (i) a Saturday or a Sunday or (ii) a day on which banking
institutions in the city of London, England are required or authorized by law to
be closed.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Class A-1 Certificates for the related Accrual Period shall
(in the absence of manifest error) be final and binding.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the amounts remaining for
distribution after payments under clauses (a) through (d) under "--Priority of
Payment" above, an amount (as determined separately for the Class A-1
Certificates and Class A-2 Certificates, the related "Class A Principal
Distribution Amount"), in reduction of the Certificate Principal Balance thereof
as described below, which equals the sum of (i) the portion of any Group I Class
A Carry-Forward Amount or Group II Class A Carry-Forward Amount, as applicable,
which relates to a shortfall in a distribution of a related Subordination
Deficit, (ii) all scheduled installments of principal in respect of the Mortgage
Loans in the related Loan Group received or advanced during the related Due
Period, together with all unscheduled recoveries of principal on such Mortgage
Loan received by the Master Servicer during the prior calendar month, (iii) the
Principal
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Balance of each Mortgage Loan in the related Loan Group that was repurchased by
either the Seller or by the Company, (iv) any amounts delivered by the Company
on the Master Servicer Remittance Date (as defined herein) in connection with a
substitution of a Mortgage Loan in the related Loan Group, (v) the net
Liquidation Proceeds (as defined in the Prospectus) collected by the Master
Servicer of all Mortgage Loans in the related Loan Group during the prior
calendar month (to the extent such net Liquidation Proceeds are related to
principal), (vi) the amount of any related Subordination Deficit for such
Distribution Date, (vii) the proceeds received by the Trustee of any termination
of the related Loan Group (to the extent such proceeds are related to
principal), (viii) the amount of any related Subordination Increase Amount (as
defined herein) for such Distribution Date, and (ix) with respect to the Class
A-1 Certificates and Class A-2 Certificates, with respect to the Distribution
Date occurring in January 1997, any amounts in the related Pre-Funding Account
after giving effect to any purchase of related Subsequent Mortgage Loans; MINUS
(x) the amount of any related Subordination Reduction Amount (as defined herein)
for such Distribution Date.
In no event will the Class A Principal Distribution Amount with respect
to any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balance of the Class A Certificates.
Distributions of the Class A Principal Distribution Amount with respect
to the Class A-1 Certificates will be allocated to the Class A-1 Certificates in
reduction of the Certificate Principal Balance thereof, until such Certificate
Principal Balance has been reduced to zero. Distributions of the Class A
Principal Distribution Amount with respect to the Class A-2 Certificates will be
allocated to the Class A-2 Certificates in reduction of the Certificate
Principal Balance thereof, until such Certificate Principal Balance has been
reduced to zero.
The "Master Servicer Remittance Date" with respect to any Distribution
Date is the 18th day of the month in which such Distribution Date occurs, or if
such 18th day is not a business day, the business day immediately preceding such
18th day.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of the Due Date
preceding such date of determination, as such principal balance is specified for
such Due Date in the amortization schedule, (before any adjustment to such
amortization schedule by reason of any bankruptcy (other than Deficient
Valuations (as defined in the Prospectus)) or similar proceeding or any
moratorium or similar waiver or grace period) after giving effect to prepayments
received prior to such Due Date, Deficient Valuations incurred prior to such Due
Date, and to the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor. The Principal Balance of a
Mortgage Loan which becomes a Liquidated Mortgage Loan (as defined herein) on or
prior to such Due Date shall be zero.
See "Summary--Special Prepayment Considerations" and "--Special Yield
Considerations" and "Certain Yield and Prepayment Considerations" herein.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to
make Advances with respect to any payments of principal and interest (net of the
related servicing fees) which were due on the Mortgage Loans on the immediately
preceding Due Date and have not been received as of the business day immediately
preceding the related Master Servicer Remittance Date. With respect to a
delinquent Balloon Payment, the Master Servicer is not required to make an
Advance of such delinquent Balloon Payment. The Master Servicer will, however,
make monthly Advances with respect to balloon Mortgage Loans with delinquent
Balloon Payments, in each case in an amount equal to the assumed monthly
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principal and interest payment (net of the related servicing fees) that would
have been due on the related Due Date based on the original principal
amortization schedule for such balloon Mortgage Loan.
Such Advances are required to be made by the Master Servicer only to
the extent they are deemed by the Master Servicer to be recoverable from related
late collections, insurance proceeds or liquidation proceeds. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, to maintain a specified level of overcollateralization and
to pay the premium due the Certificate Insurer and to pay the Trustee, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to application of the Relief Act. Any
failure by the Master Servicer to make an Advance as required under the Pooling
and Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor servicer, will be obligated to make any such
Advance, in accordance with the terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer making the
Advance subject to certain conditions and restrictions from late collections,
insurance proceeds and liquidation proceeds from the Mortgage Loan as to which
such unreimbursed Advance was made.
CERTIFICATE GUARANTY INSURANCE POLICIES
The following information regarding the Certificate Insurance Policies
has been supplied by the Certificate Insurer for inclusion in this Prospectus
Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment (as defined below)
will be received by the Trustee, or its successor as Trustee for the Owners, on
behalf of the Owners from the Certificate Insurer, for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Certificate Insurance
Policies with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Certificate Insurance
Policies, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Class A Certificates, unless such acceleration is at the
sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust Fund, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the Business Day following receipt on
a Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for such Owner in any
legal proceeding related to such preference payment, such instruments being in a
form satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has
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returned principal or interest paid on the Class A Certificates to such receiver
or trustee in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policies no later than 12:00 noon, New York City time, on
the later of the Distribution Date on which the related Insured Payment is due
or the Business Day following receipt in New York, New York on a Business Day by
State Street Bank and Trust Company, N.A., as the Certificate Insurer's Fiscal
Agent or any successor fiscal agent appointed by the Certificate Insurer (the
"Certificate Insurer's Fiscal Agent") of a Notice (as described below); provided
that if such Notice is received after 12:00 noon, New York City time, on such
Business Day, it will be deemed to be received on the following Business Day. If
any such Notice received by the Certificate Insurer's Fiscal Agent is not in
proper form or is otherwise insufficient for the purpose of making a claim under
any Certificate Insurance Policy it shall be deemed not to have been received by
the Certificate Insurer's Fiscal Agent for purposes of this paragraph, and the
Certificate Insurer or the Certificate Insurer's Fiscal Agent, as the case may
be, shall promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under the Certificate Insurance Policies, unless
otherwise stated therein, will be disbursed by the Certificate Insurer's Fiscal
Agent to the Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The Certificate Insurer's Fiscal Agent is the agent of the Certificate
Insurer only and the Certificate Insurer's Fiscal Agent shall in no event be
liable to Owners for any acts of the Certificate Insurer's Fiscal Agent or any
failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policies.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City or in the city
in which the corporate trust office of the Trustee under the Pooling
and Servicing Agreement is located are authorized or obligated by law
or executive order to close.
"Insured Payment" means (i) as of any Distribution Date, an
amount equal to the sum of (a) the related Class A Interest
Distribution Amount minus the related Available Funds and (b) the
related Subordination Deficit (to the extent not covered, with respect
to the Class A-2 Certificates, by Cross-Collateralization Payments) and
(ii) the related unpaid Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to each Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment which shall be due and owing on
the applicable Distribution Date.
"Owner" means each related Class A Certificateholder (as
defined in the Pooling and Servicing Agreement) who, on the applicable
Distribution Date, is entitled under the terms of the applicable Class
A Certificate, to payment under the related Certificate Insurance
Policy.
"Preference Amount" means any amount previously distributed to
an Owner on the related Class A Certificates that is recoverable and
sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.),
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as amended from time to time in accordance with a final nonappealable
order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined in the Certificate Insurance Policies shall have the
respective meanings set forth in the Pooling and Servicing Agreement as of the
date of execution of the Certificate Insurance Policies, without giving effect
to any subsequent amendment or modification to the Pooling and Servicing
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of
process on the Certificate Insurer's Fiscal Agent may be made at the address
listed below for the Certificate Insurer's Fiscal Agent or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Certificate Insurer's Fiscal Agent is 15th
Floor, 61 Broadway, New York, New York 10006, Attention: Municipal Registrar and
Paying Agency, or such other address as the Certificate Insurer's Fiscal Agent
shall specify to the Trustee in writing.
The Certificate Insurance Policies are being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policies is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason.
The premium on each of the Certificate Insurance Policies is not refundable for
any reason including payment, or provision being made for payment, prior to
maturity of the Class A Certificates.
MANDATORY PREPAYMENTS ON CLASS A-1 CERTIFICATES AND CLASS A-2 CERTIFICATES
The Class A-1 Certificates and Class A-2 Certificates will be prepaid
on the January 1997 Distribution Date to the extent that any amount remains on
deposit in the related Pre-Funding Account on such Distribution Date. Although
no assurance can be given, it is anticipated by the Company that the principal
amount of Subsequent Mortgage Loans sold to the Trust Fund will require the
application of substantially all of the related Original Pre-Funded Amount and
that there should be no material amount of principal prepaid to the Class A-1
Certificateholders and Class A-2 Certificateholders from the Pre-Funding
Accounts. However, it is unlikely that the Company will be able to deliver
Subsequent Mortgage Loans for Loan Group I and Loan Group II with an aggregate
principal balance identical to the related Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
The Company will establish for the benefit of Class A-1
Certificateholders and Class A-2 Certificateholders two trust accounts (the
"Group I Interest Coverage Account" and the "Group II Interest Coverage
Account"; and together the "Interest Coverage Accounts"). On the Delivery Date,
the Company will deposit in each such account a cash amount as required by the
Certificate Insurer and specified in the Pooling and Servicing Agreement. On
each Distribution Date during the Funding Period and on the Distribution Date
immediately following, funds on deposit in the Interest Coverage Accounts will
be applied by the Trustee to cover shortfalls in the Group I and Group II Class
A Interest Distribution Amount attributable to the pre-funding feature during
the related Funding Period. Such shortfall initially will exist during the
Funding Period because while the Class A-1 Certificateholders and Class A-2
Certificateholders are entitled to receive interest accruing on the Certificate
Principal Balance of the Class A-1 Certificates and Class A-2 Certificates, the
Certificate Principal Balance of the Class A Certificates
S-60
<PAGE>
during the Funding Period will be greater than the aggregate principal balance
of the related Mortgage Loans on the Delivery Date. On the first business day
following the first Distribution Date following the termination of the related
Funding Period, funds on deposit in the related Interest Coverage Account will
be released by the Trustee to the Company.
MBIA INSURANCE CORPORATION
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for the nine months ended September 30, 1996 and for the
periods ending September 30, 1996 and September 30, 1995 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September 30,
1996, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is 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 Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA, Inc. pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Senior Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
S-61
<PAGE>
<TABLE>
<CAPTION>
SAP
----------------------------------------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------------- ------------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets....................................... $3,814 $4,348
Liabilities........................................... 2,540 2,911
Capital and Surplus................................... 1,274 1,437
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------------------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------------- ------------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets................................................ $4,463 $4,861
Liabilities........................................... 1,937 2,161
Shareholder's Equity.................................. 2,526 2,700
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1995
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policies and the
Certificate Insurer set forth under the heading "Description of the
Certificates--Certificate Guaranty Insurance Policies" and "MBIA Insurance
Corporation." The Certificate Insurer makes no additional representations
regarding the Class A Certificates or the advisability of investing in the Class
A Certificates.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa."
Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc., rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The Certificate Insurer does not guaranty the market price of
the Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be reversed or withdrawn.
S-62
<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans in the related Loan Group and the amount, if any,
distributed from the related Pre-Funding Account at the end of the related
Funding Period. Such yield may be adversely affected by a higher or lower than
anticipated rate of principal payments on the Mortgage Loans in the related Loan
Group. The rate of principal payments on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans in the related Loan
Group due to certain breaches of representations or warranties. The timing of
changes in the rate of prepayments, liquidations and purchases of the Mortgage
Loans in the related Loan Group may, and the timing of losses on the Mortgage
Loans in the related Loan Group will, significantly affect the yield on the
related Class A Certificates to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans in the related Loan Group will depend on future events and on a variety of
factors (as described herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the timing of principal payments on the related Class A
Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time;
however, a majority of the Mortgage Loans in each Loan Group are subject to a
prepayment charge for prepayments. See "Description of the Mortgage Pool"
herein. In addition, the Mortgage Loans contain a provision that may result in
the acceleration of the payment of the Mortgage Loan in the event of the
transfer or sale of the related Mortgaged Property. Prepayments, liquidations
and purchases of the Mortgage Loans in the related Loan Group will result in
distributions to holders of the related Class A Certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
Mortgage Loans in the related Loan Group. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates, solicitations and servicing decisions. In
addition, if prevailing mortgage rates fell significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayments (including refinancings)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The Mortgage Loans in the Trust Fund which are balloon payment Mortgage
Loans will not be fully amortizing over their terms to maturity, and will
require substantial principal payments at their stated maturity. Mortgage loans
of this type involve a greater degree of risk than self-amortizing loans because
the ability of a borrower to make a balloon payment typically will depend upon
its ability either to fully refinance the loan or to sell the related Mortgaged
Property at a price sufficient to permit the borrower to make the balloon
payment. The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the value of the related Mortgaged
Property, the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the related Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for loans
secured by residential property. Because the ability of a borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property, there is a risk that the
Mortgage Loans that require balloon payments may default at maturity. Any
defaulted balloon payment that extends the maturity of a Mortgage Loan may delay
distributions of principal on the related Class A Certificates and thereby
extend the weighted average life of the related Class A Certificates and, if the
related Class A Certificates were purchased at a discount, reduce the yield
thereon.
S-63
<PAGE>
In addition, the yield to maturity on the Class A Certificates will
depend on, among other things, the price paid by the holders of the Class A
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of a Class A Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a class of Class A Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Class A
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase. For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the Prospectus.
To the extent that the Original Pre-Funded Amounts have not been fully
applied to the purchase of Subsequent Mortgage Loans by the Trust Fund by the
end of the Funding Period, the Holders of the related Class A-1 Certificates and
Class A-2 Certificates will receive on the first Distribution Date following the
termination of the Funding Period a prepayment of principal in an amount equal
to the lesser of (i) the related Pre-Funded Amount remaining in the related
Pre-Funding Account and (ii) the outstanding Certificate Principal Balance of
the related Class A Certificates. Although no assurance can be given, it is
anticipated by the Company that the principal amount of Subsequent Mortgage
Loans sold to the Trust Fund will require the application of substantially all
amounts on deposit in the Pre-Funding Accounts and that there will be no
material amount of principal prepaid to the Class A-1 Certificateholders and
Class A-2 Certificateholders. However, it is unlikely that the Company will be
able to deliver Subsequent Mortgage Loans with an aggregate principal balance
identical to the related Pre-Funded Amounts.
The following discussion assumes the characteristics set forth in the
tables below. The Final Scheduled Maturity Date for the Class A Certificates is
as follows: Class A-1 Certificates, January 25, 2028; Class A-2 Certificates,
January 25, 2028. Such Final Scheduled Maturity Dates (i) with respect to the
Class A-1 Certificates is based on a 0% CPR and (ii) with respect to the Class
A-2 Certificates is based on a 0% Prepayment Assumption, in each case with no
Net Monthly Excess Cashflow used to make accelerated payments of principal on
such classes of Class A Certificates and in each case assuming that a subsequent
Mortgage Loan in the related Loan Group has a first Due Date of February 1,
1997, and amortizes according to its fully amortizing term of 360 months, plus
twelve months. The weighted average life of the Class A Certificates is likely
to be shorter than would be the case if payments actually made on the Mortgage
Loans conformed to the foregoing assumption, and the final Distribution Date
with respect to the Class A Certificates could occur significantly earlier than
the Final Scheduled Maturity Date because (i) prepayments (including, for this
purpose, prepayments attributable to foreclosure, liquidation, repurchase and
the like) on Mortgage Loans are likely to occur, (ii) in the case of the Class
A-1 Certificates and the Class A-2 Certificates, twelve months have been added
to obtain the Final Scheduled Maturity Date above, and (iii) the holder of a
majority interest in the Class R Certificates or the Master Servicer may cause a
liquidation of the Mortgage Loans when the aggregate outstanding principal
amount
S-64
<PAGE>
of the Mortgage Loans is less than 10% (5% with respect to the Master Servicer
(or the Certificate Insurer, if Advanta is removed as Master Servicer)) of the
sum of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date and the aggregate principal balance of the Subsequent Mortgage Loans as of
the related Subsequent Cut-off Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor (assuming no losses). The
weighted average life of the Class A Certificates will be influenced by the rate
at which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes liquidations due to default). Prepayments on mortgage 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 is a
constant prepayment assumption ("CPR"), which represents an assumed constant
rate of prepayment, each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. The
model used in this Prospectus Supplement with respect to the Class A-2
Certificates is a prepayment assumption (the "Prepayment Assumption"), which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption assumes a conditional prepayment
rate of 3% per annum of the outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional
approximate 1.42% (precisely 17/12) (expressed as a percentage per annum) in
each month thereafter until the twelfth month; beginning in the twelfth month
and in each month thereafter during the life of the mortgage loans, a
conditional prepayment rate of 20% per annum each month is assumed. As used in
the table below, a 0% CPR or a 0% Prepayment Assumption assumes a prepayment
rate equal to 0% CPR or 0% of the Prepayment Assumption, i.e., no prepayments.
Correspondingly, 80% Prepayment Assumption assumes prepayment rates equal to 80%
of the Prepayment Assumption, and so forth. Neither CPR nor the Prepayment
Assumption purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans.
The following tables have been prepared assuming that Loan Group I and
Loan Group II are comprised of Mortgage Loans having the following
characteristics (dollar amounts are approximate):
LOAN GROUP I
(i) the 1st through 15th hypothetical Mortgage Loans set forth below
comprise the Initial Group I Loans included in Loan Group I and the 16th
hypothetical Mortgage Loan set forth below comprises the Subsequent Mortgage
Loans included in Loan Group I:
<TABLE>
<CAPTION>
ORIGINAL MONTHS TO REMAINING
NET TERM TO NEXT RATE TERM TO GROSS
PRINCIPAL MORTGAGE MORTGAGE MATURITY ADJUSTMENT MATURITY GROSS LIFETIME
BALANCE RATE RATE (IN MONTHS) DATE (IN MONTHS) MARGIN CAP
------- ---- ---- ----------- ---- ----------- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
$ 153,792.66 9.633% 9.133% 360 0 350 5.49% 16.243%
$ 681,193.79 9.542% 9.042% 360 1 355 5.59% 16.055%
$ 5,757,783.09 10.053% 9.553% 360 2 356 6.50% 16.969%
$ 24,040,830.55 10.097% 9.597% 359 3 356 5.76% 17.021%
$ 25,232,073.53 10.140% 9.640% 360 4 358 5.82% 17.078%
$ 25,723,788.00 9.889% 9.389% 360 5 359 5.61% 16.867%
$ 184,800.00 9.625% 9.125% 360 6 359 5.40% 16.625%
$ 1,548,038.35 10.522% 10.022% 360 19 355 7.00% 17.156%
$ 2,795,690.49 10.847% 10.347% 360 20 356 6.10% 17.789%
$ 12,206,184.39 11.235% 10.735% 360 21 357 5.65% 18.219%
$ 22,078,044.51 10.752% 10.252% 360 22 358 5.76% 17.641%
<CAPTION>
GROSS GROSS
LIFETIME PERIODIC
FLOOR CAP
----- ---
<S> <C> <C>
9.633% 1.000%
9.542% 1.137%
10.053% 1.044%
10.099% 1.005%
10.140% 0.998%
9.889% 1.001%
9.625% 1.000%
10.522% 1.512%
10.847% 1.446%
11.235% 1.495%
10.722% 1.500%
S-65
<PAGE>
<CAPTION>
ORIGINAL MONTHS TO REMAINING
NET TERM TO NEXT RATE TERM TO GROSS
PRINCIPAL MORTGAGE MORTGAGE MATURITY ADJUSTMENT MATURITY GROSS LIFETIME
BALANCE RATE RATE (IN MONTHS) DATE (IN MONTHS) MARGIN CAP
------- ---- ---- ----------- ---- ----------- ------ ---
<C> <C> <C> <C> <C> <C> <C> <C>
$ 21,128,560.00 10.700% 10.200% 360 23 359 5.79% 17.675%
$ 48,600.00 10.750% 10.250% 360 24 359 5.10% 17.750%
$ 159,865.00 10.250% 9.750% 360 33 357 5.38% 16.250%
$ 79,871.16 10.990% 10.490% 360 34 358 5.99% 17.990%
$ 48,180,884.48 10.380% 9.880% 360 12 360 5.79% 17.310%
<CAPTION>
GROSS GROSS
LIFETIME PERIODIC
FLOOR CAP
----- ---
<S> <C> <C>
10.700% 1.500%
10.750% 1.500%
10.250% 1.500%
10.990% 1.500%
10.370% 1.250%
</TABLE>
(ii) the 16th hypothetical Mortgage Loan set forth above has an initial
Due Date of February 1, 1997; however, on the Delivery Date, an amount equal to
interest at 10.380% per annum on the principal balance of the Mortgage Loan will
be deposited into the related Certificate Account and will be available for the
Distribution Date occurring in January 1997.
LOAN GROUP II
(i) the 1st through 4th and the 6th hypothetical Mortgage Loans set
forth below comprise the Initial Group II Loans included in Loan Group II and
the 5th hypothetical Mortgage Loan set forth below comprises the Subsequent
Mortgage Loans included in Loan Group II:
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TO TERM TO
PRINCIPAL MATURITY MATURITY
BALANCE MORTGAGE RATE NET MORTGAGE RATE (IN MONTHS) (IN MONTHS)
------- ------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
$ 141,064.73 12.126% 11.626% 118 120
$ 4,274,644.16 12.140% 11.640% 178 180
$ 113,140.99 11.314% 10.814% 237 240
$ 32,022,803.41 11.870% 11.370% 357 360
$ 11,817,528.45 11.900% 11.400% 331 331
$ 1,630,818.26 12.192% 11.692% 356 360
</TABLE>
(ii) the 5th hypothetical Mortgage Loan set forth above has an initial
Due Date of February 1, 1997; however, on the Delivery Date an amount equal to
the interest at 11.900% per annum on the principal balance of the Mortgage Loan
will be deposited into the related Certificate Account and will be available for
the Distribution Date occurring in January 1997; (iii) the 6th hypothetical
Mortgage Loan is a balloon Mortgage Loan with a Balloon Payment on the 176th
month.
In addition, the following tables have been prepared assuming that the Mortgage
Loans in each Loan Group have the following characteristics: (i) with respect to
the Group I Loans and Group II Loans, the Subsequent Mortgage Loans are
purchased by January 15, 1997, resulting in no mandatory prepayment from the
Pre-Funding Accounts on the Distribution Date in January 1997; (ii) all
calculations for the Mortgage Loans are done on the basis of a 360-day year
consisting of twelve 30-day months; (iii) with respect to the Class A
Certificates, all weighted average lives are calculated on the basis of a
360-day year and a 30-day month; (iv) Due Dates on each Mortgage Loan are the
first day of the month; (v) all scheduled monthly payments on the Mortgage Loans
are made in a timely fashion on the first day of each month, commencing in
January 1997, and prepayments are assumed to be received on the last day of each
month, commencing in December 1996 (except for the hypothetical mortgage loans
with a February, 1997 first Due Date, for which scheduled monthly payments
commence in February, 1997, and prepayments commence in January, 1997,
respectively); (vi) the Mortgage Rate for the Group I Loans is adjusted on its
next Adjustment Date and on subsequent Adjustment Dates as necessary to a rate
equal to the sum of the Index and the related Gross Margin, subject to the
related Periodic Rate Cap, Lifetime Rate Cap and Lifetime Rate Floor; (vii)
there are no Prepayment Interest Shortfalls; (viii) distributions on the Class A
Certificates are made on the 25th day of each month, commencing in January 1997;
(ix) the Delivery
S-66
<PAGE>
Date is December 13, 1996; (x) the Index is Six-Month LIBOR and remains constant
at 5.61719% per annum and One-Month LIBOR remains constant at 5.60547% per
annum; (xi) the Required Subordinated Amounts will be set as provided in the
Pooling and Servicing Agreement; (xii) the Mortgage Loans will prepay at the
indicated assumed percentages of CPR or the Prepayment Assumption in the
corresponding order set forth below; and (xiii) and with regard to the weighted
average lives neither the holder of a majority percentage interest of the Class
R Certificates or the Master Servicer (or the Certificate Insurer, if Advanta is
removed as Master Servicer) exercises its option to terminate the Trust Fund
when the aggregate principal balance of the Mortgage Loans is reduced to less
than 10% (or 5% in the case of the Master Servicer or the Certificate Insurer)
of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
and the aggregate Principal Balance of the Subsequent Mortgage Loans as of the
related Subsequent Cut-off Date.
Based upon the foregoing assumptions, certain of which may not reflect
actual experience, the following tables indicate the projected weighted average
life of each class of Class A Certificates and the percentages of the initial
Certificate Principal Balance of each such class that would be outstanding after
each of the dates shown at various percentages of CPR and the Prepayment
Assumption which will occur simultaneously for both Loan Groups. Investors in
the Class A Certificates should note that, irrespective of the assumptions
above, including the assumption of no losses on the Mortgage Loans, the
following tables show both CPR with respect to Loan Group I and the Prepayment
Assumption with respect to Loan Group II because Cross-Collateralization
Payments will occur with respect to distributions on Loan Group I being paid to
the Group II Certificates.
S-67
<PAGE>
<TABLE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
<CAPTION>
CLASS A-1 CERTIFICATES
-------------------------------------------------------------------------------
GROUP I (CPR) 0% 15% 18% 20% 25% 30% 35% 40%
-------- --------- -------- --------- --------- --------- --------- ------
GROUP II (PPA) 0% 50% 75% 100% 115% 125% 150% 200%
-------- --------- -------- --------- --------- --------- --------- ------
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100%
December, 1997............. 96 81 78 76 72 67 62 57
December, 1998............. 95 68 63 60 52 45 39 32
December, 1999............. 95 57 51 47 39 31 25 20
December, 2000............. 94 48 41 37 29 22 16 12
December, 2001............. 94 40 34 30 21 15 11 7
December, 2002............. 93 34 27 24 16 11 7 4
December, 2003............. 92 29 22 19 12 7 4 2
December, 2004............. 91 24 18 15 9 5 3 1
December, 2005............. 90 20 15 12 7 3 1 0
December, 2006............. 89 17 12 9 5 2 1 0
December, 2007............. 88 14 10 7 3 1 0 0
December, 2008............. 86 12 8 6 2 1 0 0
December, 2009............. 85 10 6 4 2 0 0 0
December, 2010............. 83 8 5 3 1 0 0 0
December, 2011............. 81 7 4 2 1 0 0 0
December, 2012............. 78 6 3 2 0 0 0 0
December, 2013............. 76 5 2 1 0 0 0 0
December, 2014............. 73 4 2 1 0 0 0 0
December, 2015............. 70 3 1 1 0 0 0 0
December, 2016............. 66 2 1 0 0 0 0 0
December, 2017............. 62 2 1 0 0 0 0 0
December, 2018............. 57 1 0 0 0 0 0 0
December, 2019............. 52 1 0 0 0 0 0 0
December, 2020............. 47 1 0 0 0 0 0 0
December, 2021............. 41 0 0 0 0 0 0 0
December, 2022............. 34 0 0 0 0 0 0 0
December, 2023............. 27 0 0 0 0 0 0 0
December, 2024............. 18 0 0 0 0 0 0 0
December, 2025............. 9 0 0 0 0 0 0 0
December, 2026............. 0 0 0 0 0 0 0 0
Weighted Average
Lives in Years(1).......... 21.19 5.48 4.59 4.12 3.26 2.66 2.23 1.90
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
Certificate.
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<PAGE>
<TABLE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR AND THE PREPAYMENT ASSUMPTION
CLASS A-2 CERTIFICATES
--------------------------------------------------------------------------------
GROUP I (CPR) 0% 15% 18% 20% 25% 30% 35% 40%
--------- --------- --------- --------- --------- --------- -------- ------
GROUP II (PPA) 0% 50% 75% 100% 115% 125% 150% 200%
--------- --------- --------- --------- --------- --------- -------- ------
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100% 100%
December, 1997................ 98 91 88 84 82 81 77 71
December, 1998................ 97 81 74 67 63 60 53 41
December, 1999................ 96 72 62 53 47 44 37 25
December, 2000................ 95 64 52 41 36 33 26 15
December, 2001................ 94 57 44 33 28 24 18 9
December, 2002................ 93 51 37 26 21 18 12 5
December, 2003................ 92 45 31 21 16 13 8 3
December, 2004................ 91 40 26 16 12 10 6 1
December, 2005................ 89 35 21 13 9 7 4 1
December, 2006................ 87 31 18 10 7 5 2 0
December, 2007................ 85 27 15 8 5 4 1 0
December, 2008................ 83 24 12 6 4 2 1 0
December, 2009................ 80 21 10 4 3 2 0 0
December, 2010................ 78 18 8 3 2 1 0 0
December, 2011................ 72 15 6 2 1 1 0 0
December, 2012................ 70 13 5 2 1 0 0 0
December, 2013................ 67 11 4 1 0 0 0 0
December, 2014................ 65 10 3 1 0 0 0 0
December, 2015................ 62 8 3 0 0 0 0 0
December, 2016................ 58 7 2 0 0 0 0 0
December, 2017................ 54 6 1 0 0 0 0 0
December, 2018................ 50 5 1 0 0 0 0 0
December, 2019................ 45 4 1 0 0 0 0 0
December, 2020................ 40 3 0 0 0 0 0 0
December, 2021................ 34 2 0 0 0 0 0 0
December, 2022................ 27 1 0 0 0 0 0 0
December, 2023................ 19 1 0 0 0 0 0 0
December, 2024................ 12 0 0 0 0 0 0 0
December, 2025................ 5 0 0 0 0 0 0 0
December, 2026 and
thereafter.................... 0 0 0 0 0 0 0 0
Weighted Average
Lives in Years(1)............. 19.94 8.01 5.80 4.47 3.92 3.62 3.02 2.26
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
Certificate.
----------------------
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth above,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the
given levels of CPR or the Prepayment Assumption until maturity or that all of
the Mortgage Loans will prepay at the same level of CPR or the Prepayment
Assumption. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the table at the various percentages of CPR
S-69
<PAGE>
or the Prepayment Assumption specified, even if the weighted average remaining
term to maturity of the Mortgage Loans is as assumed. Any difference between
such assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment or loss experience, will affect the percentages of
initial Certificate Principal Balances outstanding over time and the weighted
average lives of the Class A Certificates.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), dated as of December 1, 1996,
among the Company, the Master Servicer and Norwest Bank Minnesota, N.A., as
Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. See "The Pooling
Agreement" in the Prospectus.
THE MASTER SERVICER
Advanta Mortgage Corp. USA (in its capacity as master servicer, the
"Master Servicer") will act as master servicer for the Mortgage Loans pursuant
to the Pooling and Servicing Agreement. The Master Servicer is an indirect
subsidiary of Advanta Corp., a Delaware corporation (the "Advanta Parent"), a
publicly-traded company based in Horsham, Pennsylvania with assets as of
September 30, 1996 in excess of $5.6 billion. Advanta Parent, through its
subsidiaries (including the Master Servicer) had managed assets (including
mortgage loans) in excess of $18.3 billion as of September 30, 1996.
As of September 30, 1996, the Master Servicer and its subsidiaries were
servicing approximately 40,000 mortgage loans in the Owned and Managed Servicing
Portfolio (as defined below) representing an aggregate outstanding principal
balance of approximately $2.3 billion, and approximately 42,000 mortgage loans
in the Third-Party Servicing Portfolio (as defined below) representing an
aggregate outstanding principal balance of approximately $2.1 billion.
The Certificates will not represent an interest in or obligation of,
nor are the Mortgage Loans guaranteed by, the Master Servicer or the Advanta
Parent.
In addition to the rights of the Trustee with respect to the Master
Servicer as described in the Prospectus under "The Pooling Agreement," the
Certificate Insurer will have certain rights, described in the Pooling and
Servicing Agreement, with respect to the removal or resignation of the Master
Servicer and the ability of the Master Servicer to assign any of its obligations
under the Pooling and Servicing Agreement.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER
OWNED AND MANAGED SERVICING PORTFOLIO. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Master Servicer for its Owned and Managed Servicing Portfolio for September
30, 1996, and for each of the four prior years. The Master Servicer's "Owned and
Managed Servicing Portfolio" consists of the Master Servicer's servicing
portfolio of fixed and variable rate mortgage loans excluding certain loans
serviced by the Master Servicer that were not originated or purchased and
reunderwritten by the Master Servicer or any affiliate thereof. In addition to
the Owned and Managed Servicing Portfolio, the Master Servicer serviced as of
September 30, 1996, approximately 42,000 mortgage loans with an aggregate
principal balance as of such date of approximately $2.1 billion; such loans were
not originated by the Master Servicer or any affiliate thereof and are being
serviced for third parties on a contract servicing basis (the "Third-Party
Servicing Portfolio"). No loans in the Third-Party Servicing Portfolio are
included in the tables set forth below.
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<PAGE>
<TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
<CAPTION>
Year Ending December 31,
------------------------------------------------------------
Nine Months Ending
September 30, 1996 1995 1994
---------------------------- ------------------------------ -----------------------------
Number Dollar Number Dollar Number Dollar
Of Amount Of Amount Of Amount
Loans (000) Loans (000) Loans (000)
------------ -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio 40,403 $2,334,295 32,592 $1,797,582 26,446 $1,346,100
Delinquency
Percentage(1)
30-59 days 2.05% 1.93% 2.67% 2.44% 2.01% 1.57%
60-89 days 0.57 0.64 0.72 0.71 0.57 0.45
90 days or more 1.52 1.33 1.69 1.23 1.85 1.51
----- ----- ---- ---- ---- ----
Total 4.14% 3.90% 5.08% 4.38% 4.43% 3.53%
Foreclosure Rate(2) 1.30% 1.48% 1.29% 1.53% 1.35% 1.38%
REO Properties(3) 0.44% -- 0.52% -- 0.47% --
<CAPTION>
Year Ending December 31,
---------------------------------------------------------
1993 1992
----------------------------- --------------------------
Number Dollar Number Dollar
Of Amount Of Amount
Loans (000) Loans (000)
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Portfolio 25,460 $1,149,864 22,318 $908,541
Delinquency
Percentage(1)
30-59 days 2.43% 2.22% 2.71% 2.59%
60-89 days 0.77 0.63 0.64 0.64
90 days or more 2.19 2.12 1.52 1.69
---- ---- ---- ----
Total 5.39% 4.97% 4.87% 4.92%
Foreclosure Rate(2) 1.32% 1.62% 2.13% 2.78%
REO Properties(3) 0.42% -- 0.35% --
</TABLE>
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount
of mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may
be, as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties
relating to mortgage foreclosed or for which deeds in lieu of foreclosure
have been accepted, and held by the Master Servicer pending disposition)
percentages are calculated using the number of loans, not the dollar
amount.
S-71
<PAGE>
<TABLE>
LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS*
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------------------
Nine Months Ending
September 30, 1996 1995 1994 1993 1992
----------------------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $2,277,935 $1,540,238 $1,225,529 $1,049,447 $786,178
Gross losses(2) $10,741 $13,978 $20,886 $14,115 $6,069
Recoveries(3) $79 $148 $179 $123 $145
Net losses(4) $10,661 $13,830 $20,707 $13,992 $5,924
Net losses as a percentage of
average amount outstanding 7.62%(5) 0.90% 1.69% 1.33% 0.75%
</TABLE>
- ------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the mortgage loans outstanding on
the last business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be
uncollectible relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) Annualized.
- ------------
* Managed portfolio statistics restated to exclude interest advances on
serviced portfolio to be consistent with presentation of owned portfolio.
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<PAGE>
The Master Servicer experienced an increase in the net loss rate on its
Owned and Managed Servicing Portfolio during the period 1990 through 1994. It
believes that such increase was due to four primary factors: the seasoning of
its portfolio, economic conditions, a decline in property values in certain
regions and the acceleration of charge-offs on loans in 1994. In addition, the
level of net losses during such period was negatively impacted by the
performance on its Non-Income Verification ("NIV") loan program. The net loss
rates as a percentage of the average amount outstanding on its Owned and Managed
Servicing Portfolio, excluding NIV loans, are 0.82%, 1.42%, 0.88% and 0.45% for
the periods ending December 31, 1995, December 31, 1994, December 31, 1993 and
December 31, 1992, respectively.*
There can be no assurance that the delinquency experience of the Group
I Loans and Group II Loans will correspond to the delinquency experience of the
Master Servicer's servicing portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Master
Servicer's servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Group I Loans and Group II Loans will
depend on the results obtained over the life of the related Loan Group. The
Master Servicer's servicing portfolio includes mortgage loans with a variety of
payment and other characteristics (including geographic location) which are not
necessarily representative of the payment and other characteristics of the Group
I Loans and Group II Loans. The Master Servicer's servicing portfolio includes
mortgage loans underwritten pursuant to guidelines not necessarily
representative of those applicable to the Group I Loans and Group II Loans. It
should be noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the Master
Servicer. In addition, adverse economic conditions may affect the timely payment
by mortgagors of scheduled payments of principal and interest on the Group I
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Group I Loans and Group II Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees will accrue at a
rate per annum (the "Servicing Fee Rate") on the outstanding principal balance
of each Mortgage Loan equal to 0.50% per annum. The Servicing Fees consist of
servicing compensation payable to the Master Servicer in respect of its master
servicing and direct servicing activities. In addition, the Master Servicer
shall be entitled to receive, as additional servicing compensation, to the
extent permitted by applicable law and the related Mortgage Notes, any late
payment charges, assumption fees or similar items. The Master Servicer shall pay
all expenses incurred by it in connection with its servicing activities under
the Pooling and Servicing Agreement and shall not be entitled to reimbursement
therefor except as specifically provided in the Pooling and Servicing Agreement.
THE TRUSTEE
Norwest Bank Minnesota, N.A. (the "Trustee"), a national banking
association, will act as trustee for the Certificates pursuant to the Pooling
and Servicing Agreement. The Trustee will be entitled to a fee, payable monthly,
of 0.0075% per annum of the Principal Balance (as defined herein) of each
Mortgage Loan (the "Trustee's Fee"). See "The Pooling Agreement" in the
Prospectus.
- --------
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
S-73
<PAGE>
EVENTS OF DEFAULT
In addition to the Events of Default listed in the Prospectus under
"The Pooling Agreement--Events of Default," the Master Servicer may be removed
if the delinquency or loss experience of the Mortgage Loans exceeds certain
levels specified in the Pooling and Servicing Agreement.
TERMINATION
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Advances of same by the Master Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the Master
Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust Fund established by the
Pooling and Servicing Agreement terminate later than twenty-one years after the
death of the last surviving lineal descendant of the person named in the Pooling
and Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement, the
holder of a majority percentage interest of the Class R Certificates or the
Master Servicer (or the Certificate Insurer, if Advanta is removed as Master
Servicer) may, at its option and at its sole cost and expense, on any
Distribution Date when the aggregate Principal Balance of the Mortgage Loans is
less than 10% (5% with respect to the exercise of this option by the Master
Servicer or the Certificate Insurer) of the sum of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date and the aggregate principal
balance of the Subsequent Mortgage Loans as of the related Subsequent Cut-off
Date, purchase from the Trust Fund all of the outstanding Mortgage Loans at a
price equal to the sum of (a) 100% of the Principal Balance of each outstanding
Mortgage Loan, (b) the aggregate amount of accrued and unpaid interest on the
Mortgage Loans through the related Due Period and 30 days' accrued interest
thereon at a rate equal to the Mortgage Rate (net of the Servicing Fee Rate in
the case of such a purchase by the Master Servicer), (c) any unreimbursed
amounts due to the Certificate Insurer under the Pooling and Servicing Agreement
or the Insurance Agreement (as defined in the Pooling and Servicing Agreement),
(d) any excess of the actual stated principal balance of each such Mortgage Loan
over the Principal Balance thereof, the aggregate amount of accrued and unpaid
interest on such excess through the related due period and 30 days' interest on
such excess at a rate equal to the related Mortgage Interest Rate with respect
to each related Mortgage Loan and (e) any other unpaid or unreimbursed amounts
owed to the Master Servicer and not included in clauses (a) through (d) above.
Any such purchase shall be accomplished by deposit into the related Certificate
Account of the purchase price specified above. From the amount so deposited, the
Trustee shall reimburse the Master Servicer for the amount of any unpaid
Servicing Fees, unreimbursed Advances and unreimbursed servicing advances. No
such termination is permitted without the prior written consent of the
Certificate Insurer if it would result in a draw on the related Certificate
Insurance Policy. See "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund (exclusive of the Interest
Coverage Accounts and the Pre-Funding Accounts) will qualify as a REMIC under
the Code.
S-74
<PAGE>
For federal income tax purposes, the Class A Certificates and the
Subordinate Certificates will represent ownership of "regular interests" in the
REMIC and will generally be treated as representing ownership of debt
instruments issued by the REMIC and the Class R Certificates will constitute the
sole class of "residual interests" in the REMIC. See "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates
will not be treated as having been issued with original issue discount. The
prepayment assumption that will be used with respect to the Class A-1
Certificates and the Class A-2 Certificates in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that, subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to a 25% CPR
and a 115% Prepayment Assumption, respectively. No representation is made that
the Mortgage Loans will prepay at this rate or at any other rate. See "Certain
Federal Income Tax Consequences--General--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Class A Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code to
such Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class A Certificates are issued with original issue discount or should be
governed by the rules applicable to debt instruments having contingent payments
or by some other method not yet set forth in regulations. Prospective purchasers
of the Class A Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
A reasonable method of reporting original issue discount with respect
to the Class A Certificates if the IRS determines such Certificates are issued
with original issue discount generally would be to report all income with
respect to such Certificates as original issue discount for each period,
computing such original issue discount (i) by assuming that the value of the
applicable index will remain constant for purposes of determining the original
yield to maturity of, and projecting future distributions on, each Class of such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" in the Prospectus.
In certain circumstances the OID Regulations permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used in preparing reports to the
Certificateholders and the IRS.
The Class A Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders
S-75
<PAGE>
of the Class A Certificates should consult their tax advisors regarding the
possibility of making an election to amortize such premium. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates" and "--Premium" in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Class A
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. To the extent the manufactured housing loans meet the requirements of
Section 25(e)(10) of the Code, the Class A Certificates will be treated as
assets described in the foregoing sections of the Code. Moreover, the Class A
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "The Pooling and Servicing Agreement--Termination"
herein and "Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated December 11, 1996 (the "Underwriting Agreement"), among Morgan
Stanley & Co. Incorporated ("Morgan Stanley"), Lehman Brothers Inc. ("Lehman")
and Prudential Securities Incorporated ("Prudential"; Morgan Stanley, Lehman and
Prudential collectively, the "Underwriters"), the Company and the Seller, the
Underwriters have agreed to purchase and the Company has agreed to sell to the
Underwriters the Class A Certificates. It is expected that delivery of the Class
A Certificates will be made only in book-entry form through the Same Day Funds
Settlement System of DTC, on or about December 13, 1996, against payment
therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the
Underwriters to pay for and accept delivery of the Class A Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Class A Certificates by the Underwriters may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Class A Certificates, before deducting expenses payable by
the Company, will be approximately 99.66% of the aggregate initial Certificate
Principal Balance of the Class A Certificates plus accrued interest on the Class
A-2 Certificates from December 1, 1996. 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. In connection with the sale of
the Class A Certificates, the Underwriters may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters and
any profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
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<PAGE>
The Underwriting Agreement provides that the Company and the Seller
will jointly and severally indemnify the Underwriters, and that under limited
circumstances the Underwriters will indemnify the Company, against certain civil
liabilities under the Securities Act of 1933, or contribute to payments required
to be made in respect thereof.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Class A
Certificates. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Class A Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Company and the Underwriters by Thacher Proffitt & Wood, New York, New
York and for the Certificate Insurer by Kutak Rock, Omaha, Nebraska.
RATINGS
It is a condition of the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's Ratings Services ("S&P") and Duff & Phelps
Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc.
("Moody's").
S&P's ratings on mortgage loan asset-backed pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. S&P's ratings take into consideration
the credit quality of the mortgage pool, structural and legal aspects associated
with the Certificates, and the extent to which the payment stream in the
mortgage pool is adequate to make payments required under the Certificates.
S&P's rating on the Certificates does not, however, constitute a statement
regarding frequency of prepayments on the mortgages. See "Certain Yield and
Prepayment Considerations" herein.
The ratings assigned by Moody's to mortgage loan asset-backed
pass-through certificates also address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
mortgage loans. The ratings assigned to mortgage loan asset-backed pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The ratings assigned by DCR to mortgage loan asset-backed pass-through
certificates address the likelihood of the receipt by Certificateholders of all
distributions to which they are entitled under the transaction structure. DCR's
ratings reflect its analysis of the riskiness of the mortgage loans and its
analysis of the structure of the transaction as set forth in the operative
documents. In addition, DCR considers the claims paying ability of the
Certificate Insurer to be comparable to that of other companies
S-77
<PAGE>
for which DCR assigns a "AAA" claims paying ability. DCR's ratings do not
address the effect on the certificates' yield attributable to prepayments or
recoveries on the underlying mortgages.
The Company has not requested a rating on the Class A Certificates by
any rating agency other than S&P, Moody's and DCR. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by S&P, Moody's and DCR.
The ratings assigned to the Class A-1 Certificates do not cover the
payment of any Group I Class A Available Funds Cap Carry-Forward Amount.
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. In the event that the ratings
initially assigned to the Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to the Class A Certificates.
LEGAL INVESTMENT
The Class A-1 Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated in at least the second highest
rating category by one or more nationally recognized statistical rating
agencies, and, as such, are legal investments for certain entities to the extent
provided in SMMEA. SMMEA provides, however, that states could override its
provision on legal investment and restrict or condition investment in mortgage
related securities by taking statutory action on or prior to October 3, 1991.
The Class A-2 Certificates will not constitute "mortgage related securities" for
purposes of SMMEA because the Group II Loans include Mortgage Loans that are
secured by subordinate liens on the related Mortgaged Properties.
The Company makes no representations as to the proper characterization
of the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the Class A Certificates constitutes a legal investment or is subject to
investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and the Code impose certain requirements on employee benefit
plans and certain other retirement plans and arrangements (including, but not
limited to, individual retirement accounts and annuities), as well as on
collective investment funds and certain separate and general accounts in which
such plans or arrangements are invested (all of which are hereinafter referred
to as a "Plan") and on persons who are fiduciaries with respect to such Plans.
Any Plan fiduciary which proposes to cause a Plan to acquire any of the Class A
Certificates should determine whether such an investment is permitted under the
governing Plan
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instruments and is prudent and appropriate for the Plan in view of its overall
investment policy and the composition and diversification of its portfolio. In
addition, ERISA and the Code prohibit certain transactions involving the assets
of a Plan and "disqualified persons" (within the meaning of the Code) and
"parties in interest" (within the meaning of ERISA) who have certain specified
relationships to the Plan. Therefore, a Plan fiduciary or any other person using
the assets of a Plan considering an investment in the Class A Certificates
should also consider whether such an investment might constitute or give rise to
a prohibited transaction under ERISA or the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates or any other
person proposing to use the assets of a Plan to acquire any of the Class A
Certificates should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the acquisition and ownership of such
Certificates.
The U.S. Department of Labor ("DOL") has granted to Morgan
Stanley an administrative exemption (Prohibited Transaction Exemption 90-24, 55
Fed. Reg. 20,548 (1990) (the "Morgan Stanley Exemption"), to Lehman an
administrative exemption (Prohibited Transaction Exemption 91-14, as amended;
Exemption Application No. D-7958, 56 Fed. Reg. 7414 (the "Lehman Exemption") and
to Prudential an administrative exemption (Prohibited Transaction Exemption
90-32, as amended; Exemption Application No. D-8145, 55 Fed. Reg. 23,147 (the
"Prudential Exemption"; the Morgan Stanley Exemption, the Lehman Exemption and
the Prudential Exemption collectively, the "Exemptions") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the 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.
Among the conditions that must be satisfied for the Exemptions
to apply are the following:
(1) the acquisition of the Class A Certificates by a
Plan is on terms (including the price for such Certificates)
that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated party;
(2) the rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the
rights and interests evidenced by other certificates of the
Trust Fund;
(3) the Class A Certificates acquired by the Plan
have received a rating at the time of such acquisition that is
one of the three highest generic rating categories from either
S&P, Moody's, DCR or Fitch Investors Service, L.P. ("Fitch").
(4) the Trustee must not be 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
Class A Certificates represents not more than reasonable
compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Company pursuant to
the assignment of the Mortgage Loans to the Trust Fund
represents not more than the fair market value of such
Mortgage Loans; the sum of all payments made to and retained
by the Master Servicer and any other servicer represents not
more than reasonable compensation for such person's services
under the Pooling and Servicing Agreement and reimbursements
of such person's reasonable expenses in connection therewith;
and
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(6) the Plan investing in the Class A Certificates is
an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consists solely
of assets of the type that have been included in other
investment pools;
(ii) certificates evidencing interests in such other
investment pools must have been rated in one of the three
highest rating categories of S&P, Moody's, Fitch or DCR for at
least one year prior to the Plan's acquisition of the Class A
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 any Plan's
acquisition of the Class A Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
any person who has discretionary authority or renders investment advice with
respect to the investment of Plan Assets causes a Plan to acquire certificates
in a trust, provided that, among other requirements: (i) such person (or its
affiliate) is an obligor with respect to five percent or less of the fair market
value of the obligations or receivables contained in the trust; (ii) the Plan is
not a plan with respect to which any member of the Restricted Group (as defined
below) is the plan sponsor (as defined in Section 3(16)(B) of ERISA); (iii) 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
(as defined below) and at least fifty percent of the aggregate interest in the
trust fund is acquired by persons independent of the Restricted Group; (iv) 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 (v) immediately after the acquisition, no more than twenty-five
percent of the assets of the Plan with respect to which such person has
discretionary authority or renders investment advice 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 Seller, the Company, the Underwriters, the Trustee, the Master
Servicer, the Certificate Insurer, any obligor with respect to Mortgage Loans
included in the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any affiliate
of such parties (the "Restricted Group").
The Exemptions may apply to the acquisition, holding and
transfer of the Class A Certificates by Plans if all of the conditions of the
Exemptions are met, including those within the control of the investor.
Notwithstanding any of the foregoing, the Exemptions will not apply with respect
to any Class A Certificates until such time as the balance of the related
Pre-Funding Account is reduced to zero. Accordingly, until such time, the Class
A Certificates may not be purchased by Plans. As of the date hereof, there is no
single Mortgage Loan included in the Trust Fund that constitutes more than five
percent of the aggregate unamortized principal balance of the assets of the
Trust Fund.
Prospective Plan investors should consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of the
Exemptions and any of the prohibited transaction class exemptions issued by the
DOL and the potential consequences in their specific circumstances, prior to
making an investment in the Class A Certificates. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of investment
procedure and diversification an investment in the Class A Certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio. In particular,
purchasers that are
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insurance companies should consult with their legal advisors with respect to the
applicability of Prohibited Transaction Class Exemption ("PTCE") 95-60,
regarding transactions by insurance company general accounts. In addition to any
exemption that may be available under PTCE 95-60 for the purchase and holding of
Certificates by an insurance company general account, the Small Business Job
Protection Act of 1996 added a new Section 401(c) to ERISA, which provides
certain exemptive relief from the provisions of Part 4 of Title I of ERISA and
Section 4975 of the Code, including the prohibited transaction restrictions
imposed by ERISA and the related excise taxes imposed by the Code, for
transactions involving an insurance company general account. Pursuant to Section
401(c) of ERISA, the DOL is required to issue final regulations ("401(c)
Regulations") no later than December 31, 1997 which are to provide guidance for
the purpose of determining, in cases where insurance policies supported by an
insurer's general account are issued to or for the benefit of a Plan on or
before December 31, 1998, which general account assets constitute Plan Assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) Regulations become final, no person shall be subject to
liability under Part 4 of Title I of ERISA and Section 4975 of the Code on the
basis of a claim that the assets of an insurance company general account
constitute Plan Assets, unless (i) as otherwise provided by the Secretary of
Labor in the 401(c) Regulations to prevent avoidance of the regulations or (ii)
an action is brought by the Secretary of Labor for certain breaches of fiduciary
duty which would also constitute a violation of federal or state criminal law.
Any assets of an insurance company general account which support insurance
policies issued to a Plan after December 31, 1998 or issued to Plans on or
before December 31, 1998 for which the insurance company does not comply with
the 401(c) Regulations may be treated as Plan Assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as Plan Assets of any Plan invested in such
separate account. Insurance companies contemplating the investment of general
account assets in the Certificates should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final. See "ERISA
Considerations" in the Prospectus.
EXPERTS
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
incorporated by reference into this Prospectus Supplement, have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
thereon incorporated by reference herein in reliance upon the authority of such
firm as experts in accounting and auditing.
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APPENDIX A
UNDERWRITING GUIDELINES APPLICABLE TO THE MORTGAGE LOANS
The Mortgage Loans were originated by the Originator under the Standard
Non-Conforming Program. The Standard Non-Conforming Program is the
"Non-Conforming Credit Program" applicable to residential loans which, for
credit reasons, do not conform to FNMA or FHLMC underwriting guidelines.
THE STANDARD NON-CONFORMING PROGRAM
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten in accordance with the underwriting criteria of SPFC.
SPFC began underwriting mortgage loans in accordance with such standards in July
1993.
The Originator's underwriting standards under the Standard
Non-Conforming Program are primarily intended to assess creditworthiness of the
mortgagor, the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan. While their primary
consideration in underwriting a mortgage loan is the mortgagor's employment
stability and debt-to-income ratio, the value of the mortgaged property relative
to the amount of the mortgage loan is another critical factor. In addition, they
also consider, among other things, a mortgagor's credit history and repayment
ability, as well as the type and use of the mortgaged property. All of the
Mortgage Loans underwritten under this program are adjustable rate loans, and
generally bear higher rates of interest than mortgage loans that are originated
in accordance with FNMA and FHLMC standards.
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten pursuant to the "Non-Conforming Full Documentation,"
"Non-Conforming Alternative Documentation" and "Non-Conforming No-Income
Qualifier" residential loan programs. Under each of the these programs, SPFC
reviews the loan applicant's source of income, calculates the amount of income
from sources indicated on the loan application or similar documentation, reviews
the credit history of the applicant, calculates the debt service-to-income ratio
to determine the applicant's ability to repay the loan, reviews the type and use
of the property being financed and reviews the property for compliance with
their standards. In determining the ability of the applicant to repay the
Mortgage Loan, the Originator uses a rate (the "Qualifying Rate") which
generally is a rate equal to the Mortgage Rate at origination plus the amount of
the Periodic Cap. SPFC's underwriting standards are applied in a standardized
procedure which complies with applicable federal and state laws and regulations.
SPFC's criteria require it to verify the income of each borrower and
the source of funds (if any) required to be deposited by the applicant into
escrow under its various programs. Borrowers are generally required to submit
written verification of income signed by the employer covering the most recent
two-year period, together with a current paystub and two years' W-2 forms. Under
the Non-Conforming Alternative Documentation program, borrowers are generally
required to submit two years' W-2 Forms and the most recent paystub showing
year-to-date earnings. A telephone confirmation of employment is made regardless
of the origination program. Under the Non-Conforming No-Income Qualifier
program, borrowers may be qualified based upon monthly income as stated on the
mortgage loan application, without verification; however, self-employed
borrowers are required to submit a business license, one year's bank statements
and a current profit and loss statement. A business credit report, if
applicable, is obtained. Verification of the source of funds (if any) required
to be deposited by the applicant into escrow is generally required under all
documentation programs in the form of a standard verification of deposit or two
months' consecutive bank statements or other acceptable documentation. Twelve
months' mortgage payment or rental history must be verified by lender or
landlord. If appropriate compensating factors exist, the Originator may waive
certain documentation requirements for individual borrowers.
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All documentation must be no more than 90 days old at underwriting and no more
than 120 days old at the time of the funding of the related loan.
SPFC uses the following categories and characteristics as guidelines to
grade the potential likelihood that the mortgagor will satisfy the repayment
conditions of a mortgage loan:
"A" RISK. Under the "A" risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms with
a maximum of three 30-day late payments within the last 12 months or five 30-day
late payments or two 60-day late payments within the last 24 months. Within this
24 month period, however, a maximum of one 30-day late payment, and no 60-day
late payments are acceptable in the last 12 months, or a maximum of two 30-day
late payments, and no 60- day late payments, within the last 24 months are
acceptable on an existing mortgage loan on the subject property. The existing
mortgage obligation must be current. Minor derogatory items are allowed as to
non-mortgage credit. No collection accounts or charge-offs or judgments over
$500 within the last five years are allowed. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding five years. A
maximum Loan-to-Value Ratio of up to 90% (or 75% for mortgage loans originated
under the Non-Conforming No-Income Qualifier program, but 80% if the borrower is
self-employed) is permitted for a mortgage loan on a single family
owner-occupied property. A maximum Loan-to-Value Ratio of 80% (or 70% for
mortgage loans originated under the Non-Conforming NoIncome Qualifier program
but 75% if the borrower is self-employed) is permitted for a mortgage loan on a
non-owner occupied property or a second home property. The debt
service-to-income ratio generally is 45% or less based on the Qualifying Rate.
The maximum loan amount is $400,000 for single-family owner-occupied properties,
regardless of the documentation program. Exceptions to the maximum loan amount
for single-family, owner occupied properties are considered by SPFC on a limited
basis. The maximum loan amount is $350,000 (or $300,000 for mortgage loans
originated under the NonConforming No-Income Qualifier Program) for mortgage
loans on a single-family non-owner-occupied properties or second homes.
"A-" RISK. Under the "A-" risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms with
a maximum of five 30-day late payments or two 60-day late payments on such
obligations within the last 12 months. A maximum of two 30-day payments, and no
60-day late payments, within the last 12 months is acceptable on an existing
mortgage loan on the subject property. The existing mortgage obligation must be
current. Minor derogatory items are allowed as to non-mortgage credit. No unpaid
collection accounts, charge-offs or judgments over $500 within the last two
years are allowed. No bankruptcy or notice of default filings by the borrower
may have occurred during the preceding two years. A maximum Loan-to-Value Ratio
of up to 85% (or 75% for mortgage loans originated under the Non-Conforming
No-Income Qualifier program, but 80% if the borrower is self-employed) is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum Loan-to-Value Ratio of up to 75% (or 70% for mortgage loans originated
under the Non-Conforming No-Income Qualifier program) is permitted for a
mortgage loan on a non-owner occupied property or a second home. The debt
service-to-income ratio generally is 45% or less based on the Qualifying Rate.
The maximum loan amount is $650,000 for single-family owner-occupied properties,
under the Non-Conforming Full Documentation Program. Exceptions to the maximum
loan amount for single-family, owner occupied properties are considered by SPFC
on a limited basis. The maximum loan amount is $500,000 for mortgage loans on
single-family owner-occupied properties under the Non-Conforming No-Income
Qualifier Program. The maximum loan amount is $400,000 (or $350,000 for mortgage
loans originated under the Non-Conforming No-Income Qualifier Program) for
mortgage loans on a single-family non-owner-occupied properties or second homes.
Loan applicants with less favorable credit ratings generally are offered loans
with higher interests rates and lower Loan-toValue ratios than applicants with
more favorable ratings.
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"B" RISK. Under the "B" risk category, the prospective mortgagor must
have generally repaid consumer debt according to its terms, with a maximum of
eight 30-day late payments or four 60-day late payments or two 90-day late
payments on such obligations within the last 12 months. A maximum of four 30-day
late payment, or three 30-day late payments and one 60-day late payment, within
the last 12 months is acceptable on an existing mortgage loan on the subject
property. The existing mortgage obligation must be current. As to non-mortgage
credit, some prior defaults may have occurred. Isolated and insignificant
collections and/or charge-offs and judgments within the last 18 months,
totalling less than $1,000 are acceptable. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding 18 months. A
maximum Loan-to-Value Ratio of 80% (or 70% for mortgage loans originated under
the Non-Conforming No-Income Qualifier program, but 75% if the borrower is
self-employed) is permitted for a mortgage loan on a single family,
owner-occupied property. A maximum Loan-to-Value Ratio of 70% (or 65% for
mortgage loans originated under the NonConforming No-Income Qualifier Program)
is permitted for a mortgage loan on a non-owner occupied property or a second
home. The debt service-to-income ratio generally is 50% or less based on the
Qualifying Rate. The maximum loan amount is $600,000 for single-family
owner-occupied properties, under the Non-Conforming Full Documentation Program.
The maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the Non-Conforming No-Income Qualifier Program) for mortgage loans on a
non-owner-occupied property or a second home.
"C" RISK. Under the "C" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. A maximum of twelve
30-day late payments or six 60-day late payments, or four 90-day late payments,
on consumer debt within the last twelve months is acceptable. A maximum of five
30-day late payments or three 30-day late payments and two 60-day late payments
or three 30-day late payments and one 90-day late payment, within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage obligation can be up to 40 days past due at the funding of the
loan. As to non-mortgage credit, significant prior defaults may have occurred.
There may be open collections or charge-offs not to exceed $4,000 and up to
$6,000 in isolated circumstances. No bankruptcy or notice of default filings by
the borrower may have occurred during the preceding year. A maximum
Loan-to-Value Ratio of 75% (or 65% for mortgage loans originated under the
Non-Conforming No-Income Qualifier Program, but 70% if the borrower is
self-employed) is permitted for a mortgage loan on a single-family
owner-occupied property. A maximum Loan-to-Value Ratio of 70% (or 60% for
mortgage loans originated under the Non-Conforming NoIncome Qualifier Program,
but 65% if the borrower is self-employed) is permitted for a mortgage loan on a
non-owner-occupied property or a second home. The debt service-to-income ratio
is generally 55% or less based on the Qualifying Rate. The maximum loan amount
is $500,000 (or $400,000 for mortgage loans originated under the Non-Conforming
No-Income Qualifier Program) for mortgage loans on single-family owner-occupied
properties. The maximum loan amount is $300,000 (or $200,000 for mortgage loans
originated under the Non-Conforming No-Income Qualifier Program) for mortgage
loans on nonowner-occupied properties or second homes.
"CX" RISK. Under the "CX" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, no payment
can be more than 90 days past due. Such existing mortgage loan is not required
to be current at the time the application is submitted. The borrower may have
open collections, charge-offs and judgments, all of which must be paid prior to
the funding of the loan, but such items must be paid through the loan proceeds.
No bankruptcy or notice of default filings by the borrower may have occurred
during the preceding six months. A maximum Loan-to-Value Ratio of 65% (or 60% or
55% for mortgage loans originated under the Non-Conforming No-Income Qualifier
Program, depending on whether the borrower is self-employed) is permitted for a
mortgage loan on a single-family owner-occupied property. No mortgage loans on
non-owner-occupied property or second homes are made in the "CX" risk category.
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The maximum loan amount is $200,000 under the Non-Conforming Full Documentation
Program or $175,000 (or $200,000 in the case of borrowers who are self-employed)
under the Non-Conforming NoIncome Qualifier Program. The debt service-to-income
ratio generally is 60% or less based on the Qualifying Rate.
"D" RISK. Under the "D" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a general disregard for timely payment or credit
standing. With respect to an existing mortgage loan on the subject property, no
payment can be more than 120 days past due. Such existing mortgage loan is not
required to be current at the time the application is submitted. The borrower
may have open collections, charge-offs and judgments, all of which must be paid
simultaneously with the funding of the loan. No current bankruptcy filings by
the borrower are allowed. Borrowers who are in foreclosure are considered. A
maximum Loan-to-Value Ratio of 65% (or 55% for mortgage loans originated under
the Non-Conforming, No-Income Qualifier Program, but 60% if the borrower is
self-employed) is permitted for a mortgage loan in a single-family
owner-occupied property. No mortgage loans on a non-owner-occupied property or a
second home are made in the "D" risk category. The maximum loan amount is
$350,000 under the Non-Conforming, NoIncome Qualifier Program, but $200,000 if
the borrower is self-employed) for mortgage loans on a nonowner-occupied
property or a second home. The debt service-to-income ratio is 60% or less based
on the Qualifying Rate.
EXCEPTIONS. As described above, the Originator uses the foregoing
categories and characteristics as underwriting guidelines only. On a
case-by-case basis, it may determine that the prospective mortgagor warrants a
risk category upgrade, a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception or an exception from certain requirements
of a particular risk category (collectively called an "upgrade" or an
"exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, among others: low
loan-to-value ratio; pride of ownership; a maximum of one 30-day late payment on
all mortgage loans during the last 12 months; stable employment, and the length
of residence in the subject property. Accordingly, they may classify certain
mortgage loan applications in a more favorable risk category than other mortgage
loan applications that, in the absence of such compensating factors, would
satisfy only the criteria of a less favorable risk category.
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PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
SOUTHERN PACIFIC SECURED ASSETS CORP.
The mortgage pass-through certificates (the "Offered Certificates") offered
hereby and by the supplements hereto (each, a "Prospectus Supplement") will be
offered from time to time in series. The Offered Certificates of each series,
together with any other mortgage pass-through certificates of such series, are
collectively referred to herein as the "Certificates."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be established by Southern Pacific Secured Assets Corp. (the
"Company"). Each Trust Fund will consist primarily of a segregated pool (a
"Mortgage Pool") of one- to four-family and/or multifamily residential first
and/or junior mortgage loans or manufactured housing conditional sales contracts
and installment loan agreements (collectively, the "Mortgage Loans") or
interests therein (which may include Mortgage Securities as defined herein),
acquired by the Company from one or more affiliated or unaffiliated institutions
(the "Sellers"). See "The Company" and "The Mortgage Pools." The Mortgage Loans
and other assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates (the "Certificateholders")
pursuant to a pooling and servicing agreement or other agreement (in either
case, a "Pooling Agreement") as more fully described herein and in the related
Prospectus Supplement. Information regarding the Offered Certificates of a
series, and the general characteristics of the Mortgage Loans and other assets
in the related Trust Fund, will be set forth in the related Prospectus
Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Loans and other assets in the related Trust
Fund in the manner described herein and in the related Prospectus Supplement. A
series may include one or more classes of Certificates entitled to principal
distributions, with disproportionate, nominal or no interest distributions, or
to interest distributions, with disproportionate, nominal or no principal
distributions. A series may include two or more classes of Certificates which
differ as to the timing, sequential order, priority of payment, pass-through
rate or amount of distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF CERTIFICATES WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY, EXCEPT
AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER (THE
"MASTER SERVICER") FOR ANY SERIES OF CERTIFICATES WILL BE NAMED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH INCLUDE ITS LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE RELATED MORTGAGE LOANS). SEE "DESCRIPTION OF THE CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a mortgage pool
insurance policy, letter of credit, bankruptcy bond, special hazard insurance
policy, reserve fund or other form of credit support. In addition to or in lieu
of the foregoing, credit enhancement may be provided by means of subordination
of one or more classes of Certificates. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Loans and other assets in the
related Mortgage Pool will depend on the priority of payment of such class and
the rate and timing of principal payments (including by reason of prepayments,
defaults, liquidations and repurchases of Mortgage Loans) on such Mortgage Loans
and other assets. A rate of principal payment slower or faster than that
anticipated may affect the yield on a class of Certificates in the manner
described herein and in the related Prospectus Supplement. See "Yield
Considerations."
One or more separate elections may be made to treat a Trust Fund or a designated
portion thereof as a real estate mortgage investment conduit ("REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
series of Certificates will specify which class or classes of the related series
of Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Certain Federal Income Tax
Consequences" herein.
Prospective investors should review the information appearing under the caption
"Risk Factors" herein and such information as may be set forth under the caption
"Risk Factors" in the related Prospectus Supplement before purchasing any
Offered Certificate.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES OF ANY SERIES NOR THE UNDERLYING MORTGAGE
LOANS OR MORTGAGE SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
RESPECTIVE AFFILIATES, UNLESS OTHERWISE SPECIFIED 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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Offered Certificates may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any series
prior to the offering thereof. There can be no assurance that a secondary market
for any of the Offered Certificates will develop or, if it does develop, that it
will continue.
The Offered Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is November 11, 1996.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY AND THEREBY OR AN OFFER OF SUCH CERTIFICATES 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; HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
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TABLE OF CONTENTS
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SUMMARY OF PROSPECTUS................................................................................. 4
RISK FACTORS.......................................................................................... 12
THE MORTGAGE POOLS.................................................................................... 15
General...................................................................................... 15
The Mortgage Loans........................................................................... 16
Underwriting Standards....................................................................... 20
Qualifications of Originators and Sellers.................................................... 22
Representations by Sellers................................................................... 22
SERVICING OF MORTGAGE LOANS........................................................................... 24
General...................................................................................... 24
The Master Servicer.......................................................................... 25
Collection and Other Servicing Procedures;
Mortgage Loan Modifications........................................................ 25
Subservicers................................................................................. 27
Special Servicers............................................................................ 27
Servicing and Other Compensation and
Payment of Expenses; Spread........................................................ 30
Evidence as to Compliance.................................................................... 30
DESCRIPTION OF THE CERTIFICATES....................................................................... 31
General...................................................................................... 31
Form of Certificates......................................................................... 32
Assignment of Trust Fund Assets.............................................................. 33
Certificate Account.......................................................................... 35
Distributions................................................................................ 39
Distributions of Interest and Principal on the
Certificates....................................................................... 39
Distributions on the Certificates in Respect of
Prepayment Premiums or in Respect
of Equity Participations........................................................... 40
Allocation of Losses and Shortfalls.......................................................... 40
Advances..................................................................................... 40
Reports to Certificateholders................................................................ 41
DESCRIPTION OF CREDIT ENHANCEMENT..................................................................... 43
General...................................................................................... 43
Subordinate Certificates..................................................................... 44
Letter of Credit............................................................................. 44
Mortgage Pool Insurance Policies............................................................. 44
Special Hazard Insurance Policies............................................................ 46
Bankruptcy Bonds............................................................................. 47
Reserve Funds................................................................................ 47
Maintenance of Credit Enhancement............................................................ 47
Reduction or Substitution of Credit
Enhancement........................................................................ 49
PURCHASE OBLIGATIONS.................................................................................. 50
PRIMARY MORTGAGE INSURANCE, HAZARD
INSURANCE;
CLAIMS THEREUNDER..................................................................................... 50
General...................................................................................... 50
Primary Mortgage Insurance Policies.......................................................... 50
Hazard Insurance Policies.................................................................... 52
FHA Insurance................................................................................ 53
THE COMPANY........................................................................................... 53
IMPERIAL CREDIT INDUSTRIES, INC....................................................................... 53
THE POOLING AGREEMENT................................................................................. 54
General...................................................................................... 54
Certain Matters Regarding the Master
Servicer and the Company........................................................... 54
Events of Default............................................................................ 55
Rights Upon Event of Default................................................................. 56
Amendment.................................................................................... 56
Termination; Retirement of Certificates...................................................... 57
The Trustee.................................................................................. 58
Duties of the Trustee........................................................................ 58
Certain Matters Regarding the Trustee........................................................ 58
Resignation and Removal of the Trustee....................................................... 58
YIELD CONSIDERATIONS.................................................................................. 59
MATURITY AND PREPAYMENT
CONSIDERATIONS............................................................................... 61
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS........................................................................................ 62
Single Family Loans and Multifamily Loans.................................................... 62
Contracts.................................................................................... 63
Foreclosure on Mortgages..................................................................... 64
Repossession with respect to Contracts....................................................... 65
Rights of Redemption......................................................................... 67
Anti-Deficiency Legislation and Other
Limitations on Lenders............................................................. 67
Junior Mortgages............................................................................. 68
Consumer Protection Laws with respect to
Contracts.......................................................................... 69
Environmental Legislation.................................................................... 69
Enforceability of Certain Provisions......................................................... 70
Subordinate Financing........................................................................ 71
Applicability of Usury Laws.................................................................. 71
Alternative Mortgage Instruments............................................................. 71
Formaldehyde Litigation with respect to
Contracts.......................................................................... 72
Soldiers' and Sailors' Civil Relief Act of
1940............................................................................... 72
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................................................................................. 73
General...................................................................................... 73
REMICS....................................................................................... 73
Grantor Trust Funds.......................................................................... 87
STATE AND OTHER TAX CONSEQUENCES...................................................................... 96
ERISA CONSIDERATIONS.................................................................................. 96
Plan Asset Regulations....................................................................... 97
Tax Exempt Investors......................................................................... 99
Consultation With Counsel.................................................................... 99
LEGAL INVESTMENT MATTERS.............................................................................. 99
USE OF PROCEEDS.......................................................................................100
METHODS OF DISTRIBUTION...............................................................................100
LEGAL MATTERS.........................................................................................101
FINANCIAL INFORMATION.................................................................................101
RATING................................................................................................101
INDEX OF PRINCIPAL DEFINITIONS........................................................................103
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UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED CERTIFICATES, 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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company does not intend to send any financial reports to Certificateholders.
This Prospectus does not contain all of the information set forth in
the Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Company has filed with the Commission under the Securities Act
of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or other designated person will be required to
provide periodic unaudited reports concerning each Trust Fund to all registered
holders of Offered Certificates of the related series. See "Description of the
Certificates--Reports to Certificateholders."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement
by reference all documents and reports filed or caused to be filed by the
Company with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the
Offered Certificates of the related series. The Company will provide or cause to
be provided without charge to each person to whom this Prospectus is delivered
in connection with the offering of one or more classes of Offered Certificates,
upon written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports relate
to one or more of such classes of such Offered Certificates, other than the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference in such documents. Requests should be directed in writing to
Southern Pacific Secured Assets Corp., One Centerpointe Drive, Suite 500, Lake
Oswego, Oregon 97035, or by telephone at (503) 684-4700. The Company has
determined that its financial statements will not be material to the offering of
any Offered Certificates.
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SUMMARY OF PROSPECTUS
The following summary 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 Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Offered Certificates of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
elsewhere in this Prospectus. An index indicating where certain capitalized
terms used herein are defined appears at the end of this Prospectus.
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Securities Offered............................... Mortgage pass-through certificates. The mortgage
pass-through certificates (the "Offered Certificates")
offered hereby and by the various Prospectus
Supplements with respect hereto will be offered from
time to time in series. The Offered Certificates of each
series, together with any other mortgage pass-through
certificates of such series, are collectively referred to
herein as the "Certificates."
Company.......................................... Southern Pacific Secured Assets Corp. (the
"Company"), a wholly-owned subsidiary of Imperial
Credit Industries, Inc. ("ICII"). See "The Company."
Master Servicer.................................. The master servicer (the "Master Servicer"), if any, for
a series of Certificates will be specified in the related
Prospectus Supplement and may be ICII or another
affiliate of the Company. See "Imperial Credit
Industries, Inc." and "Servicing of Mortgage
Loans--The Master Servicer."
Special Servicer................................. The special servicer (the "Special Servicer"), if any,
for a series of Certificates will be specified, or the
circumstances under which a Special Servicer will be
appointed will be described, in the related Prospectus
Supplement. Any Special Servicer may be an affiliate
of the Company. See "Servicing of Mortgage
Loans--Special Servicers."
Trustee.......................................... The trustee (the "Trustee") for each series of
Certificates will be specified in the related Prospectus
Supplement. See "The Pooling Agreement--The
Trustee."
The Certificates................................. Each series of Certificates will include one or more
classes of Certificates which will represent in the
aggregate the entire beneficial ownership interest in a
segregated pool of Mortgage Loans (exclusive of any
portion of interest payments (the "Spread") relating to
each Mortgage Loan retained by the Company or any
of its affiliates) or interests therein (which may include
Mortgage Securities as defined herein), and certain
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other assets as described below (collectively, a "Trust
Fund"), and will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the
related Prospectus Supplement (in either case, a "Pooling
Agreement"). Except for certain Strip Certificates and
REMIC Residual Certificates (each as hereinafter
described), each series of Certificates, or class of
Certificates in the case of a series consisting of two or
more classes, will have a stated principal balance and
will be entitled to distributions of interest based on a
specified interest rate or rates (each, a "Pass-Through
Rate"). Each series or class of Certificates may have a
different Pass-Through Rate, which may be a fixed,
variable or adjustable PassThrough Rate, or any
combination of two or more such Pass-Through Rates. The
related Prospectus Supplement will specify the
Pass-Through Rate or Rates for each series or class of
Certificates, or the initial Pass-Through Rate or Rates
and the method for determining subsequent changes to the
Pass-Through Rate or Rates.
A series may include one or more classes of Certifi-
cates ("Strip Certificates") entitled (i) to principal
distributions, with disproportionate, nominal or no
interest distributions, or (ii) to interest distributions,
with disproportionate, nominal or no principal distribu-
tions. In addition, a series may include two or more
classes of Certificates which differ as to timing,
sequential order, priority of payment, pass-through 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, which series
may include one or more classes of Certificates
("Accrual Certificates"), as to which certain accrued
interest will not be distributed but rather will be added
to the principal balance thereof on each Distribution
Date, as hereinafter defined, in the manner described in
the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a
series of Certificates may include one or more classes
of Certificates (collectively, the "Senior Certificates")
which are senior to one or more classes of Certificates
(collectively, the "Subordinate Certificates") in respect
of certain distributions of principal and interest and
allocations of losses on Mortgage Loans. In addition,
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certain classes of Senior (or Subordinate) Certificates
may be senior to other classes of Senior (or Subordinate)
Certificates in respect of such distributions or losses.
As to each series, one or more elections may be made to
treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Internal Revenue Code of 1986,
as amended (the "Code"). See "Description of the
Certificates."
The Certificates will not be guaranteed or insured by
any governmental agency or instrumentality, by the
Company, the Master Servicer or any of their
respective affiliates or by any other person, unless
otherwise specified in the related Prospectus
Supplement.
The Mortgage Pools............................... Unless otherwise specified in the related Prospectus
Supplement, each Trust Fund will consist primarily of
a segregated pool (a "Mortgage Pool") of mortgage
loans and/or manufactured housing conditional sales
and installment loan agreements (collectively, the
"Mortgage Loans"). Unless otherwise specified in the
related Prospectus Supplement, each Mortgage Loan
will be secured by a first or junior lien on or security
interest in (i) a one- to four-family residential property,
(ii) a residential property consisting of five or more
rental or cooperatively-owned dwelling units or (iii) a
new or used manufactured home (each, a "Mortgaged
Property"). The Mortgaged Properties may be located
in any one of the 50 states, the District of Columbia or
the Commonwealth of Puerto Rico. For a description
of the types of Mortgage Loans that may be included in
the Mortgage Pools, see "The Mortgage Pools--The
Mortgage Loans." The Mortgage Loans will not be
guaranteed or insured by the Company, any of its
affiliates or, unless otherwise specified in the related
Prospectus Supplement, by any governmental agency or
instrumentality or any other person.
If specified in the related Prospectus Supplement,
Mortgage Loans which are converting or converted from an
adjustable-rate to a fixed-rate or certain Mortgage Loans
for which the Mortgage Rate has been reset may be
repurchased by the Company or purchased by the related
Master Servicer, the applicable Seller or another party,
or a designated remarketing agent will use its best
efforts to arrange the sale thereof as further described
herein.
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If so specified in the related Prospectus Supplement,
some Mortgage Loans may be delinquent or non-
performing as of the date of their deposit in the related
Trust Fund.
If specified in the related Prospectus Supplement, a
Trust Fund may include or consist solely of mortgage
participations or pass-through certificates evidencing
interests in Mortgage Loans ("Mortgage Securities"), as
described herein. See "The Mortgage Pools - General"
herein.
Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Loan and Mortgage
Security included in a Trust Fund will have been
selected by the Company from among those purchased,
either directly or indirectly, from a prior holder thereof
(a "Seller"), which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such
Mortgage Security and may be an affiliate of the
Company. A Mortgage Security included in a Trust
Fund, however, may also have been issued previously
by the Company or an affiliate thereof.
A Current Report on Form 8-K will be available upon
request to purchasers of the Offered Certificates of the
related series and will be filed, together with the
related Pooling Agreement, with the Securities and
Exchange Commission within fifteen days after such
initial issuance.
Interest Distributions........................... Except as otherwise specified herein or in the related
Prospectus Supplement, interest on each class of
Offered Certificates of each series, other than Strip
Certificates or Accrual Certificates (prior to the time
when accrued interest becomes payable thereon), will
accrue at the applicable Pass-Through Rate (which may
be a fixed, variable or adjustable rate or any
combination thereof) on such class's principal balance
outstanding from time to time and will be remitted on
the 25th day (or, if such day is not a business day, on
the next succeeding business day) of each month,
commencing with the month following the month in
which the Cut-off Date (as defined in the applicable
Prospectus Supplement) occurs (each, a "Distribution
Date"). Distributions, if any, with respect to interest
on Strip Certificates will be calculated and made on
each Distribution Date as described herein and in the
related Prospectus Supplement. Interest that has
accrued but is not yet payable on any Accrual
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Certificates will be added to the principal balance of
such class on each Distribution Date, and will thereafter
bear interest. Distributions of interest with respect to
one or more classes of Offered Certificates (or, in the
case of a class of Accrual Certificates, accrued interest
to be added to the principal balance thereof) may be
reduced as a result of the occurrence of certain
delinquencies not covered by advances, losses,
prepayments and other contingencies described herein and
in the related Prospectus Supplement. See "Yield
Considerations" and "Description of the Certificates."
Principal Distributions.......................... Except as otherwise specified in the related Prospectus
Supplement, principal distributions on the Certificates
of each series will be payable on each Distribution
Date, commencing with the Distribution Date in the
month following the month in which the Cut-off Date
occurs, to the holders of the Certificates of such series,
or of the class or classes of Certificates then entitled
thereto, on a pro rata basis among all such Certificates
or among the Certificates of any such class, in
proportion to their respective outstanding principal
balances, or in the priority and manner otherwise
specified in the related Prospectus Supplement. Strip
Certificates with no principal balance will not receive
distributions in respect of principal. Distributions of
principal with respect to any series of Certificates, or
with respect to one or more classes included therein,
may be reduced to the extent of certain delinquencies
not covered by advances or losses not covered by the
applicable form of credit enhancement. See "The
Mortgage Pools," "Maturity and Prepayment Consider-
ations" and "Description of the Certificates."
Credit Enhancement............................... If so specified in the Prospectus Supplement, the Trust
Fund with respect to any series of Certificates may
include any one or any combination of a letter of
credit, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, reserve fund or
other type of credit support to provide partial coverage
for certain defaults and losses relating to the Mortgage
Loans. Credit support also may be provided in the
form of subordination of one or more classes of
Certificates in a series under which losses are first
allocated to any Subordinate Certificates up to a
specified limit. Unless otherwise specified in the
related Prospectus Supplement, any form of credit
enhancement will have certain limitations and
exclusions from coverage thereunder, which will be
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described in the related Prospectus Supplement. Losses
not covered by any form of credit enhancement will be
borne by the holders of the related Certificates (or
certain classes thereof). 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 Certificates. See "Description of Credit
Enhancement" and "Subordination."
Advances......................................... If and to the extent described in the related Prospectus
Supplement, and subject to any limitations specified
therein, the Master Servicer for any Trust Fund will be
obligated to make, or have the option of making,
certain advances with respect to delinquent scheduled
payments on the Mortgage Loans in such Trust Fund.
Any such advance made by the Master Servicer with
respect to a Mortgage Loan is recoverable by it as
described herein under "Description of the
Certificates--Advances" either from recoveries on or in
respect of the specific Mortgage Loan or, with respect
to any advance subsequently determined to be
nonrecoverable from recoveries on or in respect of the
specific Mortgage Loan, out of funds otherwise
distributable to the holders of the related series of
Certificates, which may include the holders of any
Senior Certificates of such series. If and to the extent
provided in the Prospectus Supplement for a series of
Certificates, the Master Servicer will be entitled to
receive interest on its advances for the period that they
are outstanding payable from amounts in the related
Trust Fund. As specified in the Prospectus Supplement
with respect to any series of Certificates as to which
the Trust Fund includes Mortgage Securities, the
advancing obligations in respect of the underlying
Mortgage Loans will be pursuant to the terms of such
Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling Agreement, and may
differ from the provisions described herein.
Optional Termination............................. The Master Servicer, the Company or, if specified in
the related Prospectus Supplement, the holder of the
residual interest in a REMIC may at its option either (i)
effect early retirement of a series of Certificates
through the purchase of the assets in the related Trust
Fund or (ii) purchase, in whole but not in part, the
Certificates specified in the related Prospectus
Supplement; in each case under the circumstances and
in the manner set forth herein under "The Pooling
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Agreement--Termination; Retirement of Certificates" and
in the related Prospectus Supplement.
Legal Investment................................ At the date of issuance, as to each series, each class of
Offered Certificates will be rated at the request of the
Company in one of the four highest rating categories by
one or more nationally recognized statistical rating
agencies (each, a "Rating Agency"). Unless otherwise
specified in the related Prospectus Supplement, each
class of Offered Certificates that is rated in one of the
two highest rating categories by at least one Rating
Agency will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Investors
whose investment authority is subject to legal
restrictions should consult their own legal advisors to
determine whether and to what extent the Offered
Certificates of any series constitute legal investments
for them. See "Legal Investment Matters."
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, a "Plan") should carefully review with its legal
advisors whether the purchase or holding of Offered
Certificates 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 and in the related Prospectus
Supplement.
Certain Federal Income
Tax Consequences............................... Offered Certificates of each series will constitute either
(i) interests ("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust under applicable
provisions of the Code, or (ii) "regular interests"
("REMIC Regular Certificates") or "residual interests"
("REMIC Residual Certificates") in a Trust Fund, or a
portion thereof, treated as a REMIC under Sections
860A through 860G of the Code.
Investors are advised to consult their tax advisors and
to review "Certain Federal Income Tax Consequences"
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herein and in the related Prospectus Supplement. See
"Certain Federal Income Tax Consequences."
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates:
LIMITED LIQUIDITY. There can be no assurance that a secondary market
for the Offered Certificates of any series will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Offered Certificates of any series. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Certificates, however no underwriter will be obligated to do so. The Offered
Certificates will not be listed on any securities exchange.
LIMITED OBLIGATIONS. The Offered Certificates will not represent an
interest in or obligation of the Company, the Master Servicer or any of their
respective affiliates. The only obligations of the foregoing entities with
respect to the Certificates, the Mortgage Loans or any Mortgage Securities will
be the obligations (if any) of the Company pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Mortgage Securities, the Master Servicer's servicing obligations under the
related Pooling Agreement (including, if and to the extent described in the
related Prospectus Supplement, its limited obligation to make certain advances
in the event of delinquencies on the Mortgage Loans) and pursuant to the terms
of any Mortgage Securities, and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Master
Servicer in connection with a 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. Unless otherwise specified in the related Prospectus
Supplement, neither the Certificates nor the underlying Mortgage Loans or
Mortgage Securities will be guaranteed or insured by any governmental agency or
instrumentality, by the Company, the Master Servicer or any of their respective
affiliates or by any other person. Proceeds of the assets included in the
related Trust Fund for each series of Certificates (including the Mortgage Loans
or Mortgage Securities and any form of credit enhancement) will be the sole
source of payments on the Certificates, and there will be no recourse to the
Company, the Master Servicer or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Certificates.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With
respect to each series of Certificates, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: subordination of other classes of
Certificates of the same series; a Letter of Credit; a Purchase Obligation; a
Mortgage Pool Insurance Policy; a Special Hazard Insurance Policy; a Bankruptcy
Bond; a Reserve Fund; or any combination thereof. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of credit
enhancement provided, the amount of 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 or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any credit enhancement or losses of a type not covered
by any credit enhancement occur, such losses will be borne by the holders of the
related Certificates (or certain classes thereof). The Company, the Master
Servicer or other specified person will generally be permitted to reduce,
terminate or substitute all or a portion of the credit enhancement for any
series of Certificates, if each applicable Rating Agency indicates that the
then-current rating(s) thereof will not be adversely affected. The rating(s) of
any series of Certificates by any applicable Rating Agency may be lowered
following the initial issuance thereof as a result of the downgrading of the
obligations of any applicable credit support provider, or as a result of losses
on the related Mortgage Loans in excess of the levels contemplated by such
Rating Agency at the time of its initial rating analysis. Neither the Company,
the Master Servicer nor any of their respective affiliates will have any
obligation to replace or supplement any credit enhancement, or to take any other
action to maintain any rating(s) of any series of Certificates. See "Description
of Credit Enhancement--Reduction of Credit Enhancement."
INVESTMENT IN THE MORTGAGE LOANS. An investment in securities such as
the Certificates which generally represent interests in mortgage loans and/or
manufactured housing conditional sales contracts and installment loan agreements
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
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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 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 mortgage lending industry. In
addition, in the case of Mortgage Loans that are subject to negative
amortization, due to the addition to principal balance of 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 any reserve fund or instrument of credit enhancement in the related
Trust Fund, holders of Certificates 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. Certain of the types of loans which may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans 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 payment amount. In some instances, Mortgagors may not be able to
make their loan payments as such payments increase and thus the likelihood of
default will increase. In addition to the foregoing, certain geographic regions
of the United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher rates
of loss and delinquency than will be experienced on mortgage loans generally.
For example, a region's economic condition and housing market may be directly,
or indirectly, adversely affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots. The economic impact
of any of these types of events may also be felt in areas beyond the region
immediately affected by the disaster or disturbance. The Mortgage Loans
underlying certain series of Certificates may be concentrated in these regions,
and such concentration may present risk considerations in addition to those
generally present for similar mortgage-backed securities without such
concentration. Moreover, as described below, any Mortgage Loan for which a
breach of a representation or warranty exists will remain in the related Trust
Fund in the event that a Seller is unable, or disputes its obligation, to
repurchase such Mortgage Loan and such a breach does not also constitute a
breach of any representation made by any other person. In such event, any
resulting losses will be borne by the related form of credit enhancement, to the
extent available.
Certain of the Mortgage Loans included in a Trust Fund, particularly
those secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the Mortgagor to make the balloon payment. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the Mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
It is anticipated that some or all of the Mortgage Loans included in
any Trust Fund, particularly Mortgage Loans secured by Multifamily Properties,
will be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may
entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with loans made on the
security of Single Family Properties. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is
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directly related to the net operating income derived from such property. If the
net operating income of the property is reduced (for example, if rental or
occupancy rates decline or real estate tax rates or other operating expenses
increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
Additional special risks associated with particular types of Mortgage
Loans will be specified in the related Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS. The yield to maturity of the
Offered Certificates of each series will depend on, among other things, the rate
and timing of principal payments (including prepayments, liquidations due to
defaults, and repurchases due to conversion of ARM Loans to fixed interest rate
loans or breaches of representations and warranties) on the related Mortgage
Loans and the price paid by Certificateholders. 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 Certificates 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
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Certificates, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Certificates. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. See "Yield Considerations" and "Maturity and
Prepayment Considerations" herein.
ERISA CONSIDERATIONS. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans. Due
to the complexity of regulations that govern such plans, prospective investors
that are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of the
Offered Certificates of any series. See "ERISA Considerations".
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL
CERTIFICATES. Holders of REMIC Residual Certificates will be required to report
on their federal income tax returns as ordinary income their PRO RATA share of
the taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described under "Certain Federal Income Tax
Consequences--REMICs". Accordingly, under certain circumstances, holders of
Offered Certificates that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of REMIC Residual Certificates report their PRO RATA share of the
taxable income and net loss of the REMIC will continue until the principal
balances of all classes of Certificates of the related series have been reduced
to zero, even though holders of REMIC Residual Certificates have received full
payment of their stated interest and principal. A portion (or, in certain
circumstances, all) of such Certificateholder's share of the REMIC taxable
income may be treated as "excess inclusion" income to such holder, which (i)
generally will not be subject to offset by losses from other activities, (ii)
for a tax-exempt holder, will be treated as unrelated business taxable income
and (iii) for a foreign holder, will not qualify for exemption from withholding
tax. Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In addition,
REMIC Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the taxable
income arising in a given year on a REMIC Residual Certificate will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on a REMIC Residual Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of Mortgage Loans, minus the Spread, if
any, or any other interest retained by the Company or any affiliate of the
Company. The Mortgage Loans may consist of Single Family Loans, Multifamily
Loans and Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related Mortgaged Property. The Mortgaged Properties for such loans may consist
of attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home. The
Mortgaged Properties for such loans may also consist of residential properties
consisting of five or more rental or cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment buildings or projects ("Multifamily
Properties" and the related loans, "Multifamily Loans").
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "manufactured home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company,
any of its affiliates or, unless otherwise specified in the related Prospectus
Supplement, by any governmental agency or instrumentality or other person.
However, if so specified in the related Prospectus Supplement, the Mortgage
Loans may be insured by the Federal Housing Administration (the "FHA" and such
loans, "FHA Loans"). See "Description of Primary Insurance Policies--FHA
Insurance."
A Mortgage Pool may include Mortgage Loans that are delinquent or
non-performing as of the date the related series of Certificates is issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
non-performance and any other information relevant for a prospective purchaser
to make an investment decision.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, from banks, savings and loan associations, mortgage
bankers, investment banking firms, the Resolution Trust Corporation (the "RTC"),
the Federal Deposit Insurance Corporation (the "FDIC") and other mortgage loan
originators or sellers not affiliated with the Company ("Unaffiliated Sellers")
or from ICII, the parent of the Company, and its affiliates, including Southern
Pacific Funding Corp. ("SPFC") and Southern Pacific Thrift & Loan Association
("SPTL") ("Affiliated Sellers"; Unaffiliated Sellers and Affiliated Sellers are
collectively referred to herein as "Sellers"). If a Mortgage Pool is composed of
Mortgage Loans acquired by the Company directly from Unaffiliated Sellers, the
related Prospectus Supplement will specify the extent of Mortgage Loans so
acquired. The characteristics of the Mortgage Loans are as described in the
related Prospectus Supplement. Other mortgage loans available for purchase by
the Company
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may have characteristics which would make them eligible for inclusion in a
Mortgage Pool but were not selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans to be included in a
Mortgage Pool will be delivered either directly or indirectly to the Company by
one or more Sellers identified in the related Prospectus Supplement,
concurrently with the issuance of the related series of Certificates (a
"Designated Seller Transaction"). Such Certificates may be sold in whole or in
part to any such Seller in exchange for the related Mortgage Loans, or may be
offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Mortgage Pool composed of
Mortgage Loans acquired by the Company pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company or, unless it is the Seller, ICII,
SPFC, SPTL or any of their affiliates will make any representation or warranty
with respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include mortgage participations and pass-through
certificates evidencing interests in Mortgage Loans ("Mortgage Securities"), as
described herein. The Mortgage Securities may have been issued previously by the
Company or an affiliate thereof, a financial institution or other entity engaged
generally in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, acquiring and depositing
mortgage loans into such trusts, and selling beneficial interests in such
trusts. Except as otherwise set forth in the related Prospectus Supplement, such
Mortgage Securities will be generally similar to Certificates offered hereunder.
As to any such series of Certificates, the related Prospectus Supplement will
include a description of such Mortgage Securities and any related credit
enhancement, and the Mortgage Loans underlying such Mortgage Securities will be
described together with any other Mortgage Loans included in the Mortgage Pool
relating to such series.
THE MORTGAGE LOANS
Unless otherwise specified below or in the related Prospectus
Supplement, each of the Mortgage Loans will be a type of mortgage loan described
or referred to in paragraphs numbered (1) through (8) below:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of not more than
approximately 15 years;
(2) 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 more than 15
years, but not more than approximately 25 or 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM
Loans") having an original or modified term to maturity of not more
than approximately 25 or 30 years with a related interest rate (a
"Mortgage Rate") which generally adjusts initially either three months,
six months or one, three, five or seven years subsequent to the initial
payment date, and thereafter at either three-month, six-month, one-year
or other intervals (with corresponding adjustments in the amount of
monthly payments) 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 related Prospectus Supplement will set
forth the relevant index and the
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* The index (the "Index") for a particular Mortgage Pool will be
specified in the related Prospectus Supplement and may include one of
the following indexes: (i) the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of either six months or one
year, (ii) the weekly auction average investment yield of U.S. Treasury
bills of six months, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board, (iv) the cost of funds of
member institutions for the Federal Home Loan Bank of San Francisco,
(v) the interbank offered rates for U.S. dollar deposits in the London
market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related Prospectus
Supplement or (vi) any other
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highest, lowest and weighted average Note Margin with respect to the
ARM Loans in the related Mortgage Pool. The related Prospectus
Supplement will also indicate any periodic or lifetime limitations on
changes in any per annum Mortgage Rate at the time of any adjustment.
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 generally not later than six to ten years subsequent to the
initial payment date;
(4) Negatively-amortizing ARM Loans having original or
modified terms to maturity of not more than approximately 25 or 30
years with Mortgage Rates which generally adjust initially on the
payment date referred to in the related Prospectus Supplement, and on
each of certain periodic payment dates thereafter, to equal the sum of
the Note Margin and the index. The scheduled monthly payment will be
adjusted as and when described in the related Prospectus Supplement to
an amount that would fully amortize the Mortgage Loan over its
remaining term on a level debt service basis; provided that increases
in the scheduled monthly payment may be subject to certain limitations
as specified in the related Prospectus Supplement. If an adjustment to
the Mortgage Rate on a Mortgage Loan causes the amount of interest
accrued thereon in any month to exceed the scheduled monthly payment on
such mortgage loan, the resulting amount of interest that has accrued
but is not then payable ("Deferred Interest") will be added to the
principal balance of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
15 years with monthly payments during the first year calculated on the
basis of an assumed interest rate which is a specified percentage below
the Mortgage Rate on such mortgage loan. Such monthly payments increase
at the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to amortize the mortgage loan over the remainder
of its approximately 15-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
25 or 30 years with monthly payments during the first year calculated
on the basis of an assumed interest rate which is a specified
percentage below the Mortgage Rate. Such monthly payments increase at
the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to fully amortize the mortgage loan within its
approximately 25- or 30-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loan;
(7) Mortgage loans ("Balloon Loans") having payment terms
similar to those described in one of the preceding paragraphs numbered
(1) through (6), calculated on the basis of an assumed amortization
term, but providing for a payment (a "Balloon Payment") of all
outstanding principal and interest to be made at the end of a specified
term that is shorter than such assumed amortization term; or
(8) Another type of mortgage loan described in the related
Prospectus Supplement.
If provided in the related Prospectus Supplement, certain of the
Mortgage Pools may contain Single Family and Multifamily Loans secured by junior
liens, and the related senior liens ("Senior Liens") may not be included in the
Mortgage Pool. The primary risk to holders of such Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully both
the Senior Liens and the Mortgage Loan. In the event that a holder of a Senior
Lien forecloses on a Mortgaged Property, the proceeds of the foreclosure or
similar sale will be applied first to the payment of court costs and fees in
connection with the foreclosure, second to real estate taxes, third in
satisfaction of all principal, interest, prepayment or acceleration penalties,
if any, and any other sums due and owing to the holder of the Senior Liens. The
claims of the holders of the Senior Liens will be satisfied in full out of
proceeds of the liquidation of the related Mortgaged Property, if such proceeds
are sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any such
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index described in the related Prospectus Supplement.
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Mortgage Loan, it would do so subject to any related Senior Liens. In order for
the debt related to the Mortgage Loan to be paid in full at such sale, a bidder
at the foreclosure sale of such Mortgage Loan would have to bid an amount
sufficient to pay off all sums due under the Mortgage Loan and the Senior Liens
or purchase the Mortgaged Property subject to the Senior Liens. In the event
that such proceeds from a foreclosure or similar sale of the related Mortgaged
Property are insufficient to satisfy all Senior Liens and the Mortgage Loan in
the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, holders of one or more classes of the Certificates of the related
series bear (i) the risk of delay in distributions while a deficiency judgment
against the borrower is obtained and (ii) the risk of loss if the deficiency
judgment is not realized upon. Moreover, deficiency judgments may not be
available in certain jurisdictions or the Mortgage Loan may be nonrecourse. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, a Mortgage Loan
may contain a prohibition on prepayment (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Penalty"). A Multifamily Loan may also contain a provision that entitles the
lender to a share of profits realized from the operation or disposition of the
related Mortgaged Property (an "Equity Participation"). If the holders of any
class or classes of Offered Certificates of a series will be entitled to all or
a portion of an Equity Participation, the related Prospectus Supplement will
describe the Equity Participation and the method or methods by which
distributions in respect thereof will be made to such holders.
Certain information, including information regarding loan-to-value
ratios (each, a "Loan-to-Value Ratio") at origination (unless otherwise
specified in the related Prospectus Supplement) of the Mortgage Loans underlying
each series of Certificates, will be supplied in the related Prospectus
Supplement. In the case of most Mortgage Loans, the "Loan-to-Value Ratio" at
origination is defined generally as the ratio, expressed as a percentage, of the
principal amount of the Mortgage Loan at origination (or, if appropriate, at the
time of an appraisal subsequent to origination), plus, in the case of a Mortgage
Loan secured by a junior lien, the outstanding principal balance of the related
Senior Liens, to the Value of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, the "Value" of a Mortgaged
Property securing a Single Family or Multifamily Mortgage Loan will generally be
equal to the lesser of (x) the appraised value determined in an appraisal
obtained at origination of such Mortgage Loan, if any, or, if the related
Mortgaged Property has been appraised subsequent to origination, the value
determined in such subsequent appraisal and (y) the sales price for the related
Mortgaged Property (except in certain circumstances in which there has been a
subsequent appraisal). In the case of certain refinanced, modified or converted
Single Family or Multifamily Loans, unless otherwise specified in the related
Prospectus Supplement, the "Value" of the related Mortgaged Property will be
equal to the lesser of (x) the appraised value of the related Mortgaged Property
determined at origination or in an appraisal, if any, obtained at the time of
refinancing, modification or conversion and (y) the sales price of the related
Mortgage Property or, if the Mortgage Loan is not a rate and term refinance
Mortgage Loan and if the Mortgaged Property was owned for a relatively short
period of time prior to refinancing, modification or conversion, the sum of the
sales price of the related Mortgaged Property plus the added value of any
improvements. Certain Mortgage Loans which are subject to negative amortization
will have Loan-to-Value Ratios which will increase after origination as a result
of such negative amortization. Unless otherwise specified in the related
Prospectus Supplement, for purposes of calculating the Loan-to-Value Ratio of a
Contract relating to a new Manufactured Home, the "Value" is no greater than the
sum of a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site), including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, with
respect to a used Manufactured Home, the "Value" is the least of the sale price,
the appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable. Manufactured Homes are less likely to experience
appreciation in value and more likely to experience depreciation in value over
time than other types of housing.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the Mortgagor or
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used for purposes unrelated to the Mortgaged Property. Alternatively, the
Mortgage Loans may be "rate and term refinance" Mortgage Loans, as to which
substantially all of the proceeds (net of related costs incurred by the
Mortgagor) are used to refinance an existing mortgage loan or loans (which may
include a junior lien) primarily in order to change the interest rate or other
terms thereof. The Mortgage Loans may be mortgage loans which have been
consolidated and/or have had various terms changed, mortgage loans which have
been converted from adjustable rate mortgage loans to fixed rate mortgage loans,
or construction loans which have been converted to permanent mortgage loans. In
addition, a Mortgaged Property may be subject to secondary financing at the time
of origination of the Mortgage Loan or thereafter.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of origination,
depending upon the length of the initial adjustment period. If specified in the
related Prospectus Supplement, upon any conversion, the Company, the related
Master Servicer, the applicable Seller 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 Company or the related Master Servicer (or another party specified therein)
may agree to act as remarketing agent with respect to such converted Mortgage
Loans and, in such capacity, to use its best efforts to arrange for the sale of
converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any such converted Mortgage Loan, the inability
of any remarketing agent to arrange for the sale of the converted Mortgage Loan
and the unwillingness of such 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.
If provided for in the related Prospectus Supplement, certain of the
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, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Certificates--Payments on Mortgage
Loans; Deposits to Certificate Account." Generally, the Mortgagor under each
Buydown Mortgage Loan will be qualified at the applicable lower monthly payment.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the Mortgagor to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans that will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates will include certain information, generally as of the Cut-off Date
and to the extent then available to the Company, on an approximate basis, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans, (iii) the original or modified terms to
maturity of the Mortgage Loans, (iv) the range of principal balances of the
Mortgage Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if any of the Mortgage Loans
are ARM Loans, the applicable Index, the range of Note Margins and the weighted
average Note Margin, (ix) the geographical distribution of the Mortgage Loans,
(x) the number of Buydown Mortgage Loans, if applicable, and (xi) the percent of
ARM Loans which are convertible to fixed-rate mortgage loans, if applicable. A
Current Report on Form 8-K will be available upon request to holders of the
related series of Certificates and will be filed, together with the related
Pooling Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of such Certificates. In the event that Mortgage
Loans are added to or deleted from the Trust Fund after the date of the related
Prospectus Supplement, such addition or deletion will be noted in the Current
Report on Form 8-K.
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The Company will cause the Mortgage Loans constituting each Mortgage
Pool (or Mortgage Securities evidencing interests therein) to be assigned,
without recourse, to the Trustee named in the related Prospectus Supplement, for
the benefit of the holders of all of the Certificates of a series. Except to the
extent that servicing of any Mortgage Loan is to be transferred to a Special
Servicer, the Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, directly or through other mortgage servicing
institutions ("Subservicers"), pursuant to a Pooling Agreement and will receive
a fee for such services. See "Servicing of Mortgage Loans," "Description of the
Certificates" and "The Pooling Agreement." With respect to those Mortgage Loans
serviced by the Master Servicer through a Subservicer, the Master Servicer will
remain liable for its servicing obligations under the related Pooling Agreement
as if the Master Servicer alone were servicing such Mortgage Loans. The Master
Servicer's obligations with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Pooling
Agreement (including its obligation to enforce certain purchase and other
obligations of Subservicers and Sellers, as more fully described herein under
"--Representations by Sellers" below, "Servicing of Mortgage
Loans--Subservicers," and "Description of the Certificates--Assignment of Trust
Fund Assets," and, if and to the extent set forth in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans as described
herein under "Description of the Certificates--Advances") or pursuant to the
terms of any Mortgage Securities.
UNDERWRITING STANDARDS
Mortgage Loans to be included in a Mortgage Pool will have been
purchased by the Company, either directly or indirectly from Sellers. Such
Mortgage Loans, as well as Mortgage Loans underlying Mortgage Securities, will
generally have been originated in accordance with underwriting standards
acceptable to the Company and generally described below or such alternative
underwriting criteria as may be described in the related Prospectus Supplement.
However, in some cases, particularly those involving Unaffiliated Sellers, the
Company may not be able to establish the underwriting standards used in the
origination of the related Mortgage Loans. In those cases, the related
Prospectus Supplement will include a statement to such effect and will reflect
what, if any, reunderwriting of the related Mortgage Loans was done by the
Company or any of its affiliates.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards to be used in originating the Mortgage Loans are
primarily intended to assess the creditworthiness of the Mortgagor, the value of
the Mortgaged Property and the adequacy of such property as collateral for the
Mortgage Loan.
The primary considerations in underwriting a Single Family Loan or
Contract are the Mortgagor's employment stability and whether the Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed Mortgage Loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the home (such as property taxes and hazard insurance) and (ii) to meet
monthly housing expenses and other financial obligations and monthly living
expenses. However, the Loan-to-Value Ratio of the Mortgage Loan is another
critical factor. In addition, a Mortgagor's credit history and repayment
ability, as well as the type and use of the Mortgaged Property, are also
considerations.
In the case of the Multifamily Loans, lenders typically look to the
Debt Service Coverage Ratio of a loan as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement, "Net Operating Income" means, for
any given period, the total operating revenues derived from a Multifamily
Property during such period, minus the total operating expenses incurred in
respect of such property during such period other than (i) non-cash items such
as depreciation and amortization, (ii) capital expenditures and (iii) debt
service on loans (including the related Mortgage Loan) secured by liens on such
property. The Net Operating Income of a Multifamily Property will fluctuate over
time and may or may not be sufficient to cover debt service on the related
Mortgage Loan at any given time. As the primary source of the operating revenues
of a Multifamily Property, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned Multifamily Property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
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interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan.
Lenders also look to the Loan-to-Value Ratio of a Multifamily Loan as a measure
of risk of loss if a property must be liquidated following a default.
It is expected that each prospective Mortgagor will complete a mortgage
loan application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, or judgments. In the case of a Multifamily Loan,
the Mortgagor will also be required to provide certain information regarding the
related Multifamily Property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the Multifamily Property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the Mortgagor's prior experience in owning
and operating properties similar to the Multifamily Properties.
Unless otherwise specified in the related Prospectus Supplement,
Mortgaged Properties will be appraised by licensed appraisers. The appraiser
will generally address neighborhood conditions, site and zoning status and
condition and valuation of improvements. In the case of Single Family
Properties, the appraisal report will generally include a reproduction cost
analysis (when appropriate) based on the current cost of constructing a similar
home and a market value analysis based on recent sales of comparable homes in
the area. With respect to Multifamily Properties, the appraisal must specify
whether an income analysis, a market analysis or a cost analysis was used. An
appraisal employing the income approach to value analyzes a property's projected
net cash flow, capitalization and other operational information in determining
the property's value. The market approach to value analyzes the prices paid for
the purchase of similar properties in the property's area, with adjustments made
for variations between those other properties and the property being appraised.
The cost approach to value requires the appraiser to make an estimate of land
value and then determine the current cost of reproducing the improvements less
any accrued depreciation. In any case, the value of the property being financed,
as indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. Unless
otherwise specified in the related Prospectus Supplement, all appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
and the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and must be on forms acceptable to the Federal National Mortgage
Association ("FNMA") and/or the Federal Home Loan Mortgage Corporation
("FHLMC").
Notwithstanding the foregoing, Loan-to-Value Ratios will not
necessarily constitute an accurate measure of the risk of liquidation loss in a
pool of Mortgage Loans. For example, the value of a Mortgaged Property as of the
date of initial issuance of the related series of Certificates may be less than
the Value determined at loan origination, and will likely continue to fluctuate
from time to time based upon changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value for a Multifamily Property. As stated above, appraised values
of Multifamily Properties are generally based on the market analysis, the cost
analysis, the income analysis, or upon a selection from or interpolation of the
values derived from such approaches. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property may
have little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expenses and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
If so specified in the related Prospectus Supplement, the underwriting
of a Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless
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of whether or not the environmental damage or threat was caused by the borrower
or a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation".
With respect to any FHA Loan the Mortgage Loan Seller will be required
to represent that it has complied with the applicable underwriting policies of
the FHA. See "Description of Primary Insurance Policies--FHA Insurance".
To the extent relevant and available, the related Prospectus Supplement
will include delinquency and foreclosure experience for the applicable
Seller(s).
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be originated, directly or through mortgage brokers and
correspondents, by a savings and loan association, savings bank, commercial
bank, credit union, insurance company, or similar institution which is
supervised and examined by a federal or state authority, or by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to sections
203 and 211 of the National Housing Act of 1934, as amended (the "Housing Act").
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller must satisfy certain
criteria as to financial stability evaluated on a case-by-case basis by the
Company.
REPRESENTATIONS BY SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will have made representations and warranties in respect of the Mortgage
Loans and/or Mortgage Securities sold by such Seller and evidenced by a series
of Certificates. In the case of Mortgage Loans, such representations and
warranties will generally include, among other things, that as to each such
Mortgage Loan: (i) any required hazard and primary mortgage insurance policies
were effective at the origination of such Mortgage Loan, and each such policy
remained in effect on the date of purchase of such Mortgage Loan from the Seller
by or on behalf of the Company; (ii) with respect to each Mortgage Loan other
than a Contract, either (A) a title insurance policy insuring (subject only to
permissible title insurance exceptions) the lien status of the Mortgage was
effective at the origination of such Mortgage Loan and such policy remained in
effect on the date of purchase of the Mortgage Loan from the Seller by or on
behalf of the Company or (B) if the Mortgaged Property securing such Mortgage
Loan is located in an area where such policies are generally not available,
there is in the related mortgage file an attorney's certificate of title
indicating (subject to such permissible exceptions set forth therein) the first
lien status of the mortgage; (iii) the Seller has good title to such Mortgage
Loan and such Mortgage Loan was subject to no offsets, defenses or counterclaims
except as may be provided under the Relief Act and except to the extent that any
buydown agreement exists for a Buydown Mortgage Loan; (iv) there are no
mechanics' liens or claims for work, labor or material affecting the related
Mortgaged Property which are, or may be a lien prior to, or equal with, the lien
of the related Mortgage (subject only to permissible title insurance
exceptions); (v) the related Mortgaged Property is free from damage and in good
repair; (vi) there are no delinquent tax or assessment liens against the related
Mortgaged Property; (vii) such Mortgage Loan is not more than 30 days'
delinquent as to any scheduled payment of principal and/or interest; (viii) if a
Primary Insurance Policy is required with respect to such Mortgage Loan, such
Mortgage Loan is the subject of such a policy; and (ix) such Mortgage Loan was
made in compliance with, and is enforceable under, all applicable local, state
and federal laws in all material respects. In the case of Mortgage Securities,
such representations and warranties will generally include, among other things,
that as to each such Mortgage Security: (i) such Mortgage Security is validly
issued and outstanding and entitled to the benefits of the agreement pursuant to
which it was issued; and (ii) the Seller has good title to such Mortgage
Security. In the event of a breach of a Seller's representation or warranty that
materially adversely affects the interests of the Certificateholders in a
Mortgage Loan or Mortgage Security, unless otherwise specified in the related
Prospectus Supplement, the related Seller will be obligated to cure the breach
or repurchase or, if permitted, replace such Mortgage Loan or Mortgage Security
as described below. However, there can be no assurance that a Seller will honor
its obligation to repurchase or, if permitted, replace any Mortgage Loan or
Mortgage Security as to which such a breach of a representation or warranty
arises.
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All of the representations and warranties of a Seller in respect of a
Mortgage Loan or Mortgage Security will have been made as of the date on which
such Mortgage Loan or Mortgage Security was purchased from the Seller by or on
behalf of the Company; the date as of which such representations and warranties
were made will be a date prior to the date of initial issuance of the related
series of Certificates or, in the case of a Designated Seller Transaction, will
be the date of closing of the related sale by the applicable Seller. A
substantial period of time may have elapsed between the date as of which the
representations and warranties were made and the later date of initial issuance
of the related series of Certificates. Accordingly, the Seller's purchase
obligation (or, if specified in the related Prospectus Supplement, limited
replacement option) described below will not arise if, during the period
commencing on the date of sale of a Mortgage Loan or Mortgage Security by the
Seller, an event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan or Mortgage Security,
as the case may be. Unless otherwise specified in the related Prospectus
Supplement, the only representations and warranties to be made for the benefit
of holders of Certificates in respect of any related Mortgage Loan or Mortgage
Security relating to the period commencing on the date of sale of such Mortgage
Loan or Mortgage Security by the Seller to or on behalf of the Company will be
certain limited representations of the Company and the Master Servicer described
under "Description of the Certificates--Assignment of Trust Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Certificates all of its right, title and interest in
each agreement by which it purchased a Mortgage Loan or Mortgage Security from a
Seller insofar as such agreement relates to the representations and warranties
made by such Seller in respect of such Mortgage Loan or Mortgage Security and
any remedies provided for with respect to any breach of such representations and
warranties. If a Seller cannot cure a breach of any representation or warranty
made by it in respect of a Mortgage Loan or Mortgage Security which materially
and adversely affects the interests of the Certificateholders therein within a
specified period after having discovered or received notice of such breach,
then, unless otherwise specified in the related Prospectus Supplement, such
Seller will be obligated to purchase such Mortgage Loan or Mortgage Security at
a price (the "Purchase Price") set forth in the related Pooling Agreement which
Purchase Price will generally be equal to the principal balance thereof as of
the date of purchase plus accrued and unpaid interest through or about the date
of purchase at the related Mortgage Rate or pass-through rate, as applicable
(net of any portion of such interest payable to such Seller in respect of master
servicing compensation, special servicing compensation or subservicing
compensation, as applicable, and the Spread, if any).
Unless otherwise specified in the related Prospectus Supplement, as to
any Mortgage Loan required to be purchased by an Affiliated Seller as provided
above, rather than repurchase the Mortgage Loan, the Seller will be entitled, at
its sole option, to remove such Mortgage Loan (a "Deleted Mortgage Loan") from
the Trust Fund and substitute in its place another Mortgage Loan of like kind (a
"Qualified Substitute Mortgage Loan"); however, such substitution must be
effected within 120 days of the date of the initial issuance of the related
series of Certificates with respect to a Trust Fund for which no REMIC election
is to be made. With respect to a Trust Fund for which a REMIC election is to be
made, except as otherwise provided in the related Prospectus Supplement, such
substitution of a defective Mortgage Loan must be effected within two years of
the date of the initial issuance of the related series of Certificates, and may
not be made if such substitution would cause the Trust Fund, or any portion
thereof, to fail to 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 Substitute Mortgage Loan generally will, on the date
of substitution, (i) have an outstanding principal balance, after deduction of
the principal portion of the monthly payment 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 deposited in the Certificate Account by the
Master Servicer in the month of substitution for distribution to the
Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate not less
than (and not more than one percentage point greater than) the Mortgage Rate and
Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the date of
substitution, (iii) have a Loan-to-Value Ratio at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of substitution, (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Mortgage Loan, (v) comply with all of the
representations and warranties made by such Affiliated Seller as of the date of
substitution, and (vi) be covered under a primary insurance policy if such
Mortgage Loan has a Loan-to-Value Ratio greater than 80%. The related purchase
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, an Unaffiliated Seller will have no option to substitute for a
Mortgage Loan that it
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is obligated to repurchase in connection with a breach of a representation and
warranty, and neither an Affiliated Seller nor an Unaffiliated Seller will have
any option to substitute for a Mortgage Security that it is obligated to
repurchase in connection with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Pooling
Agreement to use reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the Trustee and the Certificateholders, following
such practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the applicable Seller fails to
honor such obligation. In instances where a Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans and/or Mortgage Securities, the
Master Servicer, employing the standards set forth in the preceding sentence,
may negotiate and enter into one or more settlement agreements with such Seller
that could provide for, among other things, the purchase of only a portion of
the affected Mortgage Loans and/or Mortgage Securities. Any such settlement
could lead to losses on the Mortgage Loans and/or Mortgage Securities which
would be borne by the related Certificates. In accordance with the above
described practices, the Master Servicer will not be required to enforce any
purchase obligation of a Seller arising from any misrepresentation by the
Seller, if the Master Servicer determines in the reasonable exercise of its
business judgment that the matters related to such misrepresentation did not
directly cause or are not likely to directly cause a loss on the related
Mortgage Loan or Mortgage Security. If the Seller fails to repurchase and no
breach of any other party's representations has occurred, the Seller's purchase
obligation will not become an obligation of the Company or any other party. In
the case of a Designated Seller Transaction where the Seller fails to repurchase
a Mortgage Loan or Mortgage Security and neither the Company nor any other
entity has assumed the representations and warranties, such repurchase
obligation of the Seller will not become an obligation of the Company or any
other party. Unless otherwise specified in the related Prospectus Supplement,
the foregoing obligations will constitute the sole remedies available to
Certificateholders or the Trustee for a breach of any representation by a Seller
or for any other event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Mortgage Loan or Mortgage Security if a Seller defaults on its
obligation to do so, and no assurance can be given that the Sellers will carry
out such purchase obligations. Such a default by a Seller is not a default by
the Company or by the Master Servicer. However, to the extent that a breach of
the representations and warranties of a Seller also constitutes a breach of a
representation made by the Company or the Master Servicer, as described below
under "Description of the Certificates--Assignment of Trust Fund Assets," the
Company or the Master Servicer may have a purchase or substitution obligation.
Any Mortgage Loan or Mortgage Security not so purchased or substituted for shall
remain in the related Trust Fund and any losses related thereto shall be
allocated to the related credit enhancement, to the extent available, and
otherwise to one or more classes of the related series of Certificates.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any Mortgage Loan or Mortgage Security in connection
with a breach of such representations and warranties, the identity of such
person will be specified in the related Prospectus Supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The Mortgage Loans and Mortgage Securities included in each Mortgage
Pool will be serviced and administered pursuant to a Pooling Agreement. Forms of
Pooling Agreements have been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. However, the provisions of each Pooling
Agreement will vary depending upon the nature of the related Mortgage Pool. The
following summaries describe certain servicingrelated provisions that may appear
in a Pooling Agreement for a Mortgage Pool that includes Mortgage Loans. The
related Prospectus Supplement will describe any servicing-related provision of
such a Pooling Agreement that materially differs from the description thereof
contained in this Prospectus and, if the related Mortgage Pool includes Mortgage
Securities, will summarize all of the material provisions of the related Pooling
Agreement that govern the administration of such Mortgage Securities and
identify the party responsible for such administration. The summaries herein do
not purport to be complete and are subject to, and are qualified in their
entirety by reference
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to, all of the provisions of the related Pooling Agreement and the description
of such provisions in the related Prospectus Supplement.
With respect to any series of Certificates as to which the related
Mortgage Pool includes Mortgage Securities, the servicing and administration of
the Mortgage Loans underlying such Mortgage Securities will be pursuant to the
terms of such Mortgage Securities. It is expected that Mortgage Loans underlying
any Mortgage Securities in a Mortgage Pool would be serviced and administered
generally in the same manner as Mortgage Loans included in a Mortgage Pool,
however, there can be no assurance that such will be the case, particularly if
such Mortgage Securities are issued by an entity other than the Company or any
of its affiliates. The related Prospectus Supplement will describe any material
differences between the servicing described below and the servicing of Mortgage
Loans underlying the Mortgage Securities in any Mortgage Pool.
THE MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for a series of
Certificates will be named in the related Prospectus Supplement and may be ICII
or another affiliate of the Company. The Master Servicer is required to maintain
a fidelity bond and errors and omissions policy with respect to its officers and
employees and other persons acting on behalf of the Master Servicer in
connection with its activities under a Pooling Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer for any Mortgage Pool, directly or through Subservicers, will be
obligated under the Pooling Agreement to service and administer the Mortgage
Loans in such Mortgage Pool for the benefit of the related Certificateholders,
in accordance with applicable law and the terms of such Pooling Agreement, such
Mortgage Loans and any instrument of credit enhancement included in the related
Trust Fund, and, to the extent consistent with the foregoing, in the same manner
as would prudent institutional mortgage lenders servicing comparable mortgage
loans for their own account in the jurisdictions where the related Mortgaged
Properties are located. Subject to the foregoing, the Master Servicer will have
full power and authority to do any and all things in connection with such
servicing and administration that it may deem necessary and desirable.
As part of its servicing duties, a Master Servicer will be required to
make reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans that it services and will be obligated to
follow such collection procedures as it would follow with respect to mortgage
loans that are comparable to such Mortgage Loans and held for its own account,
provided such procedures are consistent with the terms of the related Pooling
Agreement, including the servicing standard specified therein and generally
described in the preceding paragraph (as such may be more particularly described
in the related Prospectus Supplement, the "Servicing Standard"), and do not
impair recovery under any instrument of credit enhancement included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer will be
permitted, in its discretion, to waive any Prepayment Premium, late payment
charge or other charge in connection with any Mortgage Loan.
Under a Pooling Agreement, a Master Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Master Servicer may, among
other things, grant a period of temporary indulgence (generally up to four
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by such Mortgagor of delinquent amounts within a specified period
(generally up to one year) from the date of execution of the plan. However,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer must first determine that any such waiver or extension will not impair
the coverage of any related insurance policy or materially adversely affect the
security for such Mortgage Loan. In addition, unless otherwise specified in the
related Prospectus Supplement, if a material default occurs or a payment default
is reasonably foreseeable with respect to a Multifamily Loan, the Master
Servicer will be permitted, subject to any specific limitations set forth in the
related Pooling Agreement and described in the related Prospectus Supplement, to
modify, waive or amend any term of such Mortgage Loan, including deferring
payments, extending the stated maturity date or otherwise adjusting the payment
schedule, provided that such modification, waiver or amendment (i) is reasonably
likely to produce a greater recovery with respect to such Mortgage Loan on a
present value basis than would liquidation and (ii) will not adversely affect
the coverage under any applicable instrument of credit enhancement.
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In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes of
the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the Master
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Master Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Certificateholders of the related series
may vary considerably depending on the particular Multifamily Loan, the
Mortgaged Property, the Mortgagor, the presence of an acceptable party to assume
the Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Master
Servicer may not be permitted to accelerate the maturity of the related
Multifamily Loan or to foreclose on the Mortgaged Property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans."
Certain of the Mortgage Loans in a Mortgage Pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
Mortgage Loan upon any sale or other transfer of the related Mortgaged Property
made without the lender's consent. Certain of the Multifamily Loans in a
Mortgage Pool may also contain a due-on-encumbrance clause that entitles the
lender to accelerate the maturity of the Mortgage Loan upon the creation of any
other lien or encumbrance upon the Mortgaged Property. In any case in which
property subject to a Single Family Loan or Contract is being conveyed by the
Mortgagor, unless the related Prospectus Supplement provides otherwise, the
Master Servicer will in general be obligated, to the extent it has knowledge of
such conveyance, to exercise its rights to accelerate the maturity of such
Mortgage Loan under any due-on-sale clause applicable thereto, but only if the
exercise of such rights is permitted by applicable law and only to the extent it
would not adversely affect or jeopardize coverage under any Primary Insurance
Policy or applicable credit enhancement arrangements. If the Master Servicer is
prevented from enforcing such due-on-sale clause under applicable law or if the
Master Servicer determines that it is reasonably likely that a legal action
would be instituted by the related Mortgagor to avoid enforcement of such
due-on-sale clause, the Master Servicer will enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Loan subject to certain specified conditions. The original Mortgagor
may be released from liability on a Single Family Loan or Contract if the Master
Servicer shall have determined in good faith that such release will not
adversely affect the collectability of the Mortgage Loan. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
determine whether to exercise any right the Trustee may have under any
due-on-sale or due-on-encumbrance provision in a Multifamily Loan in a manner
consistent with the Servicing Standard. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will be entitled to retain as
additional servicing compensation any fee collected in connection with the
permitted transfer of a Mortgaged Property. See "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions." FHA Loans contain no such
clause and may be assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family and Multifamily Loans secured by junior
liens on the related Mortgaged Properties, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will be required to file (or
cause to be filed) of record a request for notice of any action by a superior
lienholder under the Senior Lien for the protection of the related Trustee's
interest, where permitted by local law and whenever applicable state law does
not require that a junior lienholder be named as a party defendant in
foreclosure proceedings in order to foreclose such junior lienholder's equity of
redemption. Unless otherwise specified in the related Prospectus
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Supplement, the Master Servicer also will be required to notify any superior
lienholder in writing of the existence of the Mortgage Loan and request
notification of any action (as described below) to be taken against the
Mortgagor or the Mortgaged Property by the superior lienholder. If the Master
Servicer is notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related Senior Lien, or has declared
or intends to declare a default under the mortgage or the promissory note
secured thereby, or has filed or intends to file an election to have the related
Mortgaged Property sold or foreclosed, then, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will be required to take, on
behalf of the related Trust Fund, whatever actions are necessary to protect the
interests of the related Certificateholders, and/or to preserve the security of
the related Mortgage Loan, subject to the application of the REMIC Provisions.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be required to advance the necessary funds to cure the default or
reinstate the superior lien, if such advance is in the best interests of the
related Certificateholders and the Master Servicer determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
The Master Servicer for any Mortgage Pool will also be required to
perform other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting Mortgage Rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing Mortgage Properties acquired
through or in lieu of foreclosure (each, an "REO Property"); and maintaining
servicing records relating to the Mortgage Loans in such Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of credit enhancement. See
"Description of Credit Enhancement."
SUBSERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Subservicer"), but the Master Servicer will remain liable for such obligations
under the related Pooling Agreement unless otherwise provided in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be solely liable for all fees owed by it to
any Subservicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Pooling Agreement is sufficient to pay such fees. Each
Subservicer will be entitled to reimbursement for certain expenditures which it
makes, generally to the same extent as would the Master Servicer for making the
same expenditures. See "--Servicing and Other Compensation and Payment of
Expenses; Spread" below and "Description of the Certificates--The Certificate
Account."
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Pooling
Agreement or may be appointed by the Master Servicer or another specified party
to perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Master Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Prospectus
Supplement, and the Master Servicer will be liable for the performance of a
Special Servicer only if, and to the extent, set forth in such Prospectus
Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below or in the related Prospectus Supplement, the
Master Servicer will be required, in a manner consistent with the Servicing
Standard, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans in the related Mortgage Pool as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection therewith, the
Master Servicer will be authorized to institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. The Master Servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related Trust Fund. In addition, the
Master
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Servicer will not be required to expend its own funds in connection with any
foreclosure or to restore any damaged property unless it shall determine that
(i) such foreclosure and/or restoration will increase the proceeds of
liquidation of the Mortgage Loan to the related Certificateholders after
reimbursement to itself for such expenses and (ii) such expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of withdrawal
from the Certificate Account in accordance with the Pooling Agreement).
Notwithstanding the foregoing, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer may not acquire title to any
Multifamily Property securing a Mortgage Loan or take any other action that
would cause the related Trustee, for the benefit of Certificateholders of the
related series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
as are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any Single Family Property securing a
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Master Servicer will not be liable to the Certificateholders of the related
series if, based on its belief that no such contamination or effect exists, the
Master Servicer forecloses on a Mortgaged Property and takes title to such
Mortgaged Property, and thereafter such Mortgaged Property is determined to be
so contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. Upon the first to
occur of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Certificates of the related series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Certificateholders, the amount of any Realized
Loss or the amount required to be drawn under any applicable form of credit
support, the Master Servicer may take into account minimal amounts of additional
receipts expected to be received, as well as estimated additional liquidation
expenses expected to be incurred in connection with such defaulted Mortgage
Loan. With respect to certain series of Certificates, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide, to the extent of coverage thereunder, that a defaulted Mortgage Loan
will be removed from the Trust Fund prior to the final liquidation thereof. In
addition, a Pooling Agreement may grant to the Master Servicer, a Special
Servicer, a provider of credit enhancement and/or the holder or holders of
certain classes of Certificates of the related series a right of first refusal
to purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Certificateholders to principal
and interest thereon, will be specified in the related Prospectus
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Supplement), any Mortgage Loan as to which a specified number of scheduled
payments are delinquent. Furthermore, a Pooling Agreement may authorize the
Master Servicer to sell any defaulted Mortgage Loan if and when the Master
Servicer determines, consistent with the Servicing Standard, that such a sale
would produce a greater recovery to Certificateholders on a present value basis
than would liquidation of the related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders of the related series. Notwithstanding any such acquisition
of title and cancellation of the related Mortgage Loan, such Mortgage Loan (an
"REO Mortgage Loan") will be considered for most purposes to be an outstanding
Mortgage Loan held in the Trust Fund until such time as the Mortgaged Property
is sold and all recoverable Liquidation Proceeds and Insurance Proceeds have
been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, unless otherwise
specified in the related Prospectus Supplement, the amortization schedule in
effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property within two years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund for more than two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Certificate is outstanding. Subject to the foregoing and
any other tax-related constraints, the Master Servicer will generally be
required to solicit bids for any Mortgaged Property so acquired in such a manner
as will be reasonably likely to realize a fair price for such property. Unless
otherwise provided in the related Prospectus Supplement, if title to any
Mortgaged Property is acquired by a Trust Fund as to which a REMIC election has
been made, the Master Servicer will also be required to ensure that the
Mortgaged Property is administered so that it constitutes "foreclosure property"
within the meaning of Code Section 860G(a)(8) at all times, that the sale of
such property does not result in the receipt by the Trust Fund of any income
from nonpermitted assets as described in Code Section 860F(a)(2)(B), and that
the Trust Fund does not derive any "net income from foreclosure property" within
the meaning of Code Section 860G(c)(2), with respect to such property.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer with respect to such Mortgage Loan, and
the shortfall is not covered under any applicable instrument or fund
constituting credit enhancement, the Trust Fund will realize a loss in the
amount of such difference. The Master Servicer will be entitled to reimburse
itself from the Liquidation Proceeds recovered on any defaulted Mortgage Loan,
prior to the distribution of such Liquidation Proceeds to Certificateholders,
amounts that represent unpaid servicing compensation in respect of the Mortgage
Loan, unreimbursed servicing expenses incurred with respect to the Mortgage Loan
and any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan. If so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide for reinstatement subject to
certain conditions in the event that, following the final liquidation of a
Mortgage Loan and a draw under such credit enhancement, subsequent recoveries
are received. In addition, if a gain results from the final liquidation of a
defaulted Mortgage Loan or an REO Mortgage Loan which is not required by law to
be remitted to the related Mortgagor, the Master Servicer will be entitled to
retain such gain as additional servicing compensation unless the related
Prospectus Supplement provides otherwise. For a description of the Master
Servicer's (or other specified person'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 "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder."
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for a series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it on a monthly or other periodic basis from collections of interest on such
Mortgage Loan in the related Trust Fund at the time such collections are
deposited into the applicable Certificate Account. In addition, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will retain
all Prepayment Premiums, assumption fees and late payment charges, to the extent
collected from Mortgagors, and any benefit which may accrue as a result of the
investment of funds in the applicable Certificate Account. Any additional
servicing compensation will be described in the related Prospectus Supplement.
Any Subservicer will receive a portion of the Master Servicer's compensation as
its sub-servicing compensation.
In addition to amounts payable to any Subservicer, the Master Servicer
will pay or cause to be paid certain ongoing expenses associated with each Trust
Fund and incurred by it in connection with its responsibilities under the
Pooling Agreement, including, if so specified in the related Prospectus
Supplement, 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 and the
Certificate Registrar, and payment of expenses incurred in enforcing the
obligations of Subservicers and Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Sellers under certain limited circumstances. In addition, the Master
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 Certificateholders to receive any related Liquidation Proceeds or
Insurance Proceeds. If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer will be entitled to receive interest on amounts
advanced to cover such reimbursable expenses for the period that such advances
are outstanding at the rate specified in such Prospectus Supplement, and the
Master Servicer will be entitled to payment of such interest periodically from
general collections on the Mortgage Loans in the related Trust Fund prior to any
payment to Certificateholders or as otherwise provided in the related Pooling
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Spread retained. Any such Spread will be a specified
portion of the interest payable on each Mortgage Loan in a Mortgage Pool and
will not be part of the related Trust Fund. Any such Spread will be established
on a loan-by-loan basis and the amount thereof with respect to each Mortgage
Loan in a Mortgage Pool will be specified on an exhibit to the related Pooling
Agreement. Any partial recovery of interest in respect of a Mortgage Loan will
be allocated between the owners of any Spread and the holders of classes of
Certificates entitled to payments of interest as provided in the related
Prospectus Supplement and the applicable Pooling Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from Mortgagor prepayments during such period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement will provide that on or before a specified date
in each year, beginning the first such date that is at least a specified number
of months after the Cut-off Date, a firm of independent public accountants will
furnish a statement to the Company and the Trustee to the effect that, on the
basis of an examination by such firm conducted substantially in compliance with
the Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC, the servicing of mortgage loans under agreements
(including the related Pooling Agreement) substantially similar to each other
was conducted in compliance with such agreements except for such significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC requires it to report. In rendering its statement such firm
may rely, as to the matters relating to the direct servicing of mortgage loans
by Subservicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program
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for Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to those Subservicers which
also have been the subject of such an examination.
Each Pooling Agreement will also provide for delivery to the Trustee,
on or before a specified date in each year, of an annual statement signed by one
or more officers of the Master Servicer to the effect that, to the best
knowledge of each such officer, the Master Servicer has fulfilled in all
material respects its obligations under the Pooling Agreement throughout the
preceding year or, if there has been a material default in the fulfillment of
any such obligation, such statement shall specify each such known default and
the nature and status thereof. Such statement may be provided as a single form
making the required statements as to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies
of the annual accountants' statement and the annual statement of officers of a
Master Servicer may be obtained by Certificateholders without charge upon
written request to the Master Servicer or Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in series. Each series of Certificates
(or, in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling Agreement, similar to one of the forms filed as an exhibit
to the Registration Statement of which this Prospectus is a part. Each Pooling
Agreement will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K. The following summaries (together with
additional summaries under "The Pooling Agreement" below) describe certain
provisions relating to the Certificates common to each Pooling 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 Agreement
for each Trust Fund and the related Prospectus Supplement. Wherever particular
sections or defined terms of the Pooling Agreement are referred to herein, such
sections or defined terms are thereby incorporated herein by reference.
Unless otherwise specified in the related Prospectus Supplement,
Certificates of each series covered by a particular Pooling Agreement will
evidence specified beneficial ownership interests in a separate Trust Fund
created pursuant to such Pooling Agreement. A Trust Fund will consist of, to the
extent provided in the Pooling Agreement: (i) such Mortgage Loans (and the
related mortgage documents) or interests therein (including any Mortgage
Securities) underlying a particular series of Certificates as from time to time
are subject to the Pooling Agreement, exclusive of, if specified in the related
Prospectus Supplement, any Spread or other interest retained by the Company or
any of its affiliates with respect to each such Mortgage Loan; (ii) such assets
including, without limitation, all payments and collections in respect of the
Mortgage Loans or Mortgage Securities due after the related Cut-off Date, as
from time to time are identified as deposited in respect thereof in the related
Certificate Account as described below; (iii) any property acquired in respect
of Mortgage Loans in the Trust Fund, whether through foreclosure of such
Mortgage Loans or by deed in lieu of foreclosure or otherwise; (iv) hazard
insurance policies, Primary Insurance Policies and FHA insurance policies, if
any, maintained in respect of Mortgage Loans in the Trust Fund and certain
proceeds of such policies; (v) certain rights of the Company under any Mortgage
Loan Purchase Agreement, including in respect of any representations and
warranties therein; and (vi) any combination, as and to the extent specified in
the related Prospectus Supplement, of a Letter of Credit, Purchase Obligation,
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond
or other type of credit enhancement as described under "Description of Credit
Enhancement." To the extent that any Trust Fund 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.
If provided in the related Prospectus Supplement, the original
principal amount of a series of Certificates may exceed the principal balance of
the Mortgage Loans or Mortgage Securities initially being delivered to the
Trustee. Cash in an amount equal to such difference will be deposited into a
separate trust account (the "PreFunding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement, amounts on
deposit in the Pre-Funding Account may be used to purchase additional Mortgage
Loans or Mortgage Securities for the related Trust Fund. Any amounts remaining
in the Pre-Funding Account at the end of such period
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will be distributed as a principal prepayment to the holders of the related
series of Certificates at the time and in the manner set forth in the related
Prospectus Supplement.
Each series of Certificates may consist of any one or a combination of
the following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which will be senior ("Senior
Certificates") in right of payment to one or more of the other classes
("Subordinate Certificates"), and as to which certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as described in the respective Prospectus Supplement
(any such series, a "Senior/Subordinate Series"); (iii) two or more classes of
Certificates, one or more classes ("Strip Certificates") of which will be
entitled to (a) principal distributions, with disproportionate, nominal or no
interest distributions or (b) interest distributions, with disproportionate,
nominal or no principal distributions; (iv) two or more classes of Certificates
which differ as to the timing, sequential order, rate, pass-through rate or
amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any such class may be made
upon the occurrence of specified events, in accordance with a schedule or
formula (including "planned amortization classes" and "targeted amortization
classes"), or on the basis of collections from designated portions of the
Mortgage Pool, and which classes may include one or more classes of Certificates
("Accrual Certificates") with respect to which certain accrued interest will not
be distributed but rather will be added to the principal balance thereof on each
Distribution Date for the period described in the related Prospectus Supplement;
or (v) other types of classes of Certificates, as described in the related
Prospectus Supplement. As to each series, all Certificates offered hereby (the
"Offered Certificates") will be rated in one of the four highest rating
categories by one or more Rating Agencies. Credit support for the Offered
Certificates of each series may be provided by a Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, Purchase
Obligation, Reserve Fund or other credit enhancement as described under
"Description of Credit Enhancement," by the subordination of one or more other
classes of Certificates as described under "Subordination" or by any combination
of the foregoing.
If so specified in the Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or a designated portion thereof, as a REMIC. If such an election is made with
respect to a series of Certificates, one of the classes of Certificates in such
series will be designated as evidencing the sole class of "residual interests"
in each related REMIC, as defined in the Code; alternatively, a separate class
of ownership interests will evidence such residual interests. All other classes
of Certificates in such series will constitute "regular interests" in the
related REMIC, as defined in the Code and will be designated as such. As to each
series of Certificates as to which a REMIC election is to be made, the Master
Servicer, Trustee or other specified person will be obligated to take certain
specified actions required in order to comply with applicable laws and
regulations.
FORM OF CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement, the
Offered Certificates of each series will be issued as physical certificates in
fully registered form only in the denominations specified in the related
Prospectus Supplement, and will be transferrable and exchangeable at the
corporate trust office of the registrar (the "Certificate Registrar") named in
the related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Offered Certificates, but the Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge. The term "Certificateholder" or "Holder" as used herein refers to the
entity whose name appears on the records of the Certificate Registrar
(consisting of or including the "Certificate Register") as the registered holder
of a Certificate, except as otherwise indicated in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, specified classes
of a series of Certificates will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Certificates ("DTC Registered Certificates"), the record Holder of such
Certificates will be DTC's nominee. DTC is a limited-purpose trust company
organized under the laws of the State of New York, which holds securities for
its participating organizations ("Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in the accounts of Participants. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Other institutions
that are not Participants but clear through or maintain a custodial relationship
with Participants (such institutions, "Intermediaries") have indirect access to
DTC's clearance system.
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Unless otherwise specified in the related Prospectus Supplement, no
person acquiring an interest in any DTC Registered Certificates (each such
person, a "Beneficial Owner") will be entitled to receive a Certificate
representing such interest in registered, certificated form, unless either (i)
DTC ceases to act as depository in respect thereof and a successor depository is
not obtained, or (ii) the Company elects in its sole discretion to discontinue
the registration of such Certificates through DTC. Prior to any such event,
Beneficial Owners will not be recognized by the Trustee or the Master Servicer
as Holders of the related Certificates for purposes of the related Pooling
Agreement, and Beneficial Owners will be able to exercise their rights as owners
of such Certificates only indirectly through DTC, Participants and
Intermediaries. Any Beneficial Owner that desires to purchase, sell or otherwise
transfer any interest in DTC Registered Certificates may do so only through DTC,
either directly if such Beneficial Owner is a Participant or indirectly through
Participants and, if applicable, Intermediaries. Pursuant to the procedures of
DTC, transfers of the beneficial ownership of any DTC Registered Certificates
will be required to be made in minimum denominations specified in the related
Prospectus Supplement. The ability of a Beneficial Owner to pledge DTC
Registered Certificates to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Certificates, may be
limited because of the lack of physical certificates evidencing such
Certificates and because DTC may act only on behalf of Participants.
Distributions in respect of the DTC Registered Certificates will be
forwarded by the Trustee or other specified person to DTC, and DTC will be
responsible for forwarding such payments to Participants, each of which will be
responsible for disbursing such payments to the Beneficial Owners it represents
or, if applicable, to Intermediaries. Accordingly, Beneficial Owners may
experience delays in the receipt of payments in respect of their Certificates.
Under DTC's procedures, DTC will take actions permitted to be taken by Holders
of any class of DTC Registered Certificates under the Pooling Agreement only at
the direction of one or more Participants to whose account the DTC Registered
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of Holders of
Certificates of any Class to the extent that Participants authorize such
actions. None of the Master Servicer, the Company, the Trustee or any of their
respective affiliates will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
DTC Registered Certificates, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Certificates, the Company will
assign, or cause to be assigned, to the related Trustee (or its nominee),
without recourse, the Mortgage Loans or Mortgage Securities being included in
the related Trust Fund, together with, unless otherwise specified in the related
Prospectus Supplement, all principal and interest received on or with respect to
such Mortgage Loans or Mortgage Securities after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date. If specified in the
related Prospectus Supplement, the Company or any of its affiliates may retain
the Spread, if any, for itself or transfer the same to others. The Trustee will,
concurrently with such assignment, deliver the Certificates of such series to or
at the direction of the Company in exchange for the Mortgage Loans and/or
Mortgage Securities in the related Trust Fund. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule will include, among other things, information as to the
principal balance of each Mortgage Loan in the related Trust Fund as of the
Cut-off Date, as well as information respecting the Mortgage Rate, the currently
scheduled monthly payment of principal and interest, the maturity of the
Mortgage Note and the Loan-to-Value Ratio at origination or modification
(without regard to any secondary financing).
In addition, unless otherwise specified in the related Prospectus
Supplement, the Company will, as to each Mortgage Loan (other than Mortgage
Loans underlying any Mortgage Securities and other than Contracts), deliver, or
cause to be delivered, to the related Trustee (or to the custodian described
below) the Mortgage Note endorsed, without recourse, either in blank or to the
order of such Trustee (or its nominee), the Mortgage with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office), an assignment of the Mortgage in blank or to the Trustee (or
its nominee) in recordable form, together with any intervening assignments of
the Mortgage with evidence of recording thereon (except for any such assignment
not returned from the public recording office), and, if applicable, any riders
or modifications to such Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related Pooling Agreement. Such
assignments may be blanket assignments covering Mortgages on Mortgaged
Properties located in the same county, if permitted
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by law. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the Company
delivers, or causes to be delivered, to the related Trustee (or the custodian) a
copy or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition, if
the Company cannot deliver, with respect to any Mortgage Loan, the Mortgage or
any intervening assignment with evidence of recording thereon concurrently with
the execution and delivery of the related Pooling Agreement because of a delay
caused by the public recording office, the Company will deliver, or cause to be
delivered, to the related Trustee (or the custodian) a true and correct
photocopy of such Mortgage or assignment as submitted for recording. The Company
will deliver, or cause to be delivered, to the related Trustee (or the
custodian) such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the Company
cannot deliver, with respect to any Mortgage Loan, the Mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Pooling Agreement because such Mortgage or
assignment has been lost, the Company will deliver, or cause to be delivered, to
the related Trustee (or the custodian) a true and correct photocopy of such
Mortgage or assignment with evidence of recording thereon. Assignments of the
Mortgage Loans to the Trustee (or its nominee) will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company or the originator of
such Mortgage Loan, or except as otherwise specified in the related Prospectus
Supplement as to any series of Certificates. In addition, unless specified in
the related Prospectus Supplement, the Company will, as to each Contract,
deliver, or cause to be delivered, the original Contract endorsed, without
recourse, to the order of the Trustee and copies of documents and instruments
related to the Contract and the security interest in the Manufactured Home
securing the Contract, together with a blanket assignment to the Trustee of all
Contracts in the related Trust Fund and such documents and instruments. In order
to give notice of the right, title and interest of the Certificateholders to the
Contracts, the Company will cause to be executed and delivered to the Trustee a
UCC-1 financing statement identifying the Trustee as the secured party and
identifying all Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Company will, as to each Mortgage Security
included in a Mortgage Pool, deliver, or cause to be delivered, to the related
Trustee (or the custodian) a physical certificate evidencing such Mortgage
Security, registered in the name of the related Trustee (or its nominee), or
endorsed in blank or to the related Trustee (or its nominee), or accompanied by
transfer documents sufficient to effect a transfer to the Trustee (or its
nominee).
The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the related Certificateholders, and
generally will review such documents within 90 days after receipt thereof in the
case of documents delivered concurrently with the execution and delivery of the
related Pooling Agreement, and within the time period specified in the related
Pooling Agreement in the case of all other documents delivered. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will be required to promptly so notify the Master Servicer, the Company, and the
related Seller. If the related Seller does not cure the omission or defect
within a specified period after notice is given thereto by the Trustee, and such
omission or defect materially and adversely affects the interests of
Certificateholders in the affected Mortgage Loan or Mortgage Security, then,
unless otherwise specified in the related Prospectus Supplement, the related
Seller will be obligated to purchase such Mortgage Loan or Mortgage Security
from the Trustee at its Purchase Price (or, if and to the extent it would
otherwise be permitted to do so for a breach of representation and warranty as
described under "The Mortgage Pools--Representations of Sellers," to substitute
for such Mortgage Loan or Mortgage Security). The Trustee will be obligated to
enforce this obligation of the Seller to the extent described above under "The
Mortgage Pools--Representations by Sellers," but there can be no assurance that
the applicable Seller will fulfill its obligation to purchase (or substitute
for) the affected Mortgage Loan or Mortgage Security as described above. Unless
otherwise specified in the related Prospectus Supplement, neither the Master
Servicer nor the Company will be obligated to purchase or substitute for such
Mortgage Loan or Mortgage Security if the Seller defaults on its obligation to
do so. Unless otherwise specified in the related Prospectus Supplement, this
purchase or substitution obligation constitutes the sole remedy available to the
related Certificateholders and the related Trustee for omission of, or a
material defect in, a constituent document. Any affected Mortgage Loan or
Mortgage Security not so purchased or substituted for shall remain in the
related Trust Fund.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
and/or Mortgage Securities in any Mortgage Pool, and to maintain
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possession of and, if applicable, to review, the documents relating to such
Mortgage Loans and/or Mortgage Securities, in any case as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Certificates will be set forth in the related Prospectus
Supplement. Any such custodian may be an affiliate of the Company or the Master
Servicer.
With respect to the Mortgage Loans in a Mortgage Pool, except in the
case of a Designated Seller Transaction or as to Mortgage Loans underlying any
Mortgage Securities or unless otherwise specified in the related Prospectus
Supplement, the Company will make certain representations and warranties as to
the types and geographical concentrations of such Mortgage Loans and as to the
accuracy, in all material respects, of certain identifying information furnished
to the related Trustee in respect of each such Mortgage Loan (E.G., original
Loanto-Value Ratio, principal balance as of the Cut-off Date, Mortgage Rate and
maturity). Upon a breach of any such representation which materially and
adversely affects the interests of the Certificateholders in a Mortgage Loan,
the Company will be obligated to cure the breach in all material respects, to
purchase the Mortgage Loan at its Purchase Price or, unless otherwise specified
in the related Prospectus Supplement, to substitute for such Mortgage Loan a
Qualified Substitute Mortgage Loan in accordance with the provisions for such
substitution by Affiliated Sellers as described above under "The Mortgage
Pools--Representations by Sellers." However, the Company will not be required to
repurchase or substitute for any Mortgage Loan in connection with a breach of a
representation and warranty if the substance of any such breach also constitutes
fraud in the origination of the related Mortgage Loan. Unless otherwise
specified in the related Prospectus Supplement, this purchase or substitution
obligation constitutes the sole remedy available to Certificateholders or the
Trustee for such a breach of representation by the Company. Any Mortgage Loan
not so purchased or substituted for shall remain in the related Trust Fund.
Pursuant to the related Pooling Agreement, the Master Servicer for any
Mortgage Pool, either directly or through Subservicers, will service and
administer the Mortgage Loans included in such Mortgage Pool and assigned to the
related Trustee as more fully set forth under "Servicing of Mortgage Loans." The
Master Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Pooling Agreement.
CERTIFICATE ACCOUNT
GENERAL. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more separate accounts for the collection of payments on the related Mortgage
Loans and/or Mortgage Securities constituting such Trust Fund (collectively, the
"Certificate Account"), which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
either as an interest-bearing or a non-interest-bearing account, and the funds
held therein may be held as cash or invested in United States government
securities and other investment grade obligations specified in the related
Pooling Agreement ("Permitted Investments"). Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Certificate Account will be paid to the related Master Servicer or Trustee
as additional compensation. If permitted by such Rating Agency or Agencies and
so specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or serviced by it on behalf of others.
DEPOSITS. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, the related Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be deposited
in the Certificate Account for each Trust Fund within a certain period following
receipt (in the case of collections and payments), the following payments and
collections received, or advances made, by the Master Servicer, the Trustee or
any Special Servicer subsequent to the Cut-off Date with respect to the Mortgage
Loans and/or Mortgage Securities in such Trust Fund (other than payments due on
or before the Cut-off Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, including any default interest collected, in each case net of
any portion thereof retained by the Master Servicer, any Special
Servicer or
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Sub-Servicer as its servicing compensation or as compensation to the
Trustee, and further net of any Spread;
(iii) all payments on the Mortgage Securities;
(iv) all proceeds received under any hazard, title, primary
mortgage, FHA or other insurance policy that provides coverage with
respect to a particular Mortgaged Property or the related Mortgage Loan
(other than proceeds applied to the restoration of the property or
released to the related borrower in accordance with the customary
servicing practices of the Master Servicer (or, if applicable, a
Special Servicer) and/or the terms and conditions of the related
Mortgage (collectively, "Insurance Proceeds") and all other amounts
received and retained in connection with the liquidation of defaulted
Mortgage Loans or property acquired in respect thereof, by foreclosure
or otherwise ("Liquidation Proceeds"), together with the net operating
income (less reasonable reserves for future expenses) derived from the
operation of any Mortgaged Properties acquired by the Trust Fund
through foreclosure or otherwise;
(v) any amounts paid under any instrument or drawn from any
fund that constitutes credit enhancement for the related series of
Certificates as described under "Description of Credit Enhancement";
(vi) any advances made as described under "--Advances" below;
(vii) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Certificateholders, as
described below;
(viii) all proceeds of any Mortgage Loan or Mortgage Security
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Company, a Seller or any other person pursuant to the terms of the
related Pooling Agreement as described under "The Mortgage
Pools--Representations by Sellers," "Servicing of Mortgage
Loans--Realization Upon and Sale of Defaulted Mortgage Loans,"
"--Assignment of Trust Fund Assets" above, "The Pooling
Agreement--Termination" and "Purchase Obligations" (all of the
foregoing, also "Liquidation Proceeds");
(ix) any amounts paid by the Master Servicer to cover
Prepayment Interest Shortfalls arising out of the prepayment of
Mortgage Loans as described under "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses;
Spread";
(x) to the extent that any such item does not constitute
additional servicing compensation to the Master Servicer or a Special
Servicer, any payments on account of modification or assumption fees,
late payment charges, Prepayment Premiums or Equity Participations on
the Mortgage Loans;
(xi) any amount required to be deposited by the Master
Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the Trustee, as
the case may be, of funds held in the Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Pooling Agreement and
described herein or in the related Prospectus Supplement.
With respect to each Buydown Mortgage Loan, the Master Servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth herein with respect to
the Certificate Account. Unless otherwise specified in the related Prospectus
Supplement, the terms of all Buydown Mortgage Loans provide for the contribution
of Buydown Funds in an amount equal to or exceeding either (i) the total
payments to be made from such funds pursuant to the related buydown plan or (ii)
if such Buydown Funds are to be deposited on a discounted basis, that amount of
Buydown Funds which, together with investment earnings thereon at a rate as will
support the scheduled level of payments due under the Buydown Mortgage Loan.
Neither the Master Servicer nor the Company 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 Seller, distributions to Certificateholders may be affected. With
respect to each Buydown Mortgage
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Loan, the Master Servicer will be required monthly to withdraw from the Buydown
Account and deposit in the Certificate Account as described above the amount, if
any, of the Buydown Funds (and, if applicable, investment earnings thereon) for
each Buydown Mortgage Loan that, when added to the amount due from the Mortgagor
on such Buydown Mortgage Loan, equals the full monthly payment which would be
due on the Buydown Mortgage Loan if it were not subject to the buydown plan. The
Buydown Funds will in no event be a part of the related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Master Servicer will be required
to 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 Master Servicer will generally be required to
withdraw from the Buydown Account and deposit in the Certificate Account the
Buydown Funds and investment earnings thereon, if any, which together with such
prepayment will result in a prepayment in full; provided that Buydown Funds may
not be available to cover a prepayment under certain Mortgage Loan programs. Any
Buydown Funds so remitted to the Master 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 Master
Servicer, the Primary Insurer, the insurer under the Mortgage Pool Insurance
Policy (the "Pool Insurer") or any other insurer), the Master Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and either deposit the same in the
Certificate Account or, alternatively, 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. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer, Trustee
or Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the related Certificateholders
on each Distribution Date;
(ii) to reimburse the Master Servicer or any other specified
person for unreimbursed amounts advanced by it as described under
"--Advances" below in respect of Mortgage Loans in the Trust Fund, such
reimbursement to be made out of amounts received which were identified
and applied by the Master Servicer as late collections of interest (net
of related servicing fees) on and principal of the particular Mortgage
Loans with respect to which the advances were made or out of amounts
drawn under any form of credit enhancement with respect to such
Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer
for unpaid servicing fees earned by it and certain unreimbursed
servicing expenses incurred by it with respect to Mortgage Loans in the
Trust Fund and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation
Proceeds and Insurance Proceeds collected on the particular Mortgage
Loans and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such
expenses were incurred or out of amounts drawn under any form of credit
enhancement with respect to such Mortgage Loans and properties;
(iv) to reimburse the Master Servicer or any other specified
person for any advances described in clause (ii) above made by it and
any servicing expenses referred to in clause (iii) above incurred by it
which, in the good faith judgment of the Master Servicer or such other
person, will not be recoverable from the amounts described in clauses
(ii) and (iii), respectively, such reimbursement to be made from
amounts collected on other Mortgage Loans in the Trust Fund or, if and
to the extent so provided by the related Pooling Agreement and
described in the related Prospectus Supplement, only from that portion
of
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amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the
related series;
(v) if and to the extent described in the related
Prospectus Supplement, to pay the Master Servicer, a Special Servicer
or another specified entity (including a provider of credit
enhancement) interest accrued on the advances described in clause (ii)
above made by it and the servicing expenses described in clause (iii)
above incurred by it while such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust
Fund for environmental site assessments performed with respect to
Multifamily Properties that constitute security for defaulted Mortgage
Loans, and for any containment, clean-up or remediation of hazardous
wastes and materials present on such Mortgaged Properties, as described
under "Servicing of Mortgage Loans--Realization Upon Defaulted Mortgage
Loans";
(vii) to reimburse the Master Servicer, the Company, or any
of their respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "The Pooling
Agreement--Certain Matters Regarding the Master Servicer and the
Company";
(viii) if and to the extent described in the related
Prospectus Supplement, to pay the fees of the Trustee;
(ix) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "The Pooling Agreement--Certain Matters Regarding the
Trustee";
(x) to pay the Master Servicer or the Trustee, as
additional compensation, interest and investment income earned in
respect of amounts held in the Certificate Account;
(xi) to pay (generally from related income) for costs
incurred in connection with the operation, management and maintenance
of any Mortgaged Property acquired by the Trust Fund by foreclosure or
otherwise;
(xii) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Certain Federal
Income Tax Consequences--REMICS--Prohibited Transactions and Other
Possible REMIC Taxes";
(xiii) to pay for the cost of an independent appraiser or
other expert in real estate matters retained to determine a fair sale
price for a defaulted Mortgage Loan or a property acquired in respect
thereof in connection with the liquidation of such Mortgage Loan or
property;
(xiv) to pay for the cost of various opinions of counsel
obtained pursuant to the related Pooling Agreement for the benefit of
the related Certificateholders;
(xv) to pay to itself, the Company, a Seller or any other
appropriate person all amounts received with respect to each Mortgage
Loan purchased, repurchased or removed from the Trust Fund pursuant to
the terms of the related Pooling Agreement and not required to be
distributed as of the date on which the related Purchase Price is
determined;
(xvi) to make any other withdrawals permitted by the related
Pooling Agreement and described in the related Prospectus Supplement;
and
(xvii) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
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DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided in
the related Prospectus Supplement, the "Available Distribution Amount" for any
series of Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Loans and/or Mortgage Securities and any other assets
included in the related Trust Fund that are available for distribution to the
Certificateholders of such series on such date. The particular components of the
Available Distribution Amount for any series on each Distribution Date will be
more specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated PRO RATA among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
Trustee or other person required to make such payments with wiring instructions
no later than five business days prior to the related Record Date or such other
date specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in the
requisite amount or denomination specified therein), or by check mailed to the
address of such Certificateholder as it appears on the Certificate Register;
provided, however, that the final distribution in retirement of any class of
Certificates will be made only upon presentation and surrender of such
Certificates at the location specified in the notice to Certificateholders of
such final distribution.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes
of Strip Certificates and certain REMIC Residual Certificates that have no
Pass-Through Rate) may have a different Pass-Through Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Pass-Through Rate or, in the case
of a variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates of each series will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
(other than any class of Certificates that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Strip Certificates or REMIC Residual
Certificates that is not entitled to any distributions of interest) will be made
on each Distribution Date based on the Accrued Certificate Interest for such
class and such Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is distributable on any class of Accrual
Certificates, the amount of Accrued Certificate Interest otherwise distributable
on such class will be added to the principal balance thereof on each
Distribution Date. With respect to each class of Certificates (other than
certain classes of Strip Certificates and REMIC Residual Certificates), "Accrued
Certificate Interest" for each Distribution Date will be equal to interest at
the applicable Pass-Through Rate accrued for a specified period (generally one
month) on the outstanding principal balance thereof immediately prior to such
Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, Accrued Certificate Interest for each Distribution Date on Strip
Certificates entitled to distributions of interest will be similarly calculated
except that it will accrue on a notional amount that is either (i) based on the
principal balances of some or all of the Mortgage Loans and/or Mortgage
Securities in the related Trust Fund or (ii) equal to the principal balances of
one or more other classes of Certificates of the same series. Reference to such
a notional amount with respect to a class of Strip Certificates is solely for
convenience in making certain calculations and does not represent the right to
receive any distribution of principal. If so specified in the
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related Prospectus Supplement, the amount of Accrued Certificate Interest that
is otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the principal balance of) one or more classes of the
Certificates of a series will be reduced to the extent that any Prepayment
Interest Shortfalls, as described under "Yield Considerations", exceed the
amount of any sums (including, if and to the extent specified in the related
Prospectus Supplement, the Master Servicer's servicing compensation) that are
applied to offset such shortfalls. The particular manner in which such
shortfalls will be allocated among some or all of the classes of Certificates of
that series will be specified in the related Prospectus Supplement. The related
Prospectus Supplement will also describe the extent to which the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Certificates, that may otherwise be added to the principal balance
of) a class of Offered Certificates may be reduced as a result of any other
contingencies, including delinquencies, losses and Deferred Interest on or in
respect of the related Mortgage Loans or application of the Relief Act with
respect to such Mortgage Loans. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Certificate
Interest otherwise distributable on a class of Certificates by reason of the
allocation to such class of a portion of any Deferred Interest on or in respect
of the related Mortgage Loans will result in a corresponding increase in the
principal balance of such class.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Certificates will be made
on each Distribution Date to the holders of the class or classes of Certificates
of such series entitled thereto until the principal balance(s) of such
Certificates have been reduced to zero. In the case of a series of Certificates
which includes two or more classes of Certificates, 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 Certificates
or Subordinate Certificates), shall be as set forth in the related Prospectus
Supplement. Distributions of principal with respect to one or more classes of
Certificates may be made at a rate that is faster (and, in some cases,
substantially faster) than the rate at which payments or other collections of
principal are received on the Mortgage Loans and/or Mortgage Securities in the
related Trust Fund, may not commence until the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of the same
series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on such Mortgage Loans and/or Mortgage Securities. In
addition, distributions of principal with respect to one or more classes of
Certificates may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of
Certificates, may be contingent on the specified principal payment schedule for
another class of the same series and the rate at which payments and other
collections of principal on the Mortgage Loans and/or Mortgage Securities in the
related Trust Fund are received.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations received on or in
connection with the Mortgage Assets in any Trust Fund will be distributed on
each Distribution Date to the holders of the class of Certificates of the
related series entitled thereto in accordance with the provisions described in
such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Loans and/or Mortgage Securities in any Trust Fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of Certificates of
the related series in the priority and manner, and subject to the limitations,
specified in the related Prospectus Supplement. As described in the related
Prospectus Supplement, such allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more such classes
of Certificates, or may be effected simply by a prioritization of payments among
such classes of Certificates.
ADVANCES
If and to the extent provided in the related Prospectus Supplement, and
subject to any limitations specified therein, the related Master Servicer may be
obligated to advance, or have the option of advancing, on or before each
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Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any Balloon Payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date. Unless otherwise provided in the related
Prospectus Supplement, a "Due Period" is the period between Distribution Dates,
and scheduled payments on the Mortgage Loans in any Trust Fund that became due
during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related Master Servicer or other specified
person, be distributed on the Distribution Date next succeeding such
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made from the Master Servicer's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including amounts
received under any fund or instrument constituting credit enhancement)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and such other specific sources as may be identified in the related
Prospectus Supplement, including in the case of a series that includes one or
more classes of Subordinate Certificates, collections on other Mortgage Loans in
the related Trust Fund that would otherwise be distributable to the holders of
one or more classes of such Subordinate Certificates. No advance will be
required to be made by the Master Servicer if, in the good faith judgment of the
Master Servicer, such advance would not be recoverable from Related Proceeds or
another specifically identified source (any such advance, a "Nonrecoverable
Advance"); and, if previously made by a Master Servicer, a Nonrecoverable
Advance will be reimbursable from any amounts in the related Certificate Account
prior to any distributions being made to the related series of
Certificateholders.
If advances have been made from excess funds in a Certificate Account,
the Master Servicer that advanced such funds will be required to replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds then in the Certificate Account are insufficient to permit full
distributions to Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer to make advances may
be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If any person other than the Master Servicer has any obligation to make
advances as described above, the related Prospectus Supplement will identify
such person.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
As specified in the related Prospectus Supplement with respect to any
series of Certificates as to which the Trust Fund includes Mortgage Securities,
the advancing obligations with respect to the underlying Mortgage Loans will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling Agreement, and may differ from the provisions
described above.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to Certificateholders of a particular class of
Offered Certificates, the related Master Servicer or Trustee will forward or
cause to be forwarded to each holder of record of such class of Certificates a
statement or statements with respect to the related Trust Fund setting forth the
information specifically described in the related Pooling Agreement, which
generally will include the following as applicable except as otherwise provided
therein:
(i) the amount, if any, of such distribution allocable to
principal;
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(ii) the amount, if any, of such distribution allocable to
interest;
(iii) the amount, if any, of such distribution allocable to
(A) Prepayment Premiums and (B) payments on account of Equity
Participations;
(iv) 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
Distribution Date;
(v) the amount of servicing compensation received by the
related Master Servicer (and, if payable directly out of the related
Trust Fund, by any Special Servicer and any Sub-Servicer);
(vi) the aggregate amount of advances included in the
distributions on such Distribution Date, and the aggregate amount of
unreimbursed advances at the close of business on such Distribution
Date;
(vii) the aggregate principal balance of the Mortgage Loans in
the related Mortgage Pool on, or as of a specified date shortly prior
to, such Distribution Date;
(viii) the number and aggregate principal balance of any
Mortgage Loans in the related Mortgage Pool in respect of which (A) one
scheduled payment is delinquent, (B) two scheduled payments are
delinquent, (C) three or more scheduled payments are delinquent and (D)
foreclosure proceedings have been commenced;
(ix) the book value of any real estate acquired by such Trust
Fund through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
(xi) 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;
(xii) the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
such amounts;
(xiii) in the case of Certificates benefiting from alternative
credit enhancement arrangements described in a Prospectus Supplement,
the amount of coverage under such alternative arrangements as of the
close of business on the applicable Determination Date; and
(xiv) with respect to any series of Certificates as to which
the Trust Fund includes Mortgage Securities, certain additional
information as required under the related Pooling Agreement and
specified in the related Prospectus Supplement.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of Offered Certificates or per a specified portion of such
minimum denomination. In addition to the information described above, reports to
Certificateholders will contain such other information as is set forth in the
applicable Pooling Agreement, which may include, without limitation,
prepayments, reimbursements to Subservicers and the Master Servicer and losses
borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Trustee will furnish a report to each
holder of record of a class of Offered Certificates at any time during such
calendar year which, among other things, will include information as to the
aggregate of amounts reported pursuant to subclauses (i)-(iii) above for such
calendar year or, in the event such person was a holder of record of a class of
Certificates during a portion of such calendar year, for the applicable portion
of such a year.
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DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Unless otherwise provided in the applicable Prospectus Supplement,
credit support with respect to the Offered Certificates of each series may be
comprised of one or more of the following components. Each component will have a
dollar limit and, unless otherwise specified in the related Prospectus
Supplement, will provide coverage with respect to certain losses on the related
Mortgage Loans (as more particularly described in the related Prospectus
Supplement, "Realized Losses") that are (i) attributable to the Mortgagor's
failure to make any payment of principal or interest as required under the
Mortgage Note, but not including Special Hazard Losses, Extraordinary Losses or
other losses resulting from damage to a Mortgaged Property, Bankruptcy Losses or
Fraud Losses (any such loss, a "Defaulted Mortgage Loss"); (ii) of a type
generally covered by a Special Hazard Insurance Policy (as defined below) (any
such loss, a "Special Hazard Loss"); (iii) attributable to certain actions which
may be taken by a bankruptcy court in connection with a Mortgage Loan, including
a reduction by a bankruptcy court of the principal balance of or the Mortgage
Rate on a Mortgage Loan or an extension of its maturity (any such loss, a
"Bankruptcy Loss"); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any such loss, a
"Fraud Loss"). Unless otherwise specified in the related Prospectus Supplement,
Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy Losses and Fraud
Losses in excess of the amount of coverage provided therefor and losses
occasioned by war, civil insurrection, certain governmental actions, nuclear
reaction and certain other risks ("Extraordinary Losses") will not be covered.
To the extent that the credit support for the Offered Certificates of any series
is exhausted, the holders thereof will bear all further risks of loss not
otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Letter of Credit or a Mortgage Pool Insurance Policy, (ii) coverage
with respect to Special Hazard Losses may be provided by one or more of a Letter
of Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Letter of
Credit or a Bankruptcy Bond and (iv) coverage with respect to Fraud Losses may
be provided by one or more of a Letter of Credit, Mortgage Pool Insurance Policy
or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of a Reserve Fund to cover
such losses, in the form of subordination of one or more classes of Subordinate
Certificates to provide credit support to one or more classes of Senior
Certificates, or in the form of a specified entity's agreement to repurchase
certain Mortgage Loans or fund certain losses pursuant to a Purchase Obligation,
which obligations may be supported by a Letter of Credit, surety bonds or other
types of insurance policies, certain other secured or unsecured corporate
guarantees or in such other form as may be described in the related Prospectus
Supplement, or in the form of a combination of two or more of the foregoing. The
credit support may be provided by an assignment of the right to receive certain
cash amounts, a deposit of cash into a Reserve Fund or other pledged assets, or
by banks, insurance companies, guarantees or any combination thereof identified
in the applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Offered Certificates of
each series will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the Pooling
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 "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, credit support for the Offered
Certificates of one series may cover the Offered Certificates of one or more
other series.
The descriptions of any insurance policies or bonds 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 the
actual forms of such policies, copies of which are available upon request.
In general, references to "Mortgage Loans" under this "Description of
Credit Enhancement" section are to Mortgage Loans in a Trust Fund. However, if
so provided in the Prospectus Supplement for a series of
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Certificates, any Mortgage Securities included in the related Trust Fund and/or
the related underlying Mortgage Loans may be covered by one or more of the types
of credit support described herein. The related Prospectus Supplement will
specify, as to each such form of credit support, the information indicated below
with respect thereto, to the extent such information is material and available.
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the holders
of Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
prospectus Supplement will set forth information concerning the manner and
amount of subordination provided by a class or classes of Subordinate
Certificates in a series and the circumstances under which such subordination
will be available. The Offered Certificates of any series may include one or
more classes of Subordinate Certificates.
If the Mortgage Loans and/or Mortgage Securities in any Trust Fund are
divided into separate groups, each supporting a separate class or classes of
Certificates of the related series, credit enhancement may be provided by
cross-support provisions requiring that distributions be made on Senior
Certificates evidencing interests in one group of Mortgage Loans and/or Mortgage
Securities prior to distributions on Subordinate Certificates evidencing
interests in a different group of Mortgage Loans and/or Mortgage Securities
within the Trust Fund. The Prospectus Supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
LETTER OF CREDIT
If any component of credit enhancement as to the Offered Certificates
of any series is to be provided by a letter of credit (the "Letter of Credit"),
a bank (the "Letter of Credit Bank") will deliver to the related Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation to
make certain payments to the related 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.
If so specified in the related Prospectus Supplement, the Letter of Credit may
permit draws only in the event of certain types of losses and shortfalls. The
Letter of Credit may also provide for the payment of advances which the Master
Servicer would be obligated to make with respect to delinquent monthly mortgage
payments. The amount available under the Letter of Credit will, in all cases, be
reduced to the extent of the unreimbursed payments thereunder and may otherwise
be reduced as described in the related Prospectus Supplement. 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.
MORTGAGE POOL INSURANCE POLICIES
Any Mortgage Pool Insurance Policy obtained by the Company for each
Trust Fund will be issued by the Pool Insurer named in the applicable Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans on the Cut-off Date. As set forth under
"Maintenance of Credit Enhancement," the Master 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 related Trustee and the
related Certificateholders. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless specified in the related
Prospectus Supplement, the Mortgage Pool Insurance Policies may not cover losses
due to a failure to pay or denial of a claim under a Primary Insurance Policy,
irrespective of the reason therefor.
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Each Mortgage Pool Insurance Policy will generally provide that no
claims may be validly presented thereunder unless, among other things, (i) any
required Primary Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled, (ii) hazard insurance on
the property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date and (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Mortgage Loan at a price equal to the principal balance thereof plus
accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer, Special Servicer
or Subservicer on behalf of the related Trustee and Certificateholders, or (b)
to pay the amount by which the sum of the principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related Primary
Insurance Policy. Certificateholders will experience a shortfall in the amount
of interest payable on the related Certificates in connection with the payment
of claims under a Mortgage Pool Insurance Policy because the Pool Insurer is
only required to remit unpaid interest through the date a claim is paid rather
than through the end of the month in which such claim is paid. In addition, the
Certificateholders will also experience losses with respect to the related
Certificates in connection with payments made under a Mortgage Pool Insurance
Policy to the extent that the Master Servicer expends funds to cover unpaid real
estate taxes or to repair the related Mortgaged Property in order to make a
claim under a Mortgage Pool Insurance Policy, as those amounts will not be
covered by payments under such policy and will be reimbursable to the Master
Servicer from funds otherwise payable to the Certificateholders. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and proceeds,
if any (see "Special Hazard Insurance Policies" below for risks which are not
covered by such policies), from the related hazard insurance policy or
applicable Special Hazard Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (x) that such restoration will
increase the proceeds to one or more classes of Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (y) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds.
Unless otherwise specified in the related Prospectus Supplement, a
Mortgage Pool Insurance Policy (and certain Primary Insurance Policies) will
likely not insure against loss sustained by reason of a default arising from,
among other things, (i) fraud or negligence in the origination or servicing of a
Mortgage Loan, including misrepresentation by the Mortgagor, the Seller or other
persons involved in the origination thereof, or (ii) failure to construct a
Mortgaged Property in accordance with plans and specifications. Depending upon
the nature of the event, a breach of representation made by a Seller may also
have occurred. Such a breach, if it materially and adversely affects the
interests of Certificateholders and cannot be cured, would give rise to a
purchase obligation on the part of the Seller, as more fully described under
"The Mortgage Pools--Representations by Sellers." However, such an event would
not give rise to a breach of a representation and warranty or a purchase
obligation on the part of the Company or Master Servicer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related series of Certificates by
the aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid includes certain expenses incurred by the Master Servicer,
Special Servicer or Subservicer as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Mortgage Pool Insurance Policy reach the original
policy limit, coverage under that Mortgage Pool Insurance Policy will be
exhausted and any further losses will be borne by holders of the related series
of Certificates. In addition, unless the Master Servicer could determine that an
advance in respect of a delinquent Mortgage Loan would be recoverable to it from
the proceeds of the liquidation of such Mortgage Loan or otherwise, the Master
Servicer would not be obligated to make an advance respecting any such
delinquency since the advance would not be ultimately recoverable to it from
either the Mortgage Pool Insurance Policy or from any other related source. See
"Description of the Certificates--Advances."
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Since each Mortgage Pool Insurance Policy will require that the
property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy will not
provide coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the Mortgage Loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are significantly less than full replacement cost of such
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of any such coverage
will be limited. See "Special Hazard Insurance Policies" below. As a result,
certain hazard risks will not be insured against and will therefore be borne by
the related Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Certificates 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 ("Special Hazard Losses"). See
"Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder." However, a
Special Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, chemical
contamination, waste by the Mortgagor and certain other risks. Aggregate claims
under a Special Hazard Insurance Policy will be limited to the amount set forth
in the related Prospectus Supplement and will be subject to reduction as
described in such related Prospectus Supplement. A Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, 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 Master Servicer,
Special Servicer or the Subservicer, 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 Master Servicer, Special
Servicer or Subservicer 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. No claim may be validly presented
under the Special Hazard Insurance Policy unless hazard insurance on the
property securing a defaulted Mortgage Loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance by the Special Hazard Insurer). If the
unpaid principal balance plus accrued interest and certain expenses is paid by
the insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. Restoration of the property with the
proceeds described under (i) above will satisfy the condition under each
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render presentation of a claim in respect of such Mortgage
Loan under the related Mortgage Pool Insurance Policy unnecessary. Therefore, so
long as a Mortgage Pool Insurance Policy remains in effect, the payment by the
insurer under a Special Hazard Insurance Policy of the cost of repair or of the
unpaid principal balance of the related Mortgage Loan plus accrued interest and
certain expenses will not affect the total Insurance Proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related Special Hazard Insurance Policy and Mortgage Pool Insurance
Policy.
As and to the extent set forth in the applicable Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Certificates may be
provided, in whole or in part, by a type of Special Hazard
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Instrument other than a Special Hazard Insurance Policy or by means of the
special hazard representation of the Company.
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 could then 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 (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as Bankruptcy Losses). See
"Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to provide
coverage for Bankruptcy Losses for proceedings under the federal Bankruptcy Code
obtained by the Company for a Trust Fund will be issued by an insurer named in
the applicable Prospectus Supplement. The level of coverage under each
Bankruptcy Bond will be set forth in the applicable Prospectus Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company 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, or any other instrument satisfactory
to the relevant Rating Agency or Agencies, which will be applied and maintained
in the manner and under the conditions specified in such Prospectus Supplement.
In the alternative 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 Certificates, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Certificates, Spread or other cash flows attributable to the related
Mortgage Loans or on reinvestment income, the Reserve Fund may provide less
coverage than initially expected if the cash flows or reinvestment income on
which such funding is dependent are lower than anticipated. In addition, with
respect to any series of Certificates 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 Certificateholders, or applied to reimburse the Master 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 Fund. If set forth in the related
Prospectus Supplement, a Reserve Fund may provide coverage to more than one
series of Certificates.
In connection with the establishment of any Reserve Fund, unless
otherwise specified in the related Prospectus Supplement, the Reserve Fund will
be structured so that the Trustee will have a perfected security interest for
the benefit of the Certificateholders in the assets in the Reserve Fund.
However, to the extent that the Company, any affiliate thereof or any other
entity has an interest in any Reserve Fund, in the event of the bankruptcy,
receivership or insolvency of such entity, there could be delays in withdrawals
from the Reserve Fund and corresponding payments to the Certificateholders which
could adversely affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not
expressly provide for alternative credit enhancement arrangements in lieu of
some or all of the arrangements mentioned below, the following paragraphs shall
apply.
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If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Certificates, the Master Servicer will be obligated to
exercise reasonable efforts to keep or cause to be kept such Letter of Credit
(or an alternate form of credit support) in full force and effect throughout the
term of the applicable Pooling 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." Unless otherwise specified in the applicable Prospectus
Supplement, if a Letter of Credit obtained for a series of Certificates is
scheduled to expire prior to the date the final distribution on such
Certificates is made and coverage under such Letter of Credit has not been
exhausted and no substitution has occurred, the Trustee will draw the amount
available under the Letter of Credit and maintain such amount in trust for such
Certificateholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Certificates, the Master Servicer will be obligated to exercise reasonable
efforts to keep such Mortgage Pool Insurance Policy (or an alternate form of
credit support) in full force and effect throughout the term of the applicable
Pooling Agreement, unless coverage thereunder has been exhausted through payment
of claims or until such Mortgage Pool Insurance Policy is replaced in accordance
with the terms of the applicable Pooling Agreement. Unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will agree to pay the
premiums for each Mortgage Pool Insurance Policy on a timely basis. In the event
the Pool Insurer ceases to be a Qualified Insurer (such term being defined to
mean a private mortgage guaranty insurance company duly qualified as such under
the laws of the state of its incorporation and each state having jurisdiction
over the insurer in connection with the Mortgage Pool Insurance Policy and
approved as an insurer by FHLMC, FNMA or any successor entity) because it ceases
to be qualified under any such law to transact such insurance business or
coverage is terminated for any reason other than exhaustion of such coverage,
the Master Servicer will use reasonable efforts to obtain from another Qualified
Insurer a replacement insurance policy comparable to the Mortgage Pool Insurance
Policy with a total coverage equal to the then outstanding coverage of such
Mortgage Pool Insurance Policy, provided that, if the cost of the replacement
policy is greater than the cost of such Mortgage Pool Insurance Policy, the
coverage of the replacement policy will, unless otherwise agreed to by the
Company, be reduced to a level such that its premium rate does not exceed the
premium rate on such Mortgage Pool Insurance Policy. In the event that the Pool
Insurer ceases to be a Qualified Insurer because it ceases to be approved as an
insurer by FHLMC, FNMA or any successor entity, the Master Servicer will be
obligated to review, not less often than monthly, the financial condition of the
Pool Insurer with a view toward determining whether recoveries under the
Mortgage Pool Insurance Policy are jeopardized for reasons related to the
financial condition of the Pool Insurer. If the Master Servicer determines that
recoveries are so jeopardized, it will be obligated to exercise its best
reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy as described above, subject to the same cost limit. Any losses
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the related Certificateholders.
In lieu of the Master Servicer's obligation to maintain a Letter of
Credit, Mortgage Pool Insurance Policy or other form of credit enhancement as
provided above, the Master Servicer may obtain a substitute Letter of Credit,
Mortgage Pool Insurance Policy or an alternate form of credit enhancement. If
the Master Servicer obtains such a substitute Letter of Credit, Mortgage Pool
Insurance Policy or other form of credit enhancement, it will maintain and keep
such Letter of Credit, Mortgage Pool Insurance Policy or alternate form of
credit enhancement in full force and effect as provided herein. Prior to its
obtaining any substitute Letter of Credit, Mortgage Pool Insurance Policy or
alternate form of credit enhancement, the Master Servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Certificates that the substitution of such Mortgage Pool Insurance Policy,
Letter of Credit, or alternate form of credit enhancement for the existing
credit enhancement will not adversely affect the then-current ratings assigned
to such Certificates by such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Certificates, the Master Servicer will also be obligated to exercise reasonable
efforts to maintain and keep such Special Hazard Instrument in full force and
effect throughout the term of the applicable Pooling 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." If the Special Hazard Instrument takes the
form of a Special Hazard Insurance Policy, such policy will provide coverage
against risks of the type described herein under "Description of Credit
Enhancement--Special Hazard Insurance Policies." The Master Servicer may obtain
a substitute Special Hazard Instrument for the existing Special Hazard
Instrument if prior to such substitution the Master Servicer obtains written
confirmation from the Rating Agency or Agencies that rated the related
Certificates that such substitution shall not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies.
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If a Bankruptcy Bond has been obtained for a series of Certificates,
the Master Servicer will be obligated to exercise reasonable efforts to maintain
and keep such Bankruptcy Bond in full force and effect throughout the term of
the Pooling Agreement, unless coverage thereunder has been exhausted through
payment of claims or substitution therefor is made as described below under
"--Reduction or Substitution of Credit Enhancement." The Master Servicer may
obtain a substitute Bankruptcy Bond or other credit enhancement for the existing
Bankruptcy Bond if prior to such substitution the Master Servicer obtains
written confirmation from the Rating Agency or Agencies that rated the related
Certificates that such substitution shall not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies. See
"--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and
Certificateholders, will provide the Trustee information required for the
Trustee to draw under the Letter of Credit and will present claims to the
provider of any Purchase Obligation, 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, in respect of defaulted Mortgage Loans for
which there is no Subservicer, to each Primary Insurer and take such reasonable
steps as are necessary to permit recovery under such Letter of Credit, Purchase
Obligation, insurance policies or comparable coverage respecting defaulted
Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by the
provider of the Purchase Obligation of its Purchase Obligation. As set forth
above, all collections by the Master Servicer under any Purchase Obligation, any
Mortgage Pool Insurance Policy, any Primary Insurance Policy or any Bankruptcy
Bond and, where the related property has not been restored, any Special Hazard
Instrument, are to be deposited in the related Certificate Account, subject to
withdrawal as described above. All draws under any Letter of Credit are also to
be deposited in the related Certificate Account. In those cases in which a
Mortgage Loan is serviced by a Subservicer, the Subservicer, on behalf of
itself, the Trustee and the Certificateholders will present claims to the
Primary Insurer, and all collections thereunder shall initially be deposited in
a subservicing account that generally meets the requirements for the Certificate
Account prior to being delivered to the Master Servicer for deposit in the
related Certificate 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 Letter of Credit, Mortgage
Pool Insurance Policy or any related Primary Insurance Policy, the Master
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 Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it through Liquidation Proceeds or Insurance
Proceeds. If recovery under any Letter of Credit, Mortgage Pool Insurance
Policy, other credit enhancement or any related Primary Insurance Policy is not
available because the Master Servicer has been unable to make the above
determinations, has made such determinations incorrectly or recovery is not
available for any other reason, the Master 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 Prospectus Supplement, the amount of
credit support provided pursuant to any form of credit enhancements (including,
without limitation, a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, Bankruptcy Bond, Letter of Credit, Reserve Fund, Purchase Obligation, or
any alternative form of credit enhancement) may be reduced under certain
specified circumstances. In most cases, the amount available pursuant to any
form of 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 Agreement. Additionally, in most cases, such form of credit
support (and any replacements therefor) may be replaced, reduced or terminated,
and the formula used in calculating the amount of coverage with respect to
Bankruptcy Losses, Special Hazard Losses or Fraud Losses may be changed, without
the consent of the Certificateholders, upon the written assurance from each
applicable Rating Agency that the then-current rating of the related series of
Certificates 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(s) of the related series of Certificates may be
downgraded to
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a corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will not be obligated to obtain replacement
credit support in order to restore the rating(s) of the related series of
Certificates. The Master Servicer will also be permitted to replace such credit
support with other credit enhancement instruments issued by obligors whose
credit ratings are equivalent to such downgraded level and in lower amounts
which would satisfy such downgraded level, provided that the then-current
rating(s) of the related series of Certificates are 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 Company, the Master Servicer or such other person that
is entitled thereto. Any assets so released will not be available for
distributions in future periods.
PURCHASE OBLIGATIONS
With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that would
become applicable on a specified date or upon the occurrence of a specified
event. For example, with respect to certain types of ARM Loans as to which the
Mortgage Rate is fixed for the first five years, a Purchase Obligation may apply
on the first date that the Mortgage Rate of such Mortgage Loan is adjusted, and
such obligation may apply to the Mortgage Loans or to the related Certificates
themselves, or to a corresponding Purchase Obligation of the Company or another
person as specified in the related Prospectus Supplement. With respect to any
Purchase Obligation, such obligation will be an obligation of an entity (which
may include a bank or other financial institution or an insurance company)
specified in the related Prospectus Supplement, and an instrument evidencing
such obligation (a "Purchase Obligation") shall be delivered to the related
Trustee for the benefit of the Certificateholders to the related series.
The specific terms and conditions applicable to any Purchase Obligation
will be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Trustee for the benefit of
the Certificateholders of the related series and will be nontransferable. Unless
otherwise provided in the related Prospectus Supplement, each Purchase
Obligation will be a general unsecured obligation of the provider thereof, and
prospective purchasers of Offered Certificates must look solely to the credit of
such entity for payment under the Purchase Obligation.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Insurance Policy. 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 upon request.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i)
each Single Family Loan having a Loan-to-Value Ratio at origination of over 80%
is required by the Company to be covered by a primary mortgage guaranty
insurance policy (a "Primary Insurance Policy") insuring against default on such
Mortgage Loan as to at least the principal amount thereof exceeding 75% of the
Value of the related Mortgaged Property at origination of the Mortgage Loan,
unless and until the principal balance of the Mortgage Loan is reduced to a
level that would produce a Loan-to-Value Ratio equal to or less than at least
80%, and (ii) the Company will represent and warrant that, to the best of the
Company's knowledge, such Mortgage Loans are so covered. However, the foregoing
standard may vary significantly depending on the characteristics of the Mortgage
Loans and the applicable
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underwriting standards. A Mortgage Loan will not be considered to be an
exception to the foregoing standard if no Primary Insurance Policy was obtained
at origination but the Mortgage Loan has amortized to below an 80% Loan-to-Value
Ratio level as of the applicable Cut-off Date. Mortgage Loans which are subject
to negative amortization will only be covered by a Primary Insurance Policy if
such coverage was so required upon their origination, notwithstanding that
subsequent negative amortization may cause such Mortgage Loan's Loan-to-Value
Ratio (based on the then-current balance) to subsequently exceed the limits
which would have required such coverage upon their origination. Multifamily
Loans will not be covered by a Primary Insurance Policy, regardless of the
related Loan-to-Value Ratio.
While the terms and conditions of the Primary Insurance Policies issued
by one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and possession
of, the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
For any Certificates offered hereunder, the Master Servicer will
maintain or cause each Subservicer to maintain, as the case may be, in full
force and effect and to the extent coverage is available a Primary Insurance
Policy with regard to each Single Family Loan for which such coverage is
required under the standard described above, provided that such Primary
Insurance Policy was in place as of the Cut-off Date and the Company had
knowledge of such Primary Insurance Policy. In the event that the Company gains
knowledge that as of the Closing Date, a Mortgage Loan had a Loan-to-Value Ratio
at origination in excess of 80% and was not the subject of a Primary Insurance
Policy (and was not included in any exception to such standard disclosed in the
related Prospectus Supplement) and that such Mortgage Loan has a then current
Loan-to-Value Ratio in excess of 80%, then the Master Servicer is required to
use reasonable efforts to obtain and maintain a Primary Insurance Policy to the
extent that such a policy is obtainable at a reasonable price. The Master
Servicer or, in the case of a Designated Seller Transaction, the Seller will not
cancel or refuse to renew any such Primary Insurance Policy in effect at the
time of the initial issuance of a series of Certificates that is required to be
kept in force under the applicable Pooling Agreement unless the replacement
Primary Insurance Policy for such cancelled or non-renewed policy is maintained
with an insurer whose claims-paying ability is acceptable to the Rating Agency
or Agencies that rated such series of Certificates for mortgage pass-through
certificates having a rating equal to or better than the highest then-current
rating of any class of such series of Certificates. For further information
regarding the extent of coverage under any Mortgage Pool Insurance Policy or
Primary Insurance Policy, see "Description of Credit Enhancement--Mortgage Pool
Insurance Policies."
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HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for their Mortgage Loan. Additionally, the Pooling
Agreement will require the Master Servicer to cause to be maintained for each
Mortgage Loan a hazard insurance policy providing for no less than the coverage
of the standard form of fire insurance policy with extended coverage customary
in the state in which the property is located. Unless otherwise specified in the
related Prospectus Supplement, such coverage generally will be in an amount
equal to the lesser of the principal balance owing on such Mortgage Loan or 100%
of the insurable value of the improvements securing the Mortgage Loan except
that, if generally available, such coverage must not be less than the minimum
amount required under the terms thereof to fully compensate for any damage or
loss on a replacement cost basis. The ability of the Master Servicer to ensure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to the Master Servicer by Mortgagors or
Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Certificate Account. The Pooling Agreement will provide that the Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the Mortgage Loans. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the applicable Certificate Account all sums which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. Where
the improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling
Agreement requires the Master Servicer to cause to be maintained for each such
Mortgage Loan serviced, flood insurance (to the extent available) in an amount
equal in general to the lesser of the amount required to compensate for any loss
or damage on a replacement cost basis or the maximum insurance available under
the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
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Under the terms of the Mortgage Loans, Mortgagors are generally
required to present claims to insurers under hazard insurance policies
maintained on the Mortgaged Properties. The Master Servicer, on behalf of the
Trustee and Certificateholders, is obligated to present claims under any Special
Hazard Insurance Policy or other Special Hazard Instrument and any blanket
insurance policy insuring against hazard losses on the Mortgaged Properties.
However, the ability of the Master Servicer to present such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are
reasonably necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a wholly-owned subsidiary of ICII. The Company was
incorporated in the State of California on April 12, 1995. The Company was
organized for the purpose of serving as a private secondary mortgage market
conduit. The Company does not have, nor is it expected in the future to have,
any significant assets.
The Company maintains its principal office at One Centerpointe Drive,
Suite 500, Lake Oswego, Oregon 97035. Its telephone number is (503) 684-4700.
IMPERIAL CREDIT INDUSTRIES, INC.
Imperial Credit Industries, Inc. ("ICII") is the parent of the
Company and may from time to time be a Seller or act as Master Servicer with
respect to a Mortgage Pool. ICII, a California corporation, is a publicly traded
mortgage banking company that originates or acquires conventional and FHA one-
to four-family residential mortgage loans nationwide. ICII primarily originates
or acquires mortgage loans from approved mortgage brokers through either its
wholesale, correspondent or conduit divisions. ICII is a HUD approved lender, as
well as an
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approved seller/servicer for FNMA and FHLMC. ICII maintains loan origination
offices in California, Florida, Washington, Oregon, New Jersey, Delaware, North
Carolina and Colorado.
ICII also engages in mortgage loan servicing which includes
the processing and administration of mortgage loan payments in return for a
servicing fee. At September 30, 1995, ICII serviced one- to four-family
residential mortgage loans with an outstanding principal balance of
approximately $5 billion. ICII's servicing portfolio includes mortgage loans
held for sale and mortgage loans held for investment which were originated or
acquired by ICII's mortgage banking operations.
At September 30, 1995, ICII had approximately 378 employees
and 20 wholesale and retail branches, a correspondent and conduit division
called ICI Funding which is a wholesale production division. ICII's executive
offices are located at 20371 Irvine Avenue, Suite 200, Santa Ana Heights,
California 92707, and its telephone number is (714) 556-0122.
THE POOLING AGREEMENT
GENERAL
The Certificates of each series will be issued pursuant to a pooling
and servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to a
Pooling Agreement will include the Company, the Trustee, the Master Servicer
and, in some cases, a Special Servicer. However, a Pooling Agreement that
relates to a Trust Fund that includes Mortgage Securities may include a party
solely responsible for the administration of such Mortgage Securities, and a
Pooling Agreement that relates to a Trust Fund that consists solely of Mortgage
Securities may not include a Master Servicer, Special Servicer or other servicer
as a party. All parties to each Pooling Agreement under which Certificates of a
series are issued will be identified in the related Prospectus Supplement.
Forms of Pooling Agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement. The Prospectus Supplement for a series of Certificates will describe
any provision of the related Pooling Agreement that materially differs from the
description thereof set forth below. The summaries herein 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 Agreement for each series of
Certificates and the description of such provisions in the related Prospectus
Supplement. As used herein with respect to any series, the term "Certificate"
refers to all of the Certificates of that series, whether or not offered hereby
and by the related Prospectus Supplement, unless the context otherwise requires.
The Company will provide a copy of the Pooling Agreement (without exhibits) that
relates to any series of Certificates without charge upon written request of a
holder of a Certificate of such series addressed to it at its principal
executive offices specified herein under "The Company".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement for each series of Certificates will provide that
the Master Servicer may not resign from its obligations and duties thereunder
except upon a determination that performance of such duties is no longer
permissible under applicable law or except (a) in connection with a permitted
transfer of servicing or (b) upon appointment of a successor servicer reasonably
acceptable to the Trustee and upon receipt by the Trustee of a letter from each
Rating Agency generally to the effect that such resignation and appointment will
not, in and of itself, result in a downgrading of the Certificates. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Pooling
Agreement.
Each Pooling Agreement will also provide that, except as set forth
below, neither the Master Servicer, the Company, nor any director, officer,
employee or agent of the Master Servicer or the Company will be under any
liability to the Trust Fund or the Certificateholders for any action taken or
for refraining from the taking of any action in good faith pursuant to the
Pooling Agreement, or for errors in judgment; provided, however, that neither
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the Master Servicer, the Company, nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. Each Pooling Agreement
will further provide that the Master Servicer, the Company, and any director,
officer, employee or agent of the Master Servicer or the Company is entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the related series of Certificates, other than any
loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Pooling Agreement) and any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Pooling Agreement will
provide that neither the Master Servicer nor the Company will be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the Pooling Agreement and
which in its opinion may involve it in any expense or liability. The Master
Servicer or the Company may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Pooling
Agreement and the rights and duties of the parties thereto and the interests of
the Certificateholders thereunder. In such event, the legal expenses and costs
of such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Master Servicer or the Company, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to Certificateholders.
Any person into which the Master Servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
Master Servicer is a party or any person succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the Pooling
Agreement, provided that (i) such person is qualified to service mortgage loans
on behalf of FNMA or FHLMC and (ii) such merger, consolidation or succession
does not adversely affect the then-current ratings of the classes of
Certificates of the related series that have been rated. In addition,
notwithstanding the prohibition on its resignation, the Master Servicer may
assign its rights under a Pooling Agreement to any person to whom the Master
Servicer is transferring a substantial portion of its mortgage servicing
portfolio, provided clauses (i) and (ii) above are satisfied and such person is
reasonably satisfactory to the Company and the Trustee. In the case of any such
assignment, the Master Servicer will be released from its obligations under such
Pooling Agreement, exclusive of liabilities and obligations incurred by it prior
to the time of such assignment.
EVENTS OF DEFAULT
Events of Default under the Pooling Agreement in respect of a series of
Certificates, unless otherwise specified in the Prospectus Supplement, will
include, without limitation, (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is so
required, to distribute to the holders of any class of Certificates of such
series any required payment which continues unremedied for 5 days after the
giving of written notice of such failure to the Master Servicer by the Trustee
or the Company, or to the Master Servicer, the Company and the Trustee by the
holders of Certificates evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related Trust Fund; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Pooling Agreement with
respect to such series of Certificates which continues unremedied for 30 days
(15 days in the case of a failure to pay the premium for any insurance policy
which is required to be maintained under the Pooling Agreement) after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Company, or to the Master Servicer, the Company and the Trustee by the holders
of Certificates evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related Trust Fund; and
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations. A default pursuant to the terms of any Mortgage Securities included
in any Trust Fund will not constitute an Event of Default under the related
Pooling Agreement.
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RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Company
or the Trustee may, and at the direction of the holders of Certificates
evidencing not less than 51% of the aggregate undivided interests (or, if
applicable, voting rights) in the related Trust Fund the Trustee shall, by
written notification to the Master Servicer and to the Company or the Trustee,
as applicable, terminate all of the rights and obligations of the Master
Servicer under the Pooling Agreement (other than any rights of the Master
Servicer as Certificateholder) covering such Trust Fund and in and to the
Mortgage Loans and the proceeds thereof, whereupon the Trustee or, upon notice
to the Company and with the Company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling 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
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of, a FNMA- or FHLMCapproved mortgage servicing institution with
a net worth of at least $10,000,000 to act as successor to the Master Servicer
under the Pooling Agreement (unless otherwise set forth in the Pooling
Agreement). Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Master Servicer under the Pooling Agreement.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting rights)
in the related Trust Fund have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 60 days after receipt of
such request and indemnity has neglected or refused to institute any such
proceeding. However, the Trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the Pooling Agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of Certificates covered by
such Pooling Agreement, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
The holders of Certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
Certificates affected by a default or Event of Default may waive such default or
Event of Default (other than a failure by the Master Servicer to make an
advance); provided, however, that (a) a default or Event of Default under clause
(i) under "--Events of Default" above may be waived only by all of the holders
of Certificates affected by such default or Event of Default and (b) no waiver
shall reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed to, or otherwise
materially adversely affect, any non-consenting Certificateholder.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without
the consent of any of the holders of Certificates covered by such Pooling
Agreement, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein which may be inconsistent with any other provision therein or
to correct any error, (iii) to change the timing and/or nature of deposits in
the Certificate Account, provided that (A) such change would not adversely
affect in any material respect the interests of any Certificateholder, as
evidenced by an opinion of counsel, and (B) such change would not adversely
affect the then-current rating of any rated classes of Certificates, as
evidenced by a letter from each applicable Rating Agency, (iv) if a REMIC
election has been made with respect to the related Trust Fund, to modify,
eliminate or add to any of its provisions (A) to such extent as shall be
necessary to maintain the qualification of the Trust Fund as a REMIC or to avoid
or minimize the risk of imposition of any tax on the related Trust Fund,
provided that the Trustee has received an opinion of counsel to the effect that
(1) such action is necessary or desirable to maintain such qualification or to
avoid or minimize such risk, and (2) such action will not adversely affect in
any material respect the interests of any holder of Certificates covered by the
Pooling Agreement, or (B) to restrict the transfer of the REMIC Residual
Certificates, provided that the Company has determined that the then-current
ratings of the classes of the Certificates that have been rated will not be
adversely affected, as evidenced by a letter from each applicable Rating Agency,
and that any such amendment will not give
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rise to any tax with respect to the transfer of the REMIC Residual Certificates
to a non-Permitted Transferee, (v) to make any other provisions with respect to
matters or questions arising under such Pooling Agreement which are not
materially inconsistent with the provisions thereof, provided that such action
will not adversely affect in any material respect the interests of any
Certificateholder, or (vi) to amend specified provisions that are not material
to holders of any class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with
the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 662/3% 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
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a Certificate
of any class without the consent of the holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates of any class the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Pooling Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Company, the Trustee or any other specified
person in accordance with such amendment will not result in the imposition of a
tax on the related Trust Fund or cause such Trust Fund to fail to qualify as a
REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling Agreement for each series of
Certificates (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Certificateholders of that series of all amounts held in the Certificate Account
or by the Master Servicer and required to be paid to them pursuant to such
Pooling Agreement following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Mortgage Loan, REO Property and/or Mortgage Security subject thereto and (ii)
the purchase by the Master Servicer or the Company or, if specified in the
related Prospectus Supplement, by the holder of the REMIC Residual Certificates
(see "Certain Federal Income Tax Consequences" below) from the Trust Fund for
such series of all remaining Mortgage Loans, REO Properties and/or Mortgage
Securities. In addition to the foregoing, the Master Servicer or the Company
will have the option to purchase, in whole but not in part, the Certificates
specified in the related Prospectus Supplement in the manner set forth in the
related Prospectus Supplement. Upon the purchase of such Certificates or at any
time thereafter, at the option of the Master Servicer or the Company, the assets
of the Trust Fund may be sold, thereby effecting a retirement of the
Certificates and the termination of the Trust Fund, or the Certificates so
purchased may be held or resold by the Master Servicer or the Company. In no
event, however, will the trust created by the Pooling Agreement continue beyond
the expiration of 21 years from the death of the survivor of certain persons
named in such Pooling Agreement. Written notice of termination of the Pooling
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in the notice
of termination. If the Certificateholders are permitted to terminate the trust
under the applicable Pooling Agreement, a penalty may be imposed upon the
Certificateholders based upon the fee that would be foregone by the Master
Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of the Master Servicer, the Company
or, if applicable, such holder to so purchase is subject to the aggregate
principal balance of the Mortgage Loans and/or Mortgage Securities in the Trust
Fund for that series as of the Distribution Date on which the purchase proceeds
are to be distributed to Certificateholders being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of such Mortgage Loans and/or Mortgage Securities at the Cut-off Date
for that series. The Prospectus Supplement for each series of Certificates will
set forth the amounts that the holders of such Certificates will be entitled to
receive upon such early retirement. Such early termination may
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adversely affect the yield to holders of certain classes of such Certificates.
If a REMIC election has been made, the termination of the related Trust Fund
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 Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Company and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation
as to the validity or sufficiency of the related Pooling Agreement, the
Certificates or any underlying Mortgage Loan, Mortgage Security or related
document and will not be accountable for the use or application by or on behalf
of any Master Servicer or Special Servicer of any funds paid to the Master
Servicer or Special Servicer in respect of the Certificates or the underlying
Mortgage Loans or Mortgage Securities, or any funds deposited into or withdrawn
from the Certificate Account for such series or any other account by or on
behalf of the Master Servicer or Special Servicer. If no Event of Default has
occurred and is continuing, the Trustee for each series of Certificates will be
required to perform only those duties specifically required under the related
Pooling Agreement. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it pursuant to the
related Pooling Agreement, a Trustee will be required to examine such documents
and to determine whether they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement,
the fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be borne
by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate undivided interests
(or, if applicable, voting rights) in the related Trust Fund. 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.
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YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the
price paid by the holder for such Certificate, the Pass-Through Rate on any such
Certificate entitled to payments of interest (which Pass-Through Rate may vary
if so specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if applicable)
and other factors.
A class of Certificates may be entitled to payments of interest at a
fixed Pass-Through Rate, a variable Pass-Through Rate or adjustable Pass-Through
Rate, or any combination of such Pass-Through Rates, each as specified in the
related Prospectus Supplement. A variable Pass-Through Rate may be calculated
based on the weighted average of the Mortgage Rates (in each case, net of the
per annum rate or rates applicable to the calculation of servicing and
administrative fees and any Spread (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the month preceding the Distribution Date if so specified in
the related Prospectus Supplement. As will be described in the related
Prospectus Supplement, the aggregate payments of interest on a class of
Certificates, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Certificates (or the rate of reduction in the
notional balance of Certificates entitled only to payments of interest) and, in
the case of Certificates 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 Certificates will also be affected by
liquidations of Mortgage Loans following Mortgagor defaults and by purchases of
Mortgage Loans in the event of breaches of representations made in respect of
such Mortgage Loans by the Company, the Master Servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage
Pools--Representations by Sellers" and "Descriptions of the
Certificates--Assignment of Trust Fund Assets" above. Holders of certain Strip
Certificates or a class of Certificates having a 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
Certificates, as applicable.
With respect to any series of Certificates, a period of time will
elapse between the date upon which payments on the related Mortgage Loans are
due and the Distribution Date on which such payments are passed through to
Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on or near the date they were due.
In general, if a class of Certificates 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.
Conversely, if a class of Certificates 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 Certificates 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 and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely 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
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with or at a multiple of an index or certain
other classes in a series including more than one class of Certificates, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Certificates.
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 Certificates
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
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When a principal prepayment in full is made on a Mortgage Loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Certificates and distributable thereon on any
Distribution Date will generally correspond to interest accrued on the principal
balance of Mortgage Loans for their respective full accrual periods.
Consequently, if a prepayment on any Mortgage Loan is distributable to
Certificateholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
Spread) may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such shortfall
is allocated to a class of Offered Certificates, the yield thereon will be
adversely affected. The Prospectus Supplement for a series of Certificates will
describe the manner in which any such shortfalls will be allocated among the
classes of such Certificates. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to apply some or all of its
servicing compensation for the corresponding period to offset the amount of any
such shortfalls. The related Prospectus Supplement will also describe any other
amounts available to offset such shortfalls. See Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses; Spread".
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. However, there is a risk that
Mortgage Loans, including Multifamily Loans, that require Balloon Payments may
default at maturity, or that the maturity of such a Mortgage Loan may be
extended in connection with a workout. The rate of default on Single Family
Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans, including Multifamily Loans, with high Loan-to-Value Ratios, may
be higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including 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
applicable underwriting standards, the Mortgagor under each Mortgage Loan
generally will be qualified, or the Mortgage Loan otherwise approved, 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. In
addition, the periodic increase in the amount paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under applicable underwriting guidelines, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally 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 which 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 of any related class or classes of
Certificates will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof, depending upon the price at which such
Certificates were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Certificates,
the
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weighted average life of such Certificates will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Certificates were purchased.
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 Certificates 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 life and yield of the related series of Certificates.
With respect to Balloon Loans, payment of the Balloon Payment (which,
based on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans 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,
none of the Company, the Master Servicer, or any of their affiliates will be
obligated to refinance or repurchase any Mortgage Loan or to sell the Mortgaged
Property.
The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located and, in the case of
Multifamily Loans, the quality of management of the Mortgage Properties, the
servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
Mortgage Loans may be affected by the existence of Lock-out Periods and
requirements that principal prepayments be accompanied by Prepayment Premiums,
as well as due-on-sale and due-on-encumbrance provisions, and by the extent to
which such provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures" and "Certain Legal Aspects of
the Mortgage Loans--Enforceability of Certain Provisions" for a description of
certain provisions of the Pooling Agreement and certain legal developments that
may affect the prepayment experience on the Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally 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 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 Certificates.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage
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loans such as the Mortgage Loans over an extended period of time. All statistics
known to the Company that have been compiled with respect to prepayment
experience on mortgage loans indicate that while some mortgage loans may remain
outstanding until their stated maturities, a substantial number will be paid
prior to their respective stated maturities. No representation is made as to the
particular factors that will affect the prepayment of the Mortgage Loans or as
to the relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the assets in a Trust Fund
and effect early retirement of the related series of Certificates. See "The
Pooling Agreement--Termination; Retirement of Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (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.
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS
GENERAL. Each Single Family and Multifamily Loan will be evidenced by a
note or bond and secured by an instrument granting a security interest in real
property, which may be a mortgage, deed of trust or a deed to secure debt,
depending upon the prevailing practice and law in the state in which the related
Mortgaged Property is located. Mortgages, deed of trust and deeds to secure debt
are herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties to
the mortgage and, generally, the order of recordation of the mortgage in the
appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later-arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS. There are two parties to a mortgage: a
mortgagor (the borrower and usually the owner of the subject property) and a
mortgagee (the lender). In contrast, a deed of trust is a three-party
instrument, among a trustor (the equivalent of a borrower), a trustee to whom
the real property is conveyed, and a beneficiary (the lender) for whose benefit
the conveyance is made. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust and generally with a power of sale,
to the trustee to secure repayment of the indebtedness evidenced by the related
note. A deed to secure debt typically has two parties. The borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal title
to the property is held by a land trustee under a land trust agreement for the
benefit of the borrower. At origination of a mortgage loan involving a land
trust, the borrower executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
(including, without limitation, the Relief Act) and, in some deed of trust
transactions, the directions of the beneficiary.
LEASES AND RENTS. Mortgages that encumber income-producing multifamily
properties often contain an assignment of rents and leases, pursuant to which
the borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
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CONTRACTS
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a security interest in a unit of manufactured housing, so long as it is
not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Pooling
Agreement to effect such notation or delivery of the required documents and
fees, and to obtain possession of the certificate of title, as appropriate under
the laws of the state in which any Manufactured Home is registered. In the event
the Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention by
the borrowers to move them, courts in many states have held that manufactured
homes may, under certain circumstances, become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state where
the home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home that is prior to
the security interest originally retained by the Seller and transferred to the
Company.
The Company will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Company, the Master Servicer nor the Trustee will amend the certificates of
title to identify the Trustee, on behalf of the Certificateholders, as the new
secured party and, accordingly, the Company or the Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Company's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest might not be held effective against creditors of the Company
or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Company
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Certificateholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and reregister
the Manufactured Home in such state, and if the Company did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Company must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Company would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Pooling Agreement, the Master Servicer will be
obligated to take such steps, at the Master Servicer's expense, as are necessary
to maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Company will obtain the representation of the related Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Certificateholders in the
event such a lien arises.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, in some states, the trustee must
record a notice of default and 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 newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. 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,
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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, subject to the terms of
the loan, the lender may be entitled to a deficiency judgment. Any loss may be
reduced by the receipt of any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family and
Multifamily Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its 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
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of 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 minimums. 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
protection to the borrower.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession
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methods are more commonly employed, and are accomplished simply by
retaking possession of the manufactured home. In cases in which the
debtor objects or raises a defense to repossession, a court order must
be obtained from the appropriate state court, and the manufactured home
must then be repossessed in accordance with that order. Whether the
method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual
physical removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and their
belongings from the manufactured home and maintaining possession of the
manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of the lease
of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in
the event that the home is already set up, because the expenses of
retaking and redelivery will be saved. However, in those cases where
the home is left on location, expenses for site rentals will usually be
incurred.
(ii) Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgement in those states that do
not prohibit or limit such judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall. Occasionally,
after resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
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RIGHTS OF REDEMPTION
SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. The purposes of a
foreclosure action in respect of a Single Family Property or Multifamily
Property are to enable the lender to realize upon its security and to bar the
borrower, and all persons who have interests in the property that are
subordinate to that of the foreclosing lender, from exercise of their "equity of
redemption". The doctrine of equity of redemption provides that, until the
property encumbered by a mortgage has been sold in accordance with a properly
conducted foreclosure and foreclosure sale, those having interests that are
subordinate to that of the foreclosing lender have an equity of redemption and
may redeem the property by paying the entire debt with interest. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from postsale statutory 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 are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. 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, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
MANUFACTURED HOMES. While state laws do not usually require notice to
be given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Certain states have imposed
statutory prohibitions which limit the remedies of a beneficiary under a deed of
trust or a mortgagee under a mortgage. In some states including California,
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 net amount realized upon the public sale of the real
property and the amount due to the lender. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. In the case
of a Mortgage Loan secured by a property owned by a trust where the Mortgage
Note is executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust, even if obtainable under
applicable law, may be of little value to the mortgagee or beneficiary if there
are no trust assets against which such deficiency judgment may be executed.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security; however
in some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
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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, under the federal Bankruptcy
Code, as amended from time to time (Title 11 of the United States Code) (the
"Bankruptcy Code"), virtually all actions (including foreclosure actions and
deficiency judgment proceedings) to collect a debt are automatically stayed upon
the filing of the bankruptcy petition and, often, no interest or principal
payments are made during the course of the bankruptcy case. The delay and the
consequences thereof caused by such automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in a bankruptcy by or on
behalf of a junior lienor may stay the senior lender from taking action to
foreclose out of such junior lien. Moreover, 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
arrearage 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 arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also 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 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. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
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
single family mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-inLending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes. These federal laws 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.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Certificateholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority to
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those of the holder of the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure on
Mortgages" above.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related Pooling Agreement, late charges will be retained by the Master
Servicer as additional servicing compensation, and any inability to collect
these amounts will not affect payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder. Most of the Contracts in a Trust Fund will be subject to the
requirements of the FTC Rule. Accordingly, the Trust Fund, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
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legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the Offered Certificates of the related
series might realize a loss if such costs were required to be paid by the Trust
Fund.
ENFORCEABILITY OF CERTAIN PROVISIONS
TRANSFER OF SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. Unless
the related Prospectus Supplement indicates otherwise, the Single Family Loans
and Multifamily Loans generally 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, 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 the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee on
the contract upon any such sale or transfer that is not consented to. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will, to the extent it has knowledge of such conveyance or proposed conveyance,
exercise or cause to be exercised its rights to accelerate the maturity of the
related Contracts through enforcement of due-on-sale clauses, subject to
applicable state law. In certain cases, the transfer may be made by a delinquent
obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages,
as well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In certain states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the
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enforceability of provisions that provide for prepayment fees or penalties upon
an involuntary prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller 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 adjustable rate mortgage
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
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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 alternative 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.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting such a claim, the related Certificateholders could
suffer a loss if (i) the related Seller fails or cannot be required to
repurchase the affected Contract for a breach of representation and warranty and
(ii) the Master Servicer or the Trustee were unsuccessful in asserting any claim
of contribution or subrogation on behalf of the Certificateholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
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
individuals 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 affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master 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 Certificates, and
would not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, by any Letter of Credit or any other form of credit
enhancement provided in connection with the related series of Certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan or enforce rights
under a Contract during the Mortgagor's period of active duty status, and, under
certain circumstances, during an additional three month period thereafter. Thus,
in the event that the Relief Act or similar legislation or regulations applies
to any Mortgage Loan which goes into default, there may be delays in payment and
losses on the related Certificates 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 Certificateholders of the related series.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee, the Master Servicer or another specified
party (the "REMIC Administrator") will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code and (ii) certificates ("Grantor Trust
Certificates") representing interests in a Trust Fund ("Grantor Trust Fund") as
to which no such election will be made. The Prospectus Supplement for each
series of Certificates will indicate whether a REMIC election (or elections)
will be made for the related Trust Fund and, if such an election is to be made,
will identify all "regular interests" and "residual interests" in the REMIC. For
purposes of this tax discussion, references to a "Certificateholder" or a
"holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS. Upon the issuance of each series of REMIC
Certificates, Thacher Proffitt & Wood, counsel to the Company, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the related Trust Fund (or each
applicable portion thereof) will qualify as a REMIC and the REMIC Certificates
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("REMIC Regular Certificates") or "residual interests"
("REMIC Residual Certificates") in that REMIC within the meaning of the REMIC
Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's
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income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. In general, the
REMIC Certificates will be "qualifying real property loans" within the meaning
of Section 593(d) of the Code, "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. Moreover, if 95% or more of the assets of the
REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar year. Interest (including original issue discount) on
the REMIC Regular Certificates and income allocated to the class of REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for regular or residual interests therein. The determination as to the
percentage of the REMIC's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The REMIC will report those
determinations to Certificateholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe the Mortgage Loans that may not be so treated. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Sections
593(d) and 856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES. For certain series of REMIC Certificates, two
or more separate elections may be made to treat designated portions of the
related Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes.
Upon the issuance of any such series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Company, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Certificates issued by the Tiered REMICs, respectively, will be considered
to evidence ownership of REMIC Regular Certificates or REMIC Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "qualifying real property loans" under Section 593(d) of the Code, "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance
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with the method described below, in advance of the receipt of the cash
attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers and
underwriters). If less than a substantial amount of a particular class of REMIC
Regular Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be the fair
market value of such class on the Closing Date. Under the OID Regulations, the
stated redemption price of a REMIC Regular Certificate is equal to the total of
all payments to be made on such Certificate other than "qualified stated
interest." "Qualified stated interest" includes interest that is unconditionally
payable at least annually at a single fixed rate, or at a "qualified floating
rate," an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns to the Certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid
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on the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in the stated redemption price. The
original issue discount accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the accrual period
to determine the daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such
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Certificate at the beginning of the accrual period which includes such day and
(ii) the daily portions of original issue discount for all days during such
accrual period prior to such day.
MARKET DISCOUNT. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue
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discount. Moreover, in any event a holder of a REMIC Regular Certificate
generally will be required to treat a portion of any gain on the sale or
exchange of such Certificate as ordinary income to the extent of the market
discount accrued to the date of disposition under one of the foregoing methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income
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or net loss of the REMIC will be allocated to each day in the calendar quarter
ratably using a "30 days per month/90 days per quarter/360 days per year"
convention unless otherwise disclosed in the related Prospectus Supplement. The
daily amounts so allocated will then be allocated among the REMIC Residual
Certificateholders in proportion to their respective ownership interests on such
day. Any amount included in the gross income or allowed as a loss of any REMIC
Residual Certificateholder by virtue of this paragraph will be treated as
ordinary income or loss. The taxable income of the REMIC will be determined
under the rules described below in "Taxable Income of the REMIC" and will be
taxable to the REMIC Residual Certificateholders without regard to the timing or
amount of cash distributions by the REMIC. Ordinary income derived from REMIC
Residual Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily share of
the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. Those daily amounts generally will equal the amounts
of taxable income or net loss determined as described above. The Committee
Report indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
REMIC Residual Certificateholder that purchased such REMIC Residual Certificate
from a prior holder of such Certificate at a price greater than (or less than)
the adjusted basis (as defined below) such REMIC Residual Certificate would have
had in the hands of an original holder of such Certificate. The REMIC
Regulations, however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal
the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold,
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the REMIC Administrator may be required to estimate the fair market value of
such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the
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REMIC Residual Certificateholder and decreased (but not below zero) by
distributions made, and by net losses allocated, to such REMIC Residual
Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS. Although it
has not done so, the Treasury income accruing on a REMIC Residual Certificate as
an excess inclusion if the REMIC Residual Certificates are considered to have
"significant value."
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For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below. Furthermore, for purposes of the
alternative minimum tax, excess inclusions will not be permitted to be offset by
the alternative tax net operating loss deduction and alternative minimum taxable
income may not be less than the taxpayer's excess inclusions. The latter rule
has the effect of preventing nonrefundable tax credits from reducing the
taxpayer's income tax to an amount lower than the tentative minimum tax on
excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling and Servicing Agreement that are intended to reduce
the possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. Prospective purchasers of a REMIC Residual
Certificate should be aware that on January 3, 1995, the IRS released proposed
regulations (the "Proposed Mark-to-Market Regulations") relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities owned by a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Proposed Mark-to-Market Regulations provide
that for purposes of this mark-
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to-market requirement, a REMIC Residual Certificate is not treated as a security
and thus may not be marked to market. The Proposed Mark-to-Market Regulations
apply to all REMIC Residual Certificates acquired on or after January 4, 1995.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent they exceed in the
aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Such prospective investors should carefully consult with their own tax
advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market discount
income) and reduced (but not below zero) by distributions on such REMIC Regular
Certificate received by such Certificateholder and by any amortized premium. The
adjusted basis of a REMIC Residual Certificate will be determined as described
under "--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net
Losses and Distributions." Except as provided in the following two paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
Prospectus provides for a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the "applicable
Federal rate" (generally, a rate based on an average of current yields on
Treasury securities having a maturity comparable to that of the Certificate
based on the application of the Prepayment Assumption to such Certificate, which
rate is computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as
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ordinary income in an amount not exceeding the portion of such discount that
accrued during the period such REMIC Certificate was held by such holder,
reduced by any market discount included in income under the rules described
above under "--Taxation of Owners of REMIC Regular Certificates--Market
Discount" and "--Premium."
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code
imposes a tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a 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.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
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Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (i) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate is
computed and published monthly by the IRS) of the total anticipated excess
inclusions with respect to such REMIC Residual Certificate for periods after the
transfer and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. 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 REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the
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last distribution on such REMIC Residual Certificate is less than the REMIC
Residual Certificateholder's adjusted basis in such Certificate, such REMIC
Residual Certificateholder should (but may not) be treated as realizing a loss
equal to the amount of such difference, and such loss may be treated as a
capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and under the terms of the related Agreement, will either (i) be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects or (ii)
will be designated as and will act as the "tax matters person" with respect to
the related REMIC in all respects and will hold at least a nominal amount of
REMIC Residual Certificates.
As the tax matters person or as agent for the tax matters person, the
REMIC Administrator, subject to certain notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the REMIC Residual Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC Residual
Certificateholders generally will be required to report such REMIC items
consistently with their treatment on the REMIC's tax return and may in some
circumstances be bound by a settlement agreement between the REMIC
Administrator, as either tax matters person or as agent for the tax matters
person, and the Service concerning any such REMIC item. Adjustments made to the
REMIC tax return may require a REMIC Residual Certificateholder to make
corresponding adjustments on its return, and an audit of the REMIC's tax return,
or the adjustments resulting from such an audit, could result in an audit of a
REMIC Residual Certificateholder's return. No REMIC will be registered as a tax
shelter pursuant to Section 6111 of the Code because it is not anticipated that
any REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish the REMIC, in a manner to be provided
in Treasury regulations, with the name and address of such person and other
information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the Service; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring such information to be reported to
the Service. Reporting with respect to the REMIC Residual Certificates,
including income, excess inclusions, investment expenses and relevant
information regarding qualification of the REMIC's assets will be made as
required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments 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
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recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a "United States person" (as defined below) and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not, unless otherwise disclosed in the related Prospectus
Supplement, be subject to United States federal income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that the
holder complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such Certificateholder). For
these purposes, "United States 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 whose income is subject to United States federal income tax regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that are not United States persons
will be prohibited under the related Pooling and Servicing Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of
Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the Company,
will deliver their opinion to the effect that assuming compliance with all
provisions of the related Pooling and Servicing Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership or an association taxable as a
corporation. Accordingly, each holder of a Grantor Trust Certificate generally
will be treated as the owner of an interest in the Mortgage Loans included in
the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement and subject to the discussion below with respect
to Buydown Mortgage Loans, counsel to the Company will deliver an opinion that,
in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "loans . . . secured by an interest in real property"
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within the meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s]
(including any participation or Certificate of beneficial ownership therein)
which . . .[are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3) of the Code; and (iii) "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code. In addition, counsel to the
Company will deliver an opinion that interest on Grantor Trust Fractional
Interest Certificates will to the same extent 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.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code and "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Company will not deliver any opinion on these questions. Prospective purchasers
to which such characterization of an investment in Grantor Trust Strip
Certificates is material should consult their tax advisors regarding whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized.
The Grantor Trust Strip Certificates will be "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.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the Mortgage Loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate 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. In addition, Section 68 of
the Code provides that the amount of itemized deductions otherwise allowable for
an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted gross
income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
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The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Company, the Master Servicer, any
subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would
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not have any significant effect on the yield used in calculating accruals of
interest income. In the case, however, of a Grantor Trust Fractional Interest
Certificate acquired at a discount or premium (that is, at a price less than or
greater than such principal amount, respectively), the use of a reasonable
prepayment assumption would increase or decrease such yield, and thus accelerate
or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate to
the extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal
the difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price
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of a Mortgage Loan will be the amount received by the borrower from the lender
under the terms of the Mortgage Loan, less any "points" paid by the borrower,
and the stated redemption price of a Mortgage Loan will equal its principal
amount, unless the Mortgage Loan provides for an initial below-market rate of
interest or the acceleration or the deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee in
preparing information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Loan. For this purpose, the
weighted average maturity of the Mortgage Loan will be computed as the sum of
the amounts determined, as to each payment included in the stated redemption
price of such Mortgage Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount of
the payment and the denominator of which is the stated redemption price of the
Mortgage Loan. Under the OID Regulations, original issue discount of only a de
minimis amount (other than de minimis original issue discount attributable to a
so-called "teaser" rate or initial interest holiday) will be included in income
as each payment of stated principal is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the numerator
of which is the amount of each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Loan. The OID Regulations
also permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of Grantor Trust Fractional Interest Certificates--Market Discount"
below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
In addition to its regular reports, the Trustee, unless otherwise
provided in the related Prospectus Supplement, will provide to any holder of a
Grantor Trust Fractional Interest Certificate such information as such holder
may reasonably request from time to time with respect to original issue discount
accruing on Grantor Trust Fractional Interest Certificates. See "Grantor Trust
Reporting" below.
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MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount," that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above, or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing.
If made, such election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would permit a Certificateholder to
elect to accrue all interest, discount (including de minimis market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election were made with respect to a Mortgage Loan with
market discount, the Certificateholder would be deemed to have made an election
to include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election for
a Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium" below.
Each of these elections to accrue interest, discount and premium with respect to
a Certificate on a constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be
considered to be de minimis if it is less than 0.25% of the stated redemption
price of the Mortgage Loans multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption used,
if any. The effect of using a prepayment assumption could be to accelerate the
reporting of such discount income. If market discount is treated as de minimis
under the foregoing rule, it appears that actual discount would be treated in a
manner similar to original issue discount of a de minimis amount. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply."
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Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," below, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
PREMIUM. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Mortgage Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Apply," no
regulations or published rulings under Section 1286 of the Code have been issued
and some uncertainty exists as to how it will be applied to securities such as
the Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust
Strip Certificates should consult their own tax advisors concerning the method
to be used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Proposed Contingent Payment Rules" and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Regulations could be
adopted applying those provisions to the Grantor Trust Strip
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Certificates. It is unclear whether those provisions would be applicable to the
Grantor Trust Strip Certificates or whether use of a prepayment assumption may
be required or permitted in the absence of such regulations. It is also
uncertain, if a prepayment assumption is used, whether the assumed prepayment
rate would be determined based on conditions at the time of the first sale of
the Grantor Trust Strip Certificate or, with respect to any subsequent holder,
at the time of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Company, the Master Servicer nor the Trustee
will make any representation that the Mortgage Loans will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Grantor Trust Strip Certificates would cease if the Mortgage
Loans were prepaid in full, the Grantor Trust Strip Certificates could be
considered to be debt instruments providing for contingent payments. Under the
OID Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments, but no final regulations have been promulgated with respect to
contingent payment debt instruments. Proposed regulations were promulgated on
December 16, 1994 regarding contingent payment debt instruments. As in the case
of the OID Regulations, such proposed regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip Certificate would determine a projected payment schedule with
respect to such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield.
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Assuming that a prepayment assumption were used, if the proposed
regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale of a Grantor Trust
Certificate, recognized on the sale or exchange of a Grantor Trust Certificate
by an investor who holds such Grantor Trust Certificate as a capital asset, will
be capital gain or loss, except to the extent of accrued and unrecognized market
discount, which will be treated as ordinary income, and (in the case of banks
and other financial institutions) except as provided under Section 582(c) of the
Code. The adjusted basis of a Grantor Trust Certificate generally will 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 with
respect to such Grantor Trust Certificate. The Code as of the date of this
Prospectus provides a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
GRANTOR TRUST REPORTING. Unless otherwise provided in the related
Prospectus Supplement, the Trustee will furnish to each holder of a Grantor
Trust Fractional Interest Certificate 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, the Trustee will furnish, within a reasonable time after the end of
each calendar year, to each holder of a Grantor Trust Certificate who was such a
holder at any time during such year, information regarding the amount of
servicing compensation received by the Master Servicer and sub-servicer (if any)
and such other customary factual information as the Trustee deems necessary or
desirable to enable holders of Grantor Trust Certificates to prepare their tax
returns and will furnish comparable information to the Service as and when
required by law to do so. Because the rules for accruing discount and amortizing
premium with respect to the Grantor Trust Certificates are uncertain in various
respects, there is no assurance the Service will agree with the Trustee's
information reports of such items of income and expense. Moreover, such
information reports, even if otherwise accepted as accurate by the Service, will
in any event be accurate only as to the initial Certificateholders that bought
their Certificates at the representative initial offering price used in
preparing such reports.
BACKUP WITHHOLDING. In general, the rules described in
"--REMICS--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
Regular Certificates in "REMICS--Foreign Investors in REMIC Certificates--REMIC
Regular Certificates" applies to Grantor Trust Certificates except that Grantor
Trust Certificates will, unless otherwise disclosed in the related Prospectus
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Supplement, be eligible for exemption from U.S. withholding tax, subject to the
conditions described in such discussion, only to the extent the related Mortgage
Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
certificates offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Offered Certificates
without regard to the ERISA considerations described below, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified 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.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments 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 a Plan and
persons (parties in interest under ERISA and disqualified persons under the
Code, collectively, "Parties in Interest") who have certain specified
relationships to the Plan unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Loans, interests therein, Mortgage Securities or Contracts and other
assets included in a related Trust Fund to be deemed assets of such Plan.
Section 2510.3-101 of the regulations of the United States Department of Labor
(the "DOL") provides that when a Plan acquires an equity interest in an entity,
the Plan's assets include both such equity interest and an undivided interest in
each of the underlying assets of the entity, unless certain exceptions not
applicable here apply, or unless the equity participation in the entity by
"benefit plan investors" (i.e., Plans and certain employee benefit plans not
subject to ERISA) is not "significant", both as defined therein. For this
purpose, in general, equity participation by benefit plan investors will be
"significant" on any date if 25% or more of the value of any class of equity
interests in the entity is held by benefit plan investors. Equity participation
in a Trust Fund will be significant on any date if immediately after the most
recent acquisition of any Certificate, 25% or more of any class of Certificates
is held by benefit plan investors.
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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, is a fiduciary of the investing
Plan. If the Mortgage Loans, interests therein, Mortgage Securities or Contracts
and other assets included in a Trust Fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Master Servicer, any Sub-Servicer, any Special Servicer, the Trustee, the
obligor under any credit enhancement mechanism, or certain affiliates thereof
may be deemed to be a Plan "fiduciary" and thus subject to the fiduciary
responsibility provisions and prohibited transaction provisions of ERISA and the
Code with respect to the investing Plan. In addition, if the Mortgage Loans and
other assets included in a Trust Fund constitute Plan assets, the purchase of
Certificates by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA or the Code.
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), (B), (C) and (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of certificates in the initial issuance of certificates and the
servicing and operation of mortgage pools consisting of mortgage loans secured
by first or second mortgages or deeds of trust in single-family residential
property. PTCE 83-1 permits, subject to certain general and specific conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans, related to the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by first
or second mortgages or deeds of trust on single-family residential property and
the acquisition and holding of certain mortgage pool pass-through certificates
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 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 single-family, non-farm residential property; (b)
property which had secured such obligations and which has been acquired by
foreclosure; and (c) undistributed cash.
The Company anticipates that each pool of Mortgage Loans (other than
pools including Multi-Family Loans, interests in Mortgage Loans, Mortgage
Securities or Contracts) (such Mortgage Loans eligible under PTCE 83-1,
"Eligible Mortgage Loans") will be a "mortgage pool" within the meaning of PTCE
83-1. The term "mortgage pool pass-through certificate" is defined in PTCE 83-1
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 Company believes that, for purposes of PTCE
83-1, the term "mortgage pool pass-through certificate" would include: (i)
Offered Certificates representing interests in a Trust Fund consisting of
Eligible Mortgage Loans issued in a series consisting of only a single class of
Certificates; (ii) Senior Certificates representing interests in a Trust Fund
consisting of Eligible Mortgage Loans issued in a series in which there is only
one class of Senior Certificates; provided that the Certificates described in
clauses (i) and (ii) evidence the beneficial ownership of a specified portion of
both future interest payments (greater than 0%) and future principal payments
(greater than 0%) on the Eligible Mortgage Loans. It is not clear whether other
types of Offered Certificates that may be offered hereunder would be "mortgage
pass-through certificates" for purposes of PTCE 83-1, including but not limited
to: (a) a class of Offered Certificates that evidences the beneficial ownership
of interest payments only or principal payments only, or disproportionate
interest or principal payments, or nominal principal or interest payments, such
as the Strip Certificates; or (b) Offered Certificates in a series including
classes of Certificates which differ as to timing, sequential order,
pass-through 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) Accrual Certificates; or (d) Offered Certificates
evidencing an interest in a Trust Fund as to which two or more REMIC elections
have been made; or (e) a series including other types of multiple classes.
Accordingly, until further clarification by the DOL, Plans should not purchase
Offered Certificates representing interests as described in the immediately
preceding sentence based upon the availability of PTCE 83-1. 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. PTCE
83-1 is not available for Mortgage Pools consisting of Multi-Family Loans,
interests in Mortgage Loans, Mortgage Securities or Contracts. PTCE 83-1 is not
available for Certificates that are subordinate to any other class of
Certificates of the same series.
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PTCE 83-1 sets forth three general conditions which 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 maintenance of a system of insurance
or other protection for the pooled mortgage loans and property securing such
loans, and for indemnifying certificateholders 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; (2) the pool trustee must not be an affiliate of the pool
sponsor; 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 are fiduciaries.
The Prospectus Supplement with respect to a series will set forth
whether the Trustee in respect of such series is affiliated with the Company.
Unless otherwise provided in the Prospectus Supplement with respect to a series,
the Company believes that it will receive total compensation for forming and
providing services to the Mortgage Pools which will not be more than adequate
consideration. If the credit support with respect to a series of Certificates
constitutes a system of insurance or other protection within the meaning of PTCE
83-1 and if it 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 Company believes the
first general condition referred to above will be satisfied. Each Plan fiduciary
responsible for making the investment decision whether to purchase and to hold
Offered Certificates must make its own determination as to whether (i) the
Offered Certificates constitute "mortgage pool pass-through certificates" for
purposes of PTCE 83-1, (ii) the first and third general conditions will be
satisfied, and (iii) the specific conditions not discussed herein, of PTCE 83-1
have been satisfied.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
PTCE 83-1 or any other prohibited transaction exemption. In addition, such
fiduciary should consider the availability of: PTCE 95-60, regarding investments
by insurance company general accounts; PTCE 90-1, regarding investments by
insurance company pooled separate accounts; PTCE 91-38, regarding investments by
bank collective investment funds; and PTCE 84-14, regarding transactions
effected by "qualified professional asset managers". The Plan fiduciary should
also consider its general fiduciary obligations under ERISA in determining
whether to purchase any Offered Certificates on behalf of a Plan. The Prospectus
Supplement with respect to a series of Certificates may contain additional
information regarding the application of PTCE 83-1, or any other exemption, with
respect to the Certificates offered thereby. There can be no assurance that any
of these exemptions will apply with respect to any particular Plan's investment
in the Certificates or, even if an exemption were deemed to apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with such investment.
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 "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan 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.
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LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is rated in one of the
two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can be
no assurance as to which classes of Offered Certificates will be treated as
high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class
that is not rated in one of the two highest rating categories by at least one
Rating Agency, will not constitute "mortgage related securities" for purposes of
SMMEA. Any such class of Certificates will be identified in the related
Prospectus Supplement. Prospective investors in such classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
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There may be other restrictions on the ability of certain investors
either to purchase certain classes of Offered Certificates or to purchase any
class of Offered Certificates representing more than a specified percentage of
the investors' assets. The Company will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates of any class
thereof constitute legal investments or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
and/or Mortgage Securities in the respective Mortgage Pools or will be used by
the Company for general corporate purposes. The Company expects that it will
make additional sales of securities similar to the Offered Certificates 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 Company, prevailing interest rates, availability of funds and
general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements 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 net proceeds to the Company from such sale.
The Company intends that Offered Certificates 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 the
Offered Certificates of a particular series may be made through a combination of
two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting
and public re-offering by underwriters;
2. By placements by the Company with institutional investors
through dealers; and
3. By direct placements by the Company with institutional
investors.
In addition, if specified in the related Prospectus Supplement, the
Offered Certificates of any series 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 Certificates.
If underwriters are used in a sale of any Offered Certificates (other
than in connection with an underwriting on a best efforts basis), such
Certificates 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 Company whose identities
and relationships to the Company will be as set forth in the related Prospectus
Supplement. The managing underwriter or underwriters with respect to the offer
and sale of the Offered Certificates of a particular series 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.
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In connection with the sale of the Offered Certificates, underwriters
may receive compensation from the Company or from purchasers of such
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may be
deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Company and any profit on the
resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act").
It is anticipated that the underwriting agreement pertaining to the
sale of Offered Certificates of any series 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 Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities 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 Company and
purchasers of Offered Certificates of such series.
The Company anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Offered Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of such Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement,
certain legal matters in connection with the Certificates of each series will be
passed upon for the Company by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets 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 borrowers 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 interest certificates in extreme cases
might fail to recoup their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
Page
----
Accrual Certificates...................................................5, 32, 39
Accrued Certificate Interest..................................................39
Affiliated Sellers............................................................15
ARM Loans ............................................................16
Available Distribution Amount.................................................39
Balloon Loans ............................................................17
Balloon Payment ............................................................17
Bankruptcy Code ............................................................68
Bankruptcy Loss ............................................................43
Beneficial Owner ............................................................33
Buydown Account ............................................................19
Buydown Agreement ............................................................37
Buydown Funds ............................................................19
Buydown Mortgage Loans........................................................19
Buydown Period ............................................................19
CERCLA ............................................................21
Certificate ............................................................54
Certificate Account...........................................................35
Certificate Register..........................................................32
Certificate Registrar.........................................................32
Certificateholder ............................................................32
Certificateholders.............................................................1
Certificates ..........................................................1, 4
Closing Date ............................................................75
Code .........................................................6, 73
Commission .............................................................3
Committee Report ............................................................75
Company ..........................................................1, 4
Contracts ............................................................15
Contributions Tax ............................................................85
Convertible Mortgage Loan.....................................................19
Debt Service Coverage Ratio...................................................20
Debt Service Reduction........................................................47
Defaulted Mortgage Loss.......................................................43
Deferred Interest ............................................................17
Deficient Valuation...........................................................47
Deleted Mortgage Loan.........................................................23
Designated Seller Transaction.................................................16
Determination Date............................................................39
Distribution Date .............................................................7
DOL ............................................................97
DTC ............................................................32
DTC Registered Certificates...................................................32
Due Period ............................................................41
Eligible Mortgage Loans.......................................................97
Equity Participation..........................................................18
ERISA ............................................................10
Exchange Act .............................................................3
Extraordinary Losses..........................................................43
FDIC ............................................................15
FHA ............................................................15
FHA Loans ............................................................15
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FHLMC ............................................................21
FIRREA ............................................................21
FNMA ............................................................21
Fraud Loss ............................................................43
FTC Rule ............................................................69
Garn-St Germain Act...........................................................70
Grantor Trust Certificates................................................10, 73
Grantor Trust Fractional Interest Certificate.................................87
Grantor Trust Fund............................................................73
Grantor Trust Strip Certificate...............................................88
Holder ............................................................32
Housing Act ............................................................22
HUD ............................................................53
ICII .........................................................4, 53
Index ............................................................16
Insurance Proceeds............................................................36
Intermediaries ............................................................32
IRS ............................................................75
Issue Premium ............................................................80
Letter of Credit ............................................................44
Letter of Credit Bank.........................................................44
Liquidated Mortgage Loan......................................................29
Liquidation Proceeds..........................................................36
Loan-to-Value Ratio...........................................................18
Lock-out Expiration Date......................................................18
Lock-out Period ............................................................18
Loss ............................................................51
Manufactured Homes............................................................15
Manufacturer's Invoice Price..................................................18
Master Servicer ......................................................1, 4, 25
Mortgage Loans .......................................................1, 4, 6
Mortgage Notes ............................................................15
Mortgage Pool ..........................................................1, 6
Mortgage Rate ............................................................16
Mortgage Securities........................................................7, 16
Mortgaged Property.............................................................6
Mortgages ............................................................15
Mortgagor ............................................................13
Multifamily Loans ............................................................15
Multifamily Properties........................................................15
Multifamily Property...........................................................6
Net Mortgage Rate ............................................................59
Net Operating Income..........................................................20
Nonrecoverable Advance........................................................41
Note Margin ............................................................16
Offered Certificates....................................................1, 4, 32
OID Regulations ............................................................73
OTS ...........................................................100
Participants ............................................................32
Parties in Interest...........................................................96
Pass-Through Rate .............................................................5
Permitted Investments.........................................................35
Plan ........................................................10, 96
Policy Statement ............................................................99
Pool Insurer ............................................................37
Pooling Agreement .........................................................1, 54
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Pooling and Servicing Agreement................................................5
Pre-Funding Account...........................................................31
Prepayment Assumption.....................................................75, 90
Prepayment Interest Shortfall.................................................60
Prepayment Penalty............................................................18
Primary Insurance Policy......................................................50
Primary Insurer ............................................................51
Prohibited Transactions Tax...................................................84
Proposed Mark-to-Market Regulations...........................................83
Prospectus Supplement..........................................................1
PTCE 83-1 ............................................................97
Purchase Obligation...........................................................50
Purchase Price ............................................................23
Qualified Substitute Mortgage Loan............................................23
Rating Agency ............................................................10
Realized Losses ............................................................43
Record Date ............................................................39
Related Proceeds ............................................................41
Relief Act ............................................................72
REMIC ......................................................1, 6, 73
REMIC Administrator...........................................................73
REMIC Certificates............................................................73
REMIC Provisions ............................................................73
REMIC Regular Certificates................................................10, 73
REMIC Regulations ............................................................73
REMIC Residual Certificates...............................................10, 73
REO Mortgage Loan ............................................................29
REO Property ............................................................27
Reserve Fund ............................................................47
RTC ............................................................15
Securities Act ........................................................3, 101
Seller .............................................................7
Sellers .........................................................1, 15
Senior Certificates........................................................5, 32
Senior Liens ............................................................17
Senior/Subordinate Series.....................................................32
Servicing Standard............................................................25
Single Family Loans...........................................................15
Single Family Property........................................................15
SMMEA ........................................................10, 99
Special Hazard Instrument.....................................................43
Special Hazard Insurance Policy...............................................46
Special Hazard Insurer........................................................46
Special Hazard Loss...........................................................43
Special Hazard Losses.........................................................46
Special Servicer .........................................................4, 27
SPFC ............................................................15
Spread .............................................................4
SPTL ............................................................15
Strip Certificates.........................................................5, 32
Subordinate Certificates...................................................5, 32
Subservicer ............................................................27
Subservicers ............................................................20
Tax Exempt Investor...........................................................99
Tiered REMICs ............................................................74
Title V ............................................................71
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Title VIII ............................................................71
Trust Fund ..........................................................1, 5
Trustee .............................................................4
UBTI ............................................................99
Unaffiliated Sellers..........................................................15
United States person..........................................................87
Value ............................................................18
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