PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 9, 1997)
<TABLE>
<CAPTION>
$375,000,000
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
<S> <C> <C> <C> <C> <C>
$ 244,131,000 Adjustable Rate Class A-1 Certificates $ 18,948,000 Adjustable Rate Class M-1A Certificates
$ 27,500,000 6.70% Class A-2 Certificates $ 4,801,000 7.32% Class M-1F Certificates
$ 27,500,000 6.89% Class A-3 Certificates $ 14,575,000 Adjustable Rate Class M-2A Certificates
$ 7,645,000 7.45% Class A-4 Certificates $ 2,088,000 7.53% Class M-2F Certificates
$ 10,000,000 7.09% Class A-5 Certificates $ 13,846,000 Adjustable Rate Class B-1A Certificates
N/A Variable Rate(1) Class A-IO Certificates $ 3,966,000 7.89% Class B-1F Certificates
</TABLE>
(1) BASED ON THE RELATED NOTIONAL AMOUNTS AS DESCRIBED HEREIN.
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1997-2
------------------------
SOUTHERN PACIFIC FUNDING CORPORATION
SELLER
------------------------
The Series 1997-2 Mortgage Loan Asset-Backed Pass-Through Certificates
(the "Certificates") will include the following seventeen classes (the
"Certificates"): (i) the Class A-1 Certificates, Class A-2 Certificates, Class
A-3 Certificates and Class A-4 Certificates; (ii) the Class A-5 Certificates
(the "Lockout Certificates"); (iii) the Class A-IO Certificates (the "Fixed
Strip Certificates"); (iv) the Class M-1A Certificates and
(CONTINUED ON FOLLOWING PAGE)
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, THE TRUSTEE OR ANY
OF THEIR AFFILIATES. NEITHER THE OFFERED 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 Offered Certificates.
Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated and Greenwich Capital Markets, Inc. (collectively, the
"Underwriters") intend to make a secondary market in the Offered Certificates,
but no Underwriter has any obligation to do so. There can be no assurance that a
secondary market for 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.
The Offered 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 net proceeds to the Company from the sale of
the Offered Certificates, before deducting expenses payable by the Company, will
be equal to approximately 100.83% of the aggregate initial principal balance of
the Offered Certificates, plus accrued interest on the Offered Certificates
(other than the Class A-1, Class M-1A, Class M-2A and Class B-1A Certificates)
from June 1, 1997.
The Offered 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 Offered Certificates will be made only in
book-entry form through the facilities of The Depository Trust Company, Cedel
Bank,
<PAGE>
societe anonyme, and the Euroclear System as further discussed herein, on or
about June 19, 1997, against payment therefor in immediately available funds.
The Offered Certificates will be offered in Europe and the United States of
America.
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
GREENWICH CAPITAL MARKETS, INC.
June 16, 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Class M-1F Certificates (together, the "Class M-1 Certificates"); (v) the Class
M-2A Certificates and Class M-2F Certificates (together, the "Class M-2
Certificates," and together with the Class M-1 Certificates, the "Class M
Certificates"); (vi) the Class B-1A Certificates and Class B-1F Certificates
(together, the "Class B-1 Certificates"); (vii) the Class S-1A Certificates and
Class S-1F Certificates (together, the "Subordinated IO Certificates"); and
(viii) the Class R-I Certificates, Class R-II Certificates and Class R-III
Certificates (collectively, the "Residual Certificates"). The Fixed Strip
Certificates will be divided into four components (each, a "Component"), the
Class A-IO Components A, B and C (collectively, the "Group I Fixed Strip
Components") and the Class A-IO Component D (the "Group II Fixed Strip
Component"). The Class A-1 Certificates and the Group I Fixed Strip Components
are also referred to herein as the "Group I Class A Certificates." The Class
A-2, Class A-3, Class A-4 and Lockout Certificates and the Group II Fixed Strip
Component are also referred to herein as the "Group II Class A Certificates,"
and together with the Group I Class A Certificates, the "Class A Certificates."
The Group I Class A, Class M- 1A, Class M-2A and Class B-1A Certificates are
also referred to herein as the "Group I Certificates." The Group II Class A,
Class M-1F, Class M-2F and Class B-1F Certificates are also referred to herein
as the "Group II Certificates." Only the Certificates other than the Residual
Certificates and the Subordinated IO Certificates are offered hereby
(collectively, the "Offered Certificates").
The Certificates will each evidence a beneficial ownership
interest in one or both of two loan groups (each, a "Loan Group") each
constituting a separate sub-trust, collectively comprising a trust fund (the
"Trust Fund") consisting primarily of certain first 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 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 July 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 $63,912,883.80 and $20,619,181.18 for deposit in the Group
I PreFunding Account and the 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 specified in the Pooling and Servicing
Agreement (as defined herein). The interest rate (the "Mortgage Rate") on each
Group I Loan 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 annual adjustment based on the sum of the 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 each of the Group I Loans will be based on six-month
London interbank offered rates for United States dollar deposits ("Six-Month
LIBOR") as described herein. Certain characteristics of the Mortgage Loans are
described herein under "Description of the Mortgage Pool." All distributions
with respect to a Loan Group will be allocated solely among the Certificates or
Components related to such Loan Group.
The Group I Class A Certificates in the aggregate and the Class
M-1A Certificates, Class M-2A Certificates and Class B-1A Certificates will
evidence initial undivided interest of approximately 83.75%, 6.50%, 5.00% and
4.75%, respectively, in the Group I Loans. The Group II Class A Certificates in
the aggregate and the Class M-1F Certificates, Class M-2F Certificates and Class
B-1F Certificates will evidence initial undivided interest of approximately
87.00%, 5.75%, 2.50% and 4.75%, respectively, in the Group II Loans. The rights
of the holders of the Class M-1A Certificates to receive distributions with
respect to the Group I Loans will be subordinate to the rights of the holders of
the Group I Class A Certificates, the rights of the holders of the Class M-1F
Certificates to receive distributions with respect to the Group II Loans will be
subordinate to the rights of the holders of the Group II Class A Certificates,
the rights of the holders of the Class M-2A Certificates to receive
distributions with respect to the Group I Loans will be subordinate to the
rights of the holders of the Group I Class A Certificates and the Class M-1A
Certificates, the rights of the holders of the Class M-2F Certificates to
receive distributions with respect to the Group II Loans will be subordinate to
the rights of the holders of the Group II Class A Certificates and Class M-1F
Certificates, the rights of the holders of the Class B-1A Certificates to
receive distributions with respect to the Group I Loans will be subordinate to
the rights of the holders of the Group I Class A Certificates, the Class M-1A
Certificates and the Class M-2A Certificates, the rights of the holders of the
Class B-1F Certificates to receive distributions with respect to the Group II
Loans will be subordinate to the rights of the holders of the Group II Class A
Certificates, Class M-1F Certificates and Class M-2F Certificates, in each case
to the extent described herein and in the Prospectus.
S-2
<PAGE>
It is a condition of the issuance of the Offered Certificates that
the Class A Certificates (other than the Fixed Strip Certificates) be rated
"AAA" by Standard & Poor's Ratings Services ("S&P"), Duff & Phelps Credit Rating
Co. ("DCR") and Fitch Investors Service, L.P. ("Fitch"), that the Fixed Strip
Certificates be rated "AAAr" by S&P, and "AAA" by DCR and Fitch, that the Class
M-1A Certificates and Class M-1F Certificates be rated "AA+" by DCR and "AA" by
S&P and Fitch, that the Class M-2A Certificates be rated "A" by S&P, DCR and
Fitch, that the Class M-2F Certificates be rated "AA-" by DCR and "A" by S&P and
Fitch, that the Class B-1A Certificates be rated "BBB" by S&P, DCR and Fitch,
and that the Class B-1F Certificates be rated "BBB+" by DCR and "BBB" by S&P and
Fitch.
The Offered 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 Offered 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 Offered 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
Offered Certificates only under the limited circumstances described herein. See
"Description of the Certificates--Book-Entry Registration of the Offered
Certificates" herein.
As described herein, three separate "real estate mortgage
investment conduit" ("REMIC") elections 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. Each class of the Certificates (other
than the Residual Certificates) will represent ownership of "regular interests"
in the related REMIC and each class of the Residual Certificates will constitute
the sole class of "residual interests" in the related REMIC. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
Distributions on the Offered 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 July 1997 (each, a "Distribution Date"). As
described herein, interest payable with respect to each Distribution Date (i) on
the Class A-1, Class M-1A, Class M-2A and Class B-1A 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 June 19, 1997, to July 24, 1997, and (ii)
on the Offered Certificates (other than the Class A-1, Class M-1A, Class M-2A
and Class B-1A Certificates) will accrue on the basis of a 360-day year and a
30-day month, and will be based on the Certificate Principal Balance thereof (or
the related Notional Amounts (as defined herein) in the case of the Components
of the Fixed Strip Certificates) and the then-applicable Pass-Through Rate
thereof, as reduced by certain interest shortfalls and subject to other
limitations as described herein. Distributions in respect of principal of the
Offered Certificates will be made as described herein under "Description of the
Certificates--Principal Distributions."
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S- 30 OF THE PROSPECTUS SUPPLEMENT AND ON PAGE 12 OF THE
PROSPECTUS BEFORE PURCHASING ANY OF THE OFFERED CERTIFICATES.
The yield to maturity on the Offered Certificates will be sensitive to the
rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans. The yield to maturity on each class of
Class M Certificates and Class B-1 Certificates will be extremely sensitive to
losses due to defaults on the Mortgage Loans in the related Loan Group (and the
timing thereof) to the extent that such losses are not covered by
overcollateralization or the related Net Monthly Excess Cashflow (as defined
herein), or with respect to the Class M Certificates, the related Class B-1
Certificates or any class of related Class M Certificates with a lower payment
priority. 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 Offered Certificates (and in particular, the Class
M Certificates and Class B-1 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. Investors in the Fixed Strip Certificates should fully consider that an
extremely rapid rate of principal prepayments on the Mortgage Loans could result
in the failure of such investors to recover their initial investments. See
"Summary--Special Prepayment Considerations" and "--Special Yield
Considerations" herein, "Certain Yield and Prepayment Considerations" herein and
"Yield Considerations" in the Prospectus.
------------------------
S-3
<PAGE>
THE OFFERED 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 MAY 9, 1997, 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 OFFERED 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 OFFERED 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-4
<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 1997-2.
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").
Cut-off Date........................June 1, 1997.
Statistical Reference Date..........May 1, 1997. Information provided herein
with respect to the Initial Group I Loans
and Initial Group II Loans is as of the
Statistical Reference Date. In addition, it
has been assumed that the principal balances
of the Initial Group I Loans and Initial
Group II Loans have been reduced to take
into account a scheduled Monthly Payment on
May 1, 1997 which, if and when received,
will not be a part of the Trust Fund.
Delivery Date.......................On or about June 19, 1997.
Denominations.......................The Offered 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-1, Class A-2,
Class A-3, Class A-4 and Class A-5
Certificates will be issued in minimum
denominations of $1,000 and integral
multiples of $1 in excess thereof. The Class
M-1, Class M-2 and Class B-1 Certificates
will be issued in minimum denominations
S-5
<PAGE>
of $25,000 and integral multiples of $1 in
excess thereof. The Fixed Strip Certificates
will be issued in minimum denominations of a
20.00% Percentage Interest and integral
multiples of 0.01% in excess thereof.
Certificate Registration............The Offered Certificates will be represented
by one or more certificates registered in
the name of Cede & Co., as nominee of DTC
(Offered Certificates so registered,
"Book-Entry Certificates"). No person
acquiring an interest in the Book-Entry
Certificates (a "Beneficial Owner") will be
entitled to receive an Offered 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 Offered 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 The Chase
Manhattan Bank ("Chase"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating
member of DTC. All references herein to
Offered Certificates and Offered
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
Offered 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
S-6
<PAGE>
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 Mortgage
Loans are secured by first liens on fee
simple interests in oneto four-family
residential real properties (each, a
"Mortgaged Property").
The statistical information presented in
this Prospectus Supplement describes a
sampling of mortgage loans in the Trust Fund
(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 information regarding the additional
mortgage loans which will be included in
Loan Group I on the Delivery Date (the
"Additional Group I Loans") or mortgage
loans purchased by the Trust Fund after the
Delivery Date (the "Subsequent Mortgage
Loans"). The Initial Group I Loans,
Additional Group I Loans and related
Pre-Funding Amount (as defined herein), will
constitute approximately 69.46%, 8.62% and
21.92%, respectively, of the aggregate of
the Principal Balance of such mortgage loans
and such Pre-Funding Amount as of the
Cut-off Date. The Initial Group II Loans and
related Pre-Funding Amount will constitute
approximately 75.31% and 24.69%,
respectively, of the aggregate of the
Principal Balance of such mortgage loans and
such Pre-Funding Amount as of the Cut-off
Date. While the statistical distribution of
the final characteristics of the Initial
Group I Loans and the Initial Group II Loans
transferred to the Trust Fund on the
Delivery Date will vary from the statistical
information presented in this Prospectus
Supplement, the Company does not believe
that the characteristics of the Mortgage
Loans as of the Cut-off Date will vary
materially from the information presented
herein with respect to the Initial Group I
Loans and the Initial Group II Loans as of
the Statistical Reference Date.
The Initial Group I Loans have an aggregate
principal balance as of the Statistical
Reference Date of $202,467,539.65. The
Initial Group I Loans had approximate
individual principal balances at
S-7
<PAGE>
origination of at least $14,300.00 but not
more than $700,000.00 with an average
principal balance at origination of
approximately $113,301.31. Approximately
99.79% of the Initial Group I Loans (by
aggregate principal balance as of the
Statistical Reference Date) have terms to
maturity from the date of origination or
modification of 20 or 30 years and
approximately 0.21% of the Initial Group I
Loans (by aggregate principal balance as of
the Statistical Reference Date) have terms
to maturity from the date of origination or
modification of 15 years. 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 80.25% 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 an aggregate
principal balance as of the Statistical
Reference Date of $62,880,818.82. The
Initial Group II Loans had approximate
individual principal balances at origination
of at least $12,000.00 but not more than
$500,000.00 with an average principal
balance at origination of $63,315.05.
Approximately 79.62% of the Initial Group II
Loans (by aggregate principal balance as of
the Statistical Reference Date) have terms
to maturity from the date of origination or
modification of 20 to 30 years and
approximately 20.38% of the Initial Group II
Loans have terms to maturity from the date
of origination or modification of 15 years
or less. The Initial Group II Loans have a
weighted average remaining term to stated
maturity of approximately 320 months as of
the Statistical Reference Date.
Approximately 85.76% of the Initial Group II
Loans (by aggregate principal balance as of
the Statistical Reference Date) are
refinance mortgage loans. Approximately
6.39% of the Initial Group II Loans (by
aggregate principal balance as of the
Statistical Reference Date) will be Balloon
Loans (as defined herein).
None of the Initial Group I Loans or Initial
Group II Loans were thirty days or more
delinquent in their Monthly Payments as of
the Statistical Reference Date. Prospective
investors in the Offered Certificates
S-8
<PAGE>
should be aware, however, that approximately
30.11% and 29.62% 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 April
1, 1997, and therefore, the remaining
Initial Group I Loans (and all of the
Additional Group I Loans) and Initial Group
II Loans could not have been delinquent
Mortgage Loans as of the Statistical
Reference Date.
The Mortgage Rate (as defined herein) on
each Group I Loan will be subject to
adjustment, commencing (i) with respect to
approximately 43.26% of the Initial Group I
Loans (by aggregate principal balance as of
the Statistical Reference Date),
approximately six months or one year after
the date of origination, (ii) with respect
to approximately 56.54% of the Initial Group
I Loans (by aggregate principal balance as
of the Statistical Reference Date),
approximately two years after origination
(each such Group I Loan, a "2/28 Loan") and
(iii) with respect to approximately 0.20% of
the Initial Group I Loans (by aggregate
principal balance as of the Statistical
Reference Date), 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 Index as described
below and the related 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 will be
adjusted semi-annually (after an initial
period of two years or three years, with
respect to the 2/28 Loans and 3/27 Loans,
respectively) or annually 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
Statistical Reference Date, the Initial
Group I Loans will bear interest at Mortgage
Rates of at least 5.500% per annum but no
more than 16.875% per annum, with a weighted
average Mortgage Rate of
S-9
<PAGE>
approximately 10.384% 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
8.000% per annum but no more than 17.750%
per annum, with a weighted average Mortgage
Rate of approximately 11.773% per annum as
of the Statistical Reference Date.
Pursuant to the Pooling and Servicing
Agreement, following the Delivery Date, the
Trust Fund will be obligated to purchase
from the Company on or before July 15, 1997,
additional Group I Loans and Group II Loans
(the "Subsequent Mortgage Loans"), subject
to certain conditions described herein. See
"Description of the Mortgage Pool" herein.
Approximately 81.79% of the Initial Group I
Loans and 76.66% of the Initial Group II
Loans (each by principal balance as of the
Statistical Reference Date) were originated
and underwritten or acquired and
reunderwritten by SPFC. Approximately 10.98%
of the Initial Group I Loans and 23.20% of
the Initial Group II Loans (each by
principal balance as of the Statistical
Reference Date, respectively) were
underwritten by MorCap, Inc. ("MorCap"). The
underwriting standards of SPFC and MorCap
described in "Description of the Mortgage
Pool--Underwriting Standards" and Appendix A
to this Prospectus Supplement. The remaining
Initial Group I Loans and Initial Group II
Loans were underwritten by the Strategic
Partners or the Unaffiliated Originator
(each, as defined herein) in accordance with
underwriting standards similar to those of
SPFC and MorCap. However SPFC credit graded
each of such Mortgage Loans to its own
underwriting standards. See also "Risk
Factors--Underwriting Standards" in this
Prospectus Supplement.
S-10
<PAGE>
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 $63,912,883.80
(the "Group I Original Pre-Funded Amount")
and $20,619,181.18 (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 to be included in
the Group I Loans and Group II Loans,
respectively. 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 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 Accrued Certificate Interest
on the Offered Certificates attributable to
the pre-funding feature during the related
Funding Period. See "Description of the
Certificates--Interest Coverage Accounts"
herein.
The Index...........................The Index applicable with respect to the
Group I Loans is 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.
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<PAGE>
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.
The Offered Certificates............The Offered 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 Interest Coverage Accounts and
the Pre-Funding Accounts. The Offered
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
Offered Certificates (other than the Fixed
Strip Certificates) will have the following
Certificate Principal Balances as of the
Delivery Date:
$ 244,131,000 Class A-1 Certificates
$ 27,500,000 Class A-2 Certificates
$ 27,500,000 Class A-3 Certificates
$ 7,645,000 Class A-4 Certificates
$ 10,000,000 Class A-5 Certificates
$ 18,948,000 Class M-1A Certificates
$ 4,801,000 Class M-1F Certificates
$ 14,575,000 Class M-2A Certificates
$ 2,088,000 Class M-2F Certificates
$ 13,846,000 Class B-1A Certificates
$ 3,966,000 Class B-1F Certificates
The Class A-1 Certificates and the Group I
Fixed Strip Components are also referred to
herein as the "Group I Class A
Certificates." The Class A-5 Certificates
are also referred to herein as the "Lockout
Certificates." The Class A-2, Class A-3,
Class A-4 and Lockout Certificates and the
Group II Fixed Strip Component are also
referred to herein as the "Group II Class A
Certificates." The Group I Class A
Certificates and Group II Class A
Certificates are also referred to herein as
the "Class A Certificates." The Class M-1A
Certificates and Class M-1F Certificates are
also referred to herein as the "Class M-1
Certificates." The Class M-2A Certificates
and Class M-2F Certificates are also
referred to herein as the "Class M-2
Certificates." The Class M-1 Certificates
and Class M-2
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<PAGE>
Certificates are also referred to herein as
the "Class M Certificates." The Class B-1A
Certificates and Class B-1F Certificates are
also referred to herein as the "Class B-1
Certificates." The Group I Class A, Class
M-1A, Class M-2A and Class B-1A Certificates
are also referred to herein as the "Group I
Certificates." The Group II Class A, Class
M-1F, Class M-2F and Class B-1F Certificates
are also referred to herein as the "Group II
Certificates." Only the Certificates other
than the Residual Certificates and the
Subordinated IO Certificates (collectively,
the "Offered Certificates") are offered
hereby.
The Fixed Strip Certificates will be divided
into four components (each, a "Component"),
the Class A-IO Component A, B and C
(collectively, the "Group I Fixed Strip
Components") and the Class A-IO Component D
(the "Group II Fixed Strip Component"). Each
Group I Fixed Strip Component will have a
Notional Amount as of any Distribution Date
equal to the lesser of (i) $29,150,000.00
and (ii) the aggregate Certificate Principal
Balance of the Group I Certificates
immediately prior to such date. The Group II
Fixed Strip Component will have a Notional
Amount as of any Distribution Date equal to
the lesser of (i) $8,350,000.00 and (ii) the
aggregate Certificate Principal Balance of
the Group II Certificates immediately prior
to such date.
The Components of the Fixed Strip
Certificates are not separately
transferable. For a description of the
allocation of interest and principal
distributions to the Offered Certificates,
see "Summary--Interest Distributions" and
"--Principal Distributions" below, and
"Description of the Certificates--Interest
Distributions," "--Principal Distributions"
and "-Net Monthly Excess Cashflow
Distributions" herein.
Pass-Through Rates on the
Offered Certificates..............The Pass-Through Rates on the Group I
Certificates (other than the Group I Fixed
Strip Components) are adjustable and are
calculated as follows: on each Distribution
Date, the Pass-Through Rate applicable to
each class of Group I Certificates will be
adjusted to equal the lesser of (i)
One-Month LIBOR (as
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<PAGE>
defined herein) plus the related
Pass-Through Margin (as defined below) and
(ii) the related Group I Available Funds
Pass-Through Rate (as defined below).
The "Pass-Through Margin" on the Class A-1,
Class M-1A, Class M-2A and Class B-1A
Certificates is equal to (i) 0.225%, 0.36%,
0.56% and 0.99%, respectively, with respect
to any Distribution Date which occurs on or
prior to the date on which the aggregate
Principal Balance of the Group I Loans is
less than 10% of the sum of the aggregate
Principal Balance of Group I Loans as of the
Cut-off Date and the related Original
Pre-Funded Amount and (ii) with respect to
any Distribution Date thereafter, 0.45%,
0.54%, 0.84% and 1.485%, respectively.
The "Group I Net Weighted Average Rate," as
of any Distribution Date and the Class A-1,
Class M- 1A, Class M-2A and Class B-1A
Certificates, is equal to the product of
(i)(A) the weighted average of the Mortgage
Rates of the Group I Loans (as of the
beginning of the related Due Period), minus
(B) the sum of the Servicing Fee Rate and
the per annum rate at which the related
Trustee's Fee (as defined herein) accrues,
and minus (C) the product of the Group I
Fixed Strip Effective Rate (as defined
herein) and a fraction equal to (x) the
Notional Amount of the Group I Fixed Strip
Components divided by (y) the aggregate
Principal Balance of the Group I Loans (as
of the beginning of the related Due Period),
(ii) a fraction equal to (A) the aggregate
Principal Balance of the Group I Loans (as
of the beginning of the related Due Period),
over (B) the aggregate Certificate Principal
Balance of the Group I Certificates
immediately prior to such Distribution Date.
Because the Pass-Through Margin is different
for each such class of Group I Certificates,
it is possible that the related Group I
Formula Pass- Through Rate (as defined
below) may be less than the related Group I
Net Weighted Average Rate, while the related
Group I Formula Pass-Through Rate or Rates
applicable to certain other classes of Group
I Certificates may exceed such Group I Net
Weighted Average Rate. In such event, the
Pooling and Servicing Agreement will provide
that the excess
S-14
<PAGE>
moneys resulting from the classes having
Group I Formula Pass-Through Rates less than
the related Group I Net Weighted Average
Rate shall be applied to increase the
maximum rate of interest payable with
respect to any class or classes having Group
I Formula Pass-Through Rates greater than
the related Group I Net Weighted Average
Rate. The Group I Net Weighted Average Rate,
increased by the amount of such excess
moneys (converted to a per annum rate), is
the "Group I Available Funds Pass-Through
Rate" as determined separately for the Class
A-1, Class M-1A, Class M-2A and Class B-1A
Certificates and any Distribution Date.
The "Group I Formula Pass-Through Rate," as
determined for each of the Group I
Certificates (other than the Group I Fixed
Strip Components) for any Distribution Date,
is the lesser of (x) the rate determined by
clause (i) of the definition of Pass-
Through Rate for such class of Group I
Certificates on such Distribution Date and
(y) the weighted average of the 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 (i) the Servicing Fee Rate and
the per annum rate at which the related
Trustee's Fee accrues and (ii) the Group I
Fixed Strip Effective Rate times a fraction
equal to (x) the Notional Amount of the
Group I Fixed Strip Components divided by
(y) the aggregate Principal Balance of the
Group I Loans as of the beginning of the
related Due Period.
The Pooling and Servicing Agreement provides
that if the Pass-Through Rate on any Group I
Certificate is less than the related Group I
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 defined herein)
then the amount of any such shortfall will
be carried forward and paid to the extent of
the related Net Monthly Excess Cashflow, as
described herein, to the Holders of the
applicable Group I Certificates on future
Distribution Dates and shall accrue interest
at the applicable Group I Formula
Pass-Through Rate, until paid (such
shortfall, as determined with respect
S-15
<PAGE>
to each class of Group I Certificates,
together with such accrued interest, the
"Group I Available Funds Cap Carry-Forward
Amount"). The ratings assigned to the Group
I Certificates do not address the payment of
the Group I Available Funds Cap CarryForward
Amount.
The Pass-Through Rates with respect to the
Class A- 2, Class A-3, Class A-4, Class A-5,
Class M-1F, Class M-2F and Class B-1F
Certificates are equal to the fixed rates
set forth on the cover hereof.
The Pass-Through Rate for the Group I Fixed
Strip Component A will be equal to of 2.50%
for the first 30 Distribution Dates, and
0.00% thereafter. The Pass-Through Rate for
the Group I Fixed Strip Component B will be
equal to of 1.50% for the first 24
Distribution Dates, and 0.00% thereafter.
The Pass-Through Rate for the Group I Fixed
Strip Component C will be equal to of 1.50%
for the first 12 Distribution Dates, and
0.00% thereafter. The Pass-Through Rate for
the Group II Fixed Strip Component will be
equal to 6.50% for the first 36 Distribution
Dates, and 0.00% thereafter. The Components
of the Fixed Strip Certificates have no
Certificate Principal Balance and will
accrue interest at the related Pass-Through
Rate on the related Notional Amount.
See "Description of the
Certificates--Interest Distributions" and
"--Calculation of One-Month LIBOR" herein.
Interest Distributions..............On each Distribution Date, the holders of
the Offered Certificates will be entitled to
receive interest distributions in an amount
equal to the Accrued Certificate Interest
(as defined below) on such class on each
Distribution Date in the manner and priority
set forth herein and to the extent of the
related Interest Remittance Amount (as
defined herein) less the related Trustee's
Fee.
With respect to any Distribution Date and
any class of Offered Certificates, "Accrued
Certificate Interest" will be equal to the
sum of interest accrued for the related
Accrual Period (as defined herein) on the
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<PAGE>
Certificate Principal Balance thereof (or
the related Notional Amounts thereof, in the
case of the Components of the Fixed Strip
Certificates) 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 Group I Certificates (other
than the Group I Fixed Strip Components)
provided that, for any Distribution Date for
which clause (ii) of the definition of
Pass-Through Rate on the Group I
Certificates is applicable, Accrued
Certificate Interest will be calculated on
the basis of a 360-day year and a 30-day
month, and a 360-day year and a 30-day
month, with respect to the Group I Fixed
Strip Components and the Group II
Certificates), subject to reduction (which
reductions shall be allocated pro rata to
all Classes of related Certificates based on
the amounts of Accrued Certificate Interest
otherwise payable thereon) 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.
See "Description of the
Certificates--Interest Distributions"
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. See "Pooling and
Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses" and
"Description of the Certificates--Interest
Distributions" herein.
The Notional Amount of the Group I Fixed
Strip Components as of any Distribution Date
is equal to the lesser of (i) $29,150,000.00
and (ii) the aggregate Certificate Principal
Balance of the Group I Certificates
immediately prior to such date. The Notional
Amount of the Group II Fixed Strip Component
as of any Distribution Date is equal to the
lesser of (i) $8,350,000.00 and (ii) the
aggregate
S-17
<PAGE>
Certificate Principal Balance of the Group
II Certificates immediately prior to such
date.
Principal Distributions.............Holders of the Class A Certificates (other
than the Fixed Strip Certificates, which
will not be entitled to distributions with
respect to principal) will be entitled to
receive a distribution of principal on each
Distribution Date, in the manner and
priority set forth herein, to the extent of
the related Principal Distribution Amount
(as defined herein).
Following the earlier to occur of the
Stepdown Date (as defined herein) or the
retirement of the related Class A
Certificates and any Class M Certificates
senior thereto, holders of the Class M
Certificates will be entitled to receive a
distribution of principal on each
Distribution Date, in the manner and
priority set forth herein, to the extent of
the portion of the related Principal
Distribution Amount remaining after
distributions in respect of principal to the
holders of the related Class A Certificates
and any class of Class M Certificates having
a higher payment priority.
Following the earlier to occur of the
Stepdown Date or the retirement of the
related Class M Certificates, holders of the
Class B-1 Certificates will be entitled to
receive a distribution of principal on each
Distribution Date, in the manner and
priority set forth herein, to the extent of
the portion of the related Principal
Distribution Amount remaining after
distributions in respect of principal to the
holders of the related Class A Certificates
and the related Class M Certificates.
The "Principal Distribution Amount" means,
as determined with respect to each Loan
Group separately as of any Distribution
Date, the sum of (i) the related Principal
Remittance Amount, minus, on any
Distribution Date occurring on or after the
related Stepdown Date, the related
Subordination Reduction Amount, if any, and
(ii) the related Extra Principal
Distribution Amount, if any.
The "Principal Remittance Amount" for either
Loan Group and on any Distribution Date
shall equal the sum of (i) all scheduled
installments of principal in
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<PAGE>
respect of the related Mortgage Loans
received or advanced during the related Due
Period (as defined herein), together with
all unscheduled payments of principal on
such Mortgage Loans, received by the Master
Servicer during the prior calendar month,
(ii) the Principal Balance of each Mortgage
Loan in such Loan Group that was repurchased
by either the Seller or by the Company,
(iii) any amounts in respect of principal
delivered by the Company on the Master
Servicer Remittance Date (as defined herein)
in connection with a substitution of a
Mortgage Loan in such Loan Group, (iv) the
net Liquidation Proceeds (as defined in the
Prospectus) collected by the Master Servicer
of all Mortgage Loans in such Loan Group
during the prior calendar month (to the
extent such net Liquidation Proceeds are
related to principal), (v) the proceeds
received by the Trustee of any termination
of such Loan Group (to the extent such
proceeds are related to principal), and (vi)
with respect to the Distribution Date
occurring in July 1997, any amounts in the
related Pre-Funding Account after giving
effect to any purchase of related Subsequent
Mortgage Loans.
See "Description of the
Certificates--Principal Distributions"
herein.
Net Monthly Excess
Cashflow.......................Holders of the Offered Certificates may be
entitled to receive additional distributions
in respect of principal on each Distribution
Date to the extent of Net Monthly Excess
Cashflow. Net Monthly Excess Cashflow will
consist primarily of the portion, if any, of
the Interest Remittance Amount with respect
to each Loan Group not required to pay the
related Trustee's Fee, Accrued Certificate
Interest on the related Offered Certificates
and any related Subordination Reduction
Amount. The Net Monthly Excess Cashflow
generally will be used as payments in
respect of principal on the Offered
Certificates to create
overcollateralization.
See "Description of the Certificates-Net
Monthly Excess Cashflow Distributions"
herein.
Credit Enhancement..................The credit enhancement provided for the
benefit of the Offered Certificateholders
consists solely of (i)
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<PAGE>
the subordination provisions provided herein
and (ii) the overcollateralization mechanics
which utilize the internal cash flows of the
Mortgage Loans in the related Loan Group.
SUBORDINATION. The rights of the holders of
the Class M-1A Certificates to receive
distributions with respect to the Group I
Loans will be subordinate to the rights of
the holders of the Group I Class A
Certificates, the rights of the holders of
the Class M- 1F Certificates to receive
distributions with respect to the Group II
Loans will be subordinate to the rights of
the holders of the Group II Class A
Certificates, the rights of the holders of
the Class M-2A Certificates to receive
distributions with respect to the Group I
Loans will be subordinate to the rights of
the holders of the Group I Class A
Certificates and the Class M-1A
Certificates, the rights of the holders of
the Class M-2F Certificates to receive
distributions with respect to the Group II
Loans will be subordinate to the rights of
the holders of the Group II Class A
Certificates and Class M-1F Certificates,
the rights of the holders of the Class B-1A
Certificates to receive distributions with
respect to the Group I Loans will be
subordinate to the rights of the holders of
the Group I Class A Certificates, the Class
M-1A Certificates and the Class M-2A
Certificates, the rights of the holders of
the Class B-1F Certificates to receive
distributions with respect to the Group II
Loans will be subordinate to the rights of
the holders of the Group II Class A
Certificates, Class M-1F Certificates and
Class M-2F Certificates, in each case to the
extent described herein and in the
Prospectus.
On each Distribution Date, following the
application of all amounts distributable on
such date, to the extent the aggregate
Principal Balance of the Mortgage Loans in
any Loan Group is less than the aggregate
Certificate Principal Balances of the
related Offered Certificates due to
Liquidated Loan Losses, the Certificate
Principal Balances of the related Class B-1
Certificates and Class M Certificates shall
be reduced as follows, until such deficiency
is fully allocated: first, the Certificate
Principal Balance of the related Class B-1
Certificates shall be reduced,
S-20
<PAGE>
until the related Certificate Principal
Balance has been reduced to zero; second,
the Certificate Principal Balance of the
related Class M-2 Certificates shall be
reduced, until the related Certificate
Principal Balance has been reduced to zero;
and third, the Certificate Principal Balance
of the related Class M-1 Certificates shall
be reduced, until the related Certificate
Principal Balance has been reduced to zero.
The Certificate Principal Balances of the
related Class A Certificates shall not be so
reduced; such Certificates will continue to
receive Accrued Certificate Interest on
their balance. Any loss allocated to a Class
B-1 Certificate or Class M Certificate may
be repaid through the mechanics of the
payment of the related Net Monthly Excess
Cashflow as described herein.
To the extent the Certificate Principal
Balance of any class of Class M Certificates
or Class B-1 Certificates is reduced, such
classes will only be entitled to receive
Accrued Certificate Interest on their
Certificate Principal Balance as reduced as
a result of the allocation of Liquidated
Loan Losses thereto. Losses allocated to
reduce the Certificate Principal Balance of
such Certificates may only be reimbursed
through the related Net Monthly Excess
Cashflow. See "Description of the
Certificates-Net Monthly Excess Cashflow
Distributions" herein.
OVERCOLLATERALIZATION. The
overcollateralization mechanics of the Trust
Fund result in a limited acceleration of the
Offered Certificates relative to the
amortization of 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 Balances of the
related Offered 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 aggregate Certificate Principal
Balance of the related Offered Certificates.
Once the required level of
overcollateralization is reached, and
subject to the provisions described in the
next paragraph, the acceleration feature
will
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<PAGE>
cease, unless necessary to maintain the
required level of overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain trigger tests, the
percentage 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 Offered
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-- Overcollateralization
Provisions."
Mandatory Prepayments on
the Certificates..................The Group I Certificates and Group II
Certificates will be prepaid in part on the
Distribution Date occurring in July 1997 in
the event that any amount remains on deposit
in the related Pre-Funding 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 and that
there should be no material amount of
principal prepaid to the Group I
Certificateholders and Group II
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 PreFunded Amount. See "Description
of the Certificates--Mandatory Prepayments
on the Group I Certificates and Group II
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.
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<PAGE>
Final Scheduled
Payment Dates:....................The Final Scheduled Payment Dates for each
of the respective Classes of Offered
Certificates are as follows, although it is
anticipated that the actual final
Distribution Date for each Class will occur
earlier than the Final Scheduled Payment
Date. See "Prepayment and Yield
Considerations" herein.
Class Final Scheduled
----- Payment Date
------------
Class A-1 Certificates May 25, 2027
Class A-2 Certificates January 25, 2017
Class A-3 Certificates January 25, 2026
Class A-4 Certificates May 25, 2027
Class A-5 Certificates May 25, 2027
Class A-IO Certificates June 25, 2000
Class M-1A Certificates May 25, 2027
Class M-1F Certificates May 25, 2027
Class M-2A Certificates May 25, 2027
Class M-2F Certificates May 25, 2027
Class B-1A Certificates May 25, 2027
Class B-1F Certificates May 25, 2027
Optional Termination................At its option, on any Distribution Date when
the aggregate Principal Balance of either
Loan Group is less than 10% of the sum of
the aggregate principal balance of the
Mortgage Loans in the related Loan Group as
of the Cut-off Date and the aggregate
principal balance of the related 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-I Certificates (or the Master
Servicer if the Principal Balance of the
Mortgage Loans in the related Loan Group is
less than 5% of such sum) may purchase from
the Trust Fund the Mortgage Loans in the
related Loan Group 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.
Special Prepayment Considerations...The rate and timing of principal payments on
the Offered Certificates will depend, among
other things, on the rate and timing of
principal payments (including prepayments,
defaults, liquidations and
S-23
<PAGE>
purchases of the Mortgage Loans due to a
breach of a representation or warranty) on
the Mortgage Loans in the related Loan
Group. As is the case with mortgage-backed
securities generally, the Offered
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.
The multiple class structure of the Offered
Certificates results in the allocation of
prepayments among certain classes as
follows:
SEQUENTIALLY PAYING CLASSES: The Offered
Certificates are subject to various
priorities for payment of principal as
described herein. Distributions of principal
on classes having an earlier priority of
payment will be affected by the rates of
prepayment of the Mortgage Loans in the
related Loan Group early in the life of the
Mortgage Pool. The timing of commencement of
principal distributions and the weighted
average lives of classes of Offered
Certificates with a later priority of
payment will be affected by the rates of
prepayment experienced both before and after
the commencement of principal distributions
on such classes.
LOCKOUT CERTIFICATES: As described herein,
during certain periods all or a
disproportionately large or small percentage
of principal payments on the Mortgage Loans
will be allocated among the Group II Class A
Certificates (other than the Lockout
Certificates), and, during certain periods,
no principal payments will be distributed on
the Lockout
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<PAGE>
Certificates. Unless the Certificate
Principal Balance of the Group II Class A
Certificates (other than the Lockout
Certificates) have been reduced to zero, the
Lockout Certificates will be entitled to
receive no distributions of principal
payments prior to the Distribution Date in
July 2000.
See "Description of the
Certificates--Principal Distributions" and
"Certain Yield and Prepayment
Considerations" herein, and "Maturity and
Prepayment Considerations" in the
Prospectus.
Special Yield Considerations........The yield to maturity on the Offered
Certificates will depend on, among other
things, the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of the Mortgage
Loans 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 Offered Certificates will also depend on
the related Pass-Through Rate and the
purchase price for such Certificates.
If the Offered Certificates (including the
Fixed Strip Certificates) are 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 the Offered 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 Group I 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 Group II 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 Offered
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<PAGE>
Certificates may vary as determined at the
time of sale.
The multiple class structure of the Offered
Certificates causes the yield of certain
classes to be particularly sensitive to
changes in the rates of prepayment of the
Mortgage Loans and other factors, as
follows:
LOCKOUT CERTIFICATES: Investors in the
Lockout Certificates should be aware that
because the Lockout Certificates are not
expected to receive any portion of principal
payments prior to the Distribution Date
occurring in July 2000 and will receive a
disproportionately small or large portion of
principal payments thereafter (unless the
Certificate Principal Balances of the Class
A-2, Class A-3 and Class A-4 Certificates
have been reduced to zero), the weighted
average life of the Lockout Certificates
will be longer or shorter than would
otherwise be the case, and the effect on the
market value of the Lockout Certificates of
changes in market interest rates or market
yields for similar securities may be greater
or lesser than for other classes of Group II
Class A Certificates entitled to such
distributions.
FIXED STRIP CERTIFICATES: Investors in the
Fixed Strip Certificates should fully
consider that an extremely rapid rate of
principal prepayments on the Mortgage Loans
could result in the failure of such
investors to recover their initial
investments.
CERTIFICATES WITH SUBORDINATION FEATURES:
The yield to investors on each class of
Class M Certificates and Class B-1
Certificates, and particularly on the Class
B-1 Certificates, will be extremely
sensitive to losses due to defaults on the
related Mortgage Loans (and the timing
thereof), to the extent such losses are not
covered by the related Net Monthly Excess
Cashflow or related Subordinated Amount or
by the Class B-1 Certificates or by any
other class of Class M Certificates having a
lower payment priority, because the entire
amount of such losses will be allocable to
such class or classes of Class M
Certificates or Class B-1 Certificates, as
described herein.
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See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences......................Three real estate mortgage investment
conduit ("REMIC") elections 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 Offered
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, REMIC I, REMIC
II and REMIC III (exclusive of the Interest
Coverage Accounts and the Pre-Funding
Accounts) will each qualify as a REMIC under
Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code").
For federal income tax purposes, (a) the
Class R-I Certificates will be the sole
class of "residual interests" in REMIC I,
(b) the Class R-II Certificates will be the
sole class of "residual interests" in REMIC
II, (c) each class of the Certificates
(other than the Residual Certificates), will
represent ownership of "regular interests"
in REMIC III and will generally be treated
as representing ownership of debt
instruments of REMIC III and (d) the Class
R- III Certificates will constitute the sole
class of "residual interests" in REMIC III.
For federal income tax reporting purposes,
the Offered Certificates (other than the
Fixed Strip Certificates) will not, and the
Fixed Strip Certificates will, 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 Group I
Certificates, and 115% of the Prepayment
Assumption, with respect to the Group II
Certificates. No representation is made that
the Mortgage Loans will prepay at these
rates or at any other rates.
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<PAGE>
For further information regarding the
federal income tax consequences of investing
in the Offered Certificates, see "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
ERISA Considerations................As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by employee benefit plans that are
subject to ERISA. The Class M Certificates
and Class B-1 Certificates may not be
purchased by employee benefit plans that are
subject to ERISA except as provided herein.
See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment....................The Group I Class A, Group II Class A, Class
M-1A and Class M-1F 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. 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 such Certificates and
should consult with their legal advisors.
The Class M-2A, Class M- 2F, Class B-1A and
Class B-1F Certificates will not constitute
"mortgage related securities for purposes of
SMMEA. See "Legal Investment" herein and
"Legal Investment Matters" in the
Prospectus.
Ratings.............................It is a condition of the issuance of the
Offered Certificates that the Offered
Certificates be rated by Standard & Poor's
Ratings Services ("S&P"), Duff & Phelps
Credit Rating Co. ("DCR") and Fitch
Investors Service, L.P. ("Fitch") as
follows:
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<PAGE>
CLASS S&P DCR FITCH
Class A-1 Certificates AAA AAA AAA
Class A-2 Certificates AAA AAA AAA
Class A-3 Certificates AAA AAA AAA
Class A-4 Certificates AAA AAA AAA
Class A-5 Certificates AAA AAA AAA
Class A-IO Certificates AAAr AAA AAA
Class M-1A Certificates AA AA+ AA
Class M-1F Certificates AA AA+ AA
Class M-2A Certificates A A A
Class M-2F Certificates A AA- A
Class B-1A Certificates BBB BBB BBB
Class B-1F Certificates BBB BBB+ BBB
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. 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 Fitch on payment of principal and
interest do not cover the payment of the
Group I 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 Offered 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.
SUBORDINATION
The rights of the holders of the Class M-1A Certificates to receive
distributions with respect to the Group I Loans will be subordinate to the
rights of the holders of the Group I Class A Certificates, the rights of the
holders of the Class M-1F Certificates to receive distributions with respect to
the Group II Loans will be subordinate to the rights of the holders of the Group
II Class A Certificates, the rights of the holders of the Class M-2A
Certificates to receive distributions with respect to the Group I Loans will be
subordinate to the rights of the holders of the Group I Class A Certificates and
the Class M-1A Certificates, the rights of the holders of the Class M-2F
Certificates to receive distributions with respect to the Group II Loans will be
subordinate to the rights of the holders of the Group II Class A Certificates
and Class M-1F Certificates, the rights of the holders of the Class B-1A
Certificates to receive distributions with respect to the Group I Loans will be
subordinate to the rights of the holders of the Group I Class A Certificates,
the Class M-1A Certificates and the Class M-2A Certificates, the rights of the
holders of the Class B-1F Certificates to receive distributions with respect to
the Group II Loans will be subordinate to the rights of the holders of the Group
II Class A Certificates, Class M-1F Certificates and Class M-2F Certificates, in
each case to the extent described herein. The subordination of the Class M
Certificates and Class B-1 Certificates to the related Class A Certificates is
intended to enhance the likelihood of regular receipt by the holders of the
related Class A Certificates of the full amount of the principal and interest
distributions allocable to them, and to afford such holders protection against
losses. As a result of the payment priorities described herein, holders of the
Class M Certificates or Class B-1 Certificates may not receive the full amount
of principal and interest due thereon.
After the related Subordinated Amount has been reduced to zero, the
yield to maturity on the related Class of Class B-1 Certificates will be
extremely sensitive to losses on the related Mortgage Loans (and the timing
thereof) because the entire amount of Liquidated Loan Losses (to the extent not
covered by the related Net Monthly Excess Cashflow) will be allocated to such
class of Class B-1 Certificates. After the related Subordinated Amount has been
reduced to zero and the Certificate Principal Balance of the related Class B-1
Certificates, and, in the case of the Class M-1 Certificates, the Class M-2
Certificates, have been reduced to zero, the yield to maturity on the most
subordinate class of Class M Certificates then outstanding will be extremely
sensitive to losses on the related Mortgage Loans (and the timing thereof)
because the entire amount of Liquidated Loan Losses (to the extent not covered
by the related Net Monthly Excess Cash Flow) will be allocated to such class of
Class M Certificates. Furthermore, because interest and principal distributions
are paid to certain classes of Offered Certificates before other classes,
holders of classes having a later priority of payment bear a greater risk of
losses than holders of classes having earlier priorities for distribution of
interest and principal.
UNDERWRITING STANDARDS
Approximately 81.79% and 76.66% of the Initial Group I Loans and Initial
Group II Loans (each by principal balance as of the Statistical Reference Date),
respectively, were originated and underwritten or acquired and reunderwritten by
Southern Pacific Funding Corporation ("SPFC" or the "Seller"). Approximately
10.98% and 23.20% of the Initial Group I Loans and Initial Group II Loans (each
by principal balance as of the Statistical Reference Date), respectively, were
underwritten by MorCap, Inc. ("MorCap"), and approximately 6.13% and 0.14% of
the Initial Group I Loans and Initial Group II Loans (each by principal balance
as of the Statistical Reference Date), respectively, were underwritten by BOMAC
Capital Mortgage, Inc. and American Funding Group, Inc. which are affiliated
with the
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<PAGE>
Company (together, the "Strategic Partners") and 1.10% of the Initial Group I
Loans (by principal balance as of the Statistical Reference Date) were
underwritten by an unaffiliated originator (the "Unaffiliated Originator"; and
collectively with SPFC, MorCap and the Strategic Partners, the "Originators").
The Mortgage Loans originated by SPFC and MorCap were underwritten or
reunderwritten in accordance with the underwriting standards described in
"Description of the Mortgage Pool--Underwriting" below and in Appendix A to this
Prospectus Supplement, and the Mortgage Loans originated by the Strategic
Partners and the Unaffiliated Originator were originated pursuant to similar
guidelines but were not so reunderwritten (and therefore may perform
differently), except to the extent described herein. Such underwriting
guidelines 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 ORIGINATORS' 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 Originators' 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 securing the Group I
Loans and Group II Loans 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 and MorCap described in "Description of
the Mortgage Pool--Underwriting" in this Prospectus Supplement and in Appendix A
to this Prospectus Supplement and the mortgage loan programs of the Strategic
Partners and the Unaffiliated Originator 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, each of the Originators 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 it included in
Loan Group I or Loan Group II. See "Description of the Mortgage
Pool--Delinquency and Foreclosure Experience of the Seller" herein.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
None of the Initial Group I Loans or Initial Group II Loans were thirty
days or more delinquent in their Monthly Payments as of the Statistical
Reference Date. Prospective investors in the Offered Certificates should be
aware, however, that approximately 30.11% and 29.62% 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 April 1, 1997, and therefore, the remaining Initial Group I Loans (and
all of the Additional Group I Loans) and Initial Group II Loans could not have
been delinquent Mortgage Loans as of the Statistical Reference Date.
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<PAGE>
Approximately 6.39% of the Initial Group II Loans (by aggregate principal
balance as of the Statistical Reference Date) are Balloon Loans. Because
borrowers of Balloon Loans are required to make substantial single payments upon
maturity, it is possible that the default risk associated with the Balloon Loans
in Loan Group II is greater than that associated with fully-amortizing loans.
Approximately 35.06% of the Initial Group II Loans were originated in the
southeastern United States (meaning the States of Florida, Georgia, Alabama,
North Carolina and South Carolina). In the event the southeastern United States
experiences a decline in real estate values, losses on the Group II Loans may be
greater than otherwise would be the case.
RISK OF MORTGAGE LOAN YIELD REDUCING PASS-THROUGH RATES ON THE GROUP I
CERTIFICATES
The Pass-Through Rate on each class of Group I Certificates (other than the
Group I Fixed Strip Components) 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 based upon Six-Month
LIBOR, as described under "Description of the Mortgage Pool--Mortgage Rate
Adjustment" herein. However, clause (ii) of the definition of the Pass-Through
Rate on such Group I Certificates limits the Pass-Through Rate on such Group I
Certificates to the Group I 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. As a result, the interest paid to the Group I 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 Rates on the Group I Certificates
may be determined by the Group I Available Funds Pass-Through Rate for extended
periods in a rising interest rate environment. In addition, with respect to the
Group I Certificates, One-Month LIBOR and Six-Month LIBOR may respond to
different economic and market factors, and there is not necessarily any
correlation among them. Thus, it is possible, for example, that One-Month LIBOR
may rise during periods in which Six-Month LIBOR is stable or is falling or
that, even if One-Month LIBOR and Six-Month LIBOR rise during the same period,
One-Month LIBOR may rise much more rapidly than Six-Month LIBOR.
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 56.54%
and 0.20% 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 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 July 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
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<PAGE>
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 Certificateholders on such Distribution Date.
BOOK-ENTRY CERTIFICATES
Issuance of the Offered 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 a sampling of mortgage loans included in the Trust Fund (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 additional mortgage loans
which will be included in Loan Group I on the Delivery Date (the "Additional
Group I Loans") or mortgage loans purchased by the Trust Fund after the Delivery
Date (the "Subsequent Mortgage Loans"). The Initial Group I Loans, Additional
Group I Loans and related Pre-Funding Amount (as defined herein), will
constitute approximately 69.46%, 8.62% and 21.92%, respectively, of the
aggregate of the Principal Balance of such mortgage loans and such Pre-Funding
Amount as of the Cut-off Date. The Initial Group II Loans and related
Pre-Funding Amount will constitute approximately 75.31% and 24.69%,
respectively, of the aggregate of the Principal Balance of such mortgage loans
and such Pre-Funding Amount as of the Cut-off Date. While the statistical
distribution of the final characteristics of the Initial Group I Loans and the
Initial Group II Loans transferred to the Trust Fund on the Delivery Date will
vary from the statistical information presented in this Prospectus Supplement,
the Company does not believe that the characteristics of the Mortgage Loans as
of the Cut-off Date will vary materially from the information presented herein
with respect to the Initial Group I Loans and the Initial Group II Loans as of
the Statistical Reference Date.
The information in this Prospectus Supplement with respect to the Initial
Group I Loans and Initial Group II Loans includes information as of May 1, 1997
(the "Statistical Reference Date"). In addition, it has been assumed that the
principal balances of the Initial Group I Loans and Initial Group II Loans have
been reduced to take into account a scheduled Monthly Payment on May 1, 1997
which, if and when received, will not be a part of the Trust Fund.
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 July 15, 1997, from
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<PAGE>
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."
The Mortgage Loans underlying the Certificates consist of the "Group I
Loans" and the "Group II Loans" (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 not more than 30 years from the date of
origination or modification. The Initial Group I Loans had an aggregate
outstanding principal balance as of the Statistical Reference Date of
$202,467,539.65. Approximately 99.79% of the Initial Group I Loans have terms to
maturity from the date of origination or modification of 20 or 30 years and
approximately 0.21% of the Initial Group I Loan have terms to maturity from the
date of origination or modification of 15 years or less. The Group II Loans will
generally consist of conventional, fixed-rate, monthly payment, first lien
mortgage loans. The Initial Group II Loans had an aggregate outstanding
principal balance as of the Statistical Reference Date of $62,880,818.82.
Approximately 79.62% of the Initial Group II Loans have terms to maturity from
the date of origination or modification of 20 to 30 years and approximately
20.38% of the Initial Group II 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 Originators, 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 Originators 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.
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.
Each Mortgage Loan (including each Subsequent Mortgage Loan) will have been
originated or acquired by the Seller on or before July 15, 1997. Certain of the
Mortgage Loans will have their first Monthly Payments due on August 1, 1997. As
to those Mortgage Loans, no principal amortization payments will be distributed
(unless prepayments are received thereon) until the Distribution Date occurring
in August 1997, the month in which the first Monthly Payment is due. However, on
the Delivery Date, cash will be deposited in the Certificate Accounts in an
amount equal to one month's interest on such Mortgage Loans (less the Servicing
Fee), to be remitted to the Trustee for distribution to Certificateholders on
the Distribution Date occurring in July 1997, the month prior to the month in
which the first Monthly Payment is due.
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<PAGE>
The majority of the Initial Group I Loans and Initial Group II Loans
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 Originators 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.
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 43.26% of the
Initial Group I Loans (by principal balance as of the Statistical Reference
Date), approximately six months or one year after the date of origination, (ii)
with respect to approximately 56.54% of the Initial Group I Loans (by principal
balance as of the Statistical Reference Date), approximately two years after
origination (each such Group I Loan, a "2/28 Loan") and (iii) with respect to
approximately 0.20% of the Initial Group I Loans (by principal balance as of the
Statistical Reference Date), approximately three years after origination (each
such Group I Loan, a "3/27 Loan"). The Mortgage Rate on each Group I Loan will
adjust semi-annually or annually 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 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 43.83% of the Initial Group I Loans, 1.50% with respect
to approximately 50.35% of the Initial Group I Loans, and 2.00% with respect to
approximately 1.66% of the Initial Group I Loans, and 3.00% with respect to
approximately 4.16% of the Initial Group I Loans, 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 Index applicable with respect to the Group I Loans
is 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. 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
Index and the related 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.
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 such date, of
$202,467,539.65. 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.
S-35
<PAGE>
Approximately 99.79% of the Initial Group I Loans have original terms to
stated maturity of approximately 20 or 30 years and approximately 0.21% 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 15 months.
As of the Statistical Reference Date, each Initial Group I Loan will have
an unpaid principal balance of not less than $14,300.00 or more than $700,000.00
and the average unpaid principal balance of the Initial Group I Loans will be
approximately $113,236.88. The latest stated maturity date of any of the Initial
Group I Loans will be June 1, 2027; 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 87.90% of the Initial Group I Loans will be secured by Mortgaged
Properties which are owner occupied primary residences, 12.10% 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-36
<PAGE>
INITIAL MORTGAGE RATES
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
INITIAL MORTGAGE RATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------- ----------------- -----------------
5.251% - 5.500% 1 $ 90,400.00 0.04%
7.001% - 7.250% 2 535,950.92 0.26
7.251% - 7.500% 5 749,020.91 0.37
7.501% - 7.750% 8 995,815.12 0.49
7.751% - 8.000% 31 3,355,835.55 1.66
8.001% - 8.250% 27 3,021,822.90 1.49
8.251% - 8.500% 48 6,254,884.11 3.09
8.501% - 8.750% 60 8,638,703.77 4.27
8.751% - 9.000% 124 16,664,500.69 8.23
9.001% - 9.250% 78 11,436,393.10 5.65
9.251% - 9.500% 111 12,832,162.97 6.34
9.501% - 9.750% 110 15,420,636.59 7.62
9.751% - 10.000% 141 17,189,944.91 8.49
10.001% - 10.250% 103 13,007,573.61 6.42
10.251% - 10.500% 129 13,440,268.38 6.64
10.501% - 10.750% 131 14,869,512.48 7.34
10.751% - 11.000% 104 11,614,093.67 5.74
11.001% - 11.250% 76 6,023,271.62 2.97
11.251% - 11.500% 63 6,340,216.14 3.13
11.501% - 11.750% 66 6,958,000.60 3.44
11.751% - 12.000% 52 5,019,566.41 2.48
12.001% - 12.250% 47 4,554,850.28 2.25
12.251% - 12.500% 41 2,956,158.56 1.46
12.501% - 12.750% 37 3,942,587.82 1.95
12.751% - 13.000% 27 2,200,042.01 1.09
13.001% - 13.250% 18 1,421,828.28 0.70
13.251% - 13.500% 33 3,198,695.27 1.58
13.501% - 13.750% 22 1,573,151.77 0.78
13.751% - 14.000% 26 1,930,306.90 0.95
14.001% - 14.250% 19 2,742,003.04 1.35
14.251% - 14.500% 15 1,349,491.24 0.67
14.501% - 14.750% 13 813,446.40 0.40
14.751% - 15.000% 5 413,454.59 0.20
15.001% - 15.250% 4 444,834.92 0.22
15.251% - 15.500% 7 281,614.12 0.14
15.751% - 16.000% 3 164,900.00 0.08
16.751% - 17.000% 1 21,600.00 0.01
----- ---------------- ------
Total 1,788 $202,467,539.65 100.00%
===== ================= =======
The weighted average Initial Mortgage Rate of the Initial Group I Loans
will be approximately 10.384% per annum.
S-37
<PAGE>
NEXT INTEREST ADJUSTMENT DATE
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NEXT INTEREST NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ADJUSTMENT DATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- ------------- ----------------- -----------------
June 1997 10 $ 1,466,171.00 0.72%
July 1997 10 1,242,285.68 0.61
August 1997 56 7,086,745.93 3.50
September 1997 211 27,116,393.83 13.39
October 1997 212 23,873,739.81 11.79
November 1997 175 22,256,742.74 10.99
December 1997 36 4,309,860.00 2.13
May 1998 2 242,550.00 0.12
December 1998 4 860,237.26 0.42
January 1999 6 1,012,807.38 0.50
February 1999 33 3,843,769.53 1.90
March 1999 215 20,807,187.00 10.28
April 1999 351 38,603,500.40 19.07
May 1999 374 41,140,617.01 20.32
June 1999 88 8,205,765.00 4.05
January 2000 1 135,756.14 0.07
February 2000 2 204,177.89 0.10
March 2000 1 44,933.05 0.02
April 2000 1 14,300.00 0.01
----- ------------------ ------
Total 1,788 $ 202,467,539.65 100.00%
===== ================== ======
The weighted average remaining months to the next interest Adjustment
Date of the Initial Group I Loans will be approximately 15 months.
S-38
<PAGE>
GROSS MARGIN
PERCENTAGE OF
STATISTICAL REFERENCE
DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- ------------------- -----------------
2.751% - 3.000% 1 $ 90,400.00 0.04%
4.251% - 4.500% 2 278,804.28 0.14
4.501% - 4.750% 7 1,622,587.37 0.80
4.751% - 5.000% 7 864,687.97 0.43
5.001% - 5.250% 81 10,830,372.99 5.35
5.251% - 5.500% 142 19,325,082.86 9.54
5.501% - 5.750% 147 19,004,901.54 9.39
5.751% - 6.000% 278 32,953,477.81 16.28
6.001% - 6.250% 186 20,273,414.00 10.01
6.251% - 6.500% 307 35,128,305.51 17.35
6.501% - 6.750% 154 16,199,421.70 8.00
6.751% - 7.000% 150 14,742,084.27 7.28
7.001% - 7.250% 79 6,162,628.96 3.04
7.251% - 7.500% 96 9,142,389.23 4.52
7.501% - 7.750% 45 4,410,378.68 2.18
7.751% - 8.000% 45 5,858,184.29 2.89
8.001% - 8.250% 15 1,314,108.42 0.65
8.251% - 8.500% 14 1,166,195.87 0.58
8.501% - 8.750% 6 378,391.93 0.19
8.751% - 9.000% 11 962,528.15 0.48
9.001% - 9.250% 4 156,152.52 0.08
9.251% - 9.500% 4 306,950.44 0.15
9.501% - 9.750% 3 112,222.16 0.06
9.751% - 10.000% 2 457,500.00 0.23
10.001% - 10.250% 1 633,387.04 0.31
10.751% - 11.000% 1 92,981.66 0.05
----- -------------- -----
Total 1,788 $202,467,539.65 100.00%
===== =============== ======
The weighted average Gross Margin of the Initial Group I Loans will be
approximately 6.339% per annum.
S-39
<PAGE>
LIFETIME RATE CAP
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LIFETIME RATE CAP GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------------- ------------------- ---------------
12.001% - 12.500% 1 $ 90,400.00 0.04%
13.501% - 14.000% 2 220,122.90 0.11
14.001% - 14.500% 8 1,387,531.80 0.69
14.501% - 15.000% 41 4,958,699.47 2.45
15.001% - 15.500% 80 10,642,119.18 5.26
15.501% - 16.000% 191 26,745,005.11 13.21
16.001% - 16.500% 193 23,510,745.87 11.61
16.501% - 17.000% 252 32,499,782.54 16.05
17.001% - 17.500% 226 25,764,960.36 12.73
17.501% - 18.000% 229 25,618,283.85 12.65
18.001% - 18.500% 142 12,257,486.02 6.05
18.501% - 19.000% 120 12,672,724.12 6.26
19.001% - 19.500% 87 8,139,726.72 4.02
19.501% - 20.000% 61 5,120,215.47 2.53
20.001% - 20.500% 49 3,871,666.79 1.91
20.501% - 21.000% 45 3,314,346.88 1.64
21.001% - 21.500% 29 3,535,644.70 1.75
21.501% - 22.000% 18 1,226,900.99 0.61
22.001% - 22.500% 10 704,676.88 0.35
22.501% - 23.000% 3 164,900.00 0.08
23.501% - 24.000% 1 21,600.00 0.01
----- --------------- ------
Total 1,788 $202,467,539.65 100.00%
===== =============== ======
The weighted average Lifetime Rate Cap of the Initial Group I Loans
will be approximately 17.321% per annum.
S-40
<PAGE>
LIFETIME RATE FLOOR
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LIFETIME RATE FLOOR GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ----------------- ----------------- ------------------
5.001% - 5.500% 1 $ 90,400.00 0.04%
7.001% - 7.500% 7 1,284,971.83 0.63
7.501% - 8.000% 39 4,351,650.67 2.15
8.001% - 8.500% 75 9,276,707.01 4.58
8.501% - 9.000% 184 25,303,204.46 12.50
9.001% - 9.500% 189 24,268,556.07 11.99
9.501% - 10.000% 251 32,610,581.50 16.11
10.001% - 10.500% 232 26,447,841.99 13.06
10.501% - 11.000% 235 26,483,606.15 13.08
11.001% - 11.500% 139 12,363,487.76 6.11
11.501% - 12.000% 118 11,977,567.01 5.92
12.001% - 12.500% 88 7,511,008.84 3.71
12.501% - 13.000% 64 6,142,629.83 3.03
13.001% - 13.500% 51 4,620,523.55 2.28
13.501% - 14.000% 48 3,503,458.67 1.73
14.001% - 14.500% 34 4,091,494.28 2.02
14.501% - 15.000% 18 1,226,900.99 0.61
15.001% - 15.500% 11 726,449.04 0.36
15.501% - 16.000% 3 164,900.00 0.08
16.501% - 17.000% 1 21,600.00 0.01
------ -------------- ------
Total 1,788 $202,467,539.65 100.00%
====== =============== ======
The weighted average Lifetime Rate Floor of the Initial Group I Loans
will be approximately 10.384% per annum.
REMAINING MONTHS TO STATED MATURITY
PERCENTAGE OF
STATISTICAL
REMAINING MONTHS REFERENCE DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATED MATURITY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- --------------- ------------------- -----------------
121 - 180 8 $ 423,076.69 0.21%
181 - 240 1 33,765.37 0.02
301 - 360 1,779 202,010,697.59 99.77
----- -------------- ------
Total 1,788 $202,467,539.65 100.00%
===== =============== ======
The weighted average remaining term to stated maturity of the Initial
Group I Loans will be approximately 359 months.
S-41
<PAGE>
YEARS OF ORIGINATION
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
YEARS OF ORIGINATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- --------------- -------------------- -----------------
1995 1 $ 49,000.00 0.02%
1996 60 7,436,972.01 3.67
1997 1,727 194,981,567.64 96.30
----- ------------------ ------
Total 1,788 $ 202,467,539.65 100.00%
===== ================== ======
The earliest month and year of origination of any Initial Group I Loan
is April 1995 and the latest month and year of origination will be May 1997.
<TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ----------------- ----------------- -----------------
<C> <C> <C> <C>
10.01% - 15.00% 1 $ 15,000.00 0.01%
15.01% - 20.00% 3 183,980.84 0.09
20.01% - 25.00% 3 638,304.77 0.32
25.01% - 30.00% 5 233,915.18 0.12
30.01% - 35.00% 12 773,205.82 0.38
35.01% - 40.00% 16 964,112.09 0.48
40.01% - 45.00% 17 1,184,865.48 0.59
45.01% - 50.00% 44 3,022,815.98 1.49
50.01% - 55.00% 59 5,073,869.27 2.51
55.01% - 60.00% 133 11,784,789.56 5.82
60.01% - 65.00% 346 32,544,079.74 16.07
65.01% - 70.00% 281 36,479,775.22 18.02
70.01% - 75.00% 288 33,868,455.78 16.73
75.01% - 80.00% 327 42,444,595.21 20.96
80.01% - 85.00% 146 18,299,176.32 9.04
85.01% - 90.00% 107 14,956,598.39 7.39
----- ----------------- -----
Total 1,788 $ 202,467,539.65 100.00%
===== ================= =======
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group I Loans were approximately 13.05% and 90.00%, respectively, and
the weighted average Loan-to-Value Ratio at origination of the Initial Group I
Loans was approximately 72.39%.
S-42
<PAGE>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ --------------- ----------------------- ----------------
Full Documentation 1,028 $ 106,342,291.59 52.52%
Stated Income 383 48,657,880.17 24.03
Quick Qualification 272 30,472,106.15 15.05
Limited Documentation 94 14,875,045.39 7.35
Alternative Documentation 6 1,228,025.56 0.61
No Income Qualifier 5 892,190.79 0.44
----- ----------------- ------
Total 1,788 $ 202,467,539.65 100.00%
===== ================= ======
See "--Underwriting" below and Appendix A to the Prospectus Supplement
for a description of SPFC's and MorCap's mortgage loan documentation programs.
Each Mortgage Loan underwritten by a Strategic Partner or the Unaffiliated
Originator was placed into the above categories based upon a representation by
the related Strategic Partner or Unaffiliated Originator upon the sale thereof
to SPFC.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
ORIGINAL AGGREGATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID PRINCIPAL
PRINCIPAL BALANCE GROUP I LOANS PRINCIPAL BALANCE BALANCE
- -------------------------- -------------- ----------------- ------------
$ 0.01 - $ 25,000.00 36 $ 767,881.32 0.38%
$ 25,000.01 - $ 50,000.00 325 13,007,491.12 6.42
$ 50,000.01 - $ 75,000.00 408 25,494,175.82 12.59
$ 75,000.01 - $100,000.00 347 30,442,622.99 15.04
$100,000.01 - $125,000.00 215 24,103,317.56 11.90
$125,000.01 - $150,000.00 117 16,018,034.07 7.91
$150,000.01 - $175,000.00 77 12,420,905.47 6.13
$175,000.01 - $200,000.00 57 10,672,842.28 5.27
$200,000.01 - $225,000.00 41 8,731,601.75 4.31
$225,000.01 - $250,000.00 24 5,672,756.95 2.80
$250,000.01 - $275,000.00 15 4,000,391.37 1.98
$275,000.01 - $300,000.00 21 6,034,367.99 2.98
$300,000.01 - $325,000.00 14 4,364,559.66 2.16
$325,000.01 - $350,000.00 21 7,238,910.08 3.58
$350,000.01 - $375,000.00 5 1,813,614.27 0.90
$375,000.01 - $400,000.00 15 5,883,879.01 2.91
$400,000.01 - $425,000.00 8 3,330,025.35 1.64
$425,000.01 - $450,000.00 10 4,402,437.48 2.17
$450,000.01 - $475,000.00 4 1,856,193.86 0.92
$475,000.01 - $500,000.00 6 2,977,882.76 1.47
$500,000.01 - $525,000.00 2 1,013,529.46 0.50
$525,000.01 - $550,000.00 4 2,165,684.70 1.07
$550,000.01 - $575,000.00 3 1,679,080.01 0.83
$575,000.01 - $600,000.00 1 591,884.86 0.29
$600,000.01 - $625,000.00 3 1,831,332.64 0.90
$625,000.01 - $650,000.00 5 3,223,506.76 1.59
$650,000.01 - $675,000.00 1 665,000.00 0.33
$675,000.01 - $700,000.00 3 2,063,630.06 1.02
----- --------------- ------
Total 1,788 $202,467,539.65 100.00%
===== =============== ======
The average original principal balance of the Initial Group I Loans will be
$113,301.31.
S-43
<PAGE>
PROPERTY TYPES
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------------- ----------------- ------------------
Single Family 1,294 $ 156,898,007.35 77.49%
2-4 Family 183 18,274,943.45 9.03
Condominium 86 8,555,657.64 4.23
Manufactured Housing 108 8,344,627.32 4.12
PUD 27 4,757,564.63 2.35
Mobile Home 63 3,221,810.85 1.59
Townhouse 17 1,358,080.53 0.67
Mixed Use 8 826,710.88 0.41
Condotel 1 146,919.70 0.07
Deminimus PUD 1 83,217.30 0.04
----- ---------------- ------
Total 1,788 $ 202,467,539.65 100.00%
===== ================ ======
RISK CATEGORIES
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CATEGORY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- -------------------- ----------------------
A 244 $ 34,880,550.08 17.23%
A- 670 82,995,927.80 40.99
B 398 40,334,658.67 19.92
C 175 15,904,679.78 7.86
D 301 28,351,723.32 14.00
----- ------------------ ------
Total 1,788 $ 202,467,539.65 100.00%
===== ================== ======
See "--Underwriting" below and Appendix A to this Prospectus Supplement
for a description of SPFC's and MorCap's risk classifications. Each Mortgage
Loan originated by a Strategic Partner or the Unaffiliated Originator was
classified by credit grade to SPFC's guidelines.
S-44
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ------------------ ------------------
California 239 $39,464,967.06 19.49%
Oregon 168 16,065,596.15 7.93
Washington 140 14,191,701.40 7.01
Colorado 106 12,696,657.60 6.27
Florida 106 11,859,234.53 5.86
Illinois 104 11,762,079.23 5.81
Massachusetts 74 9,567,817.01 4.73
New York 56 8,747,196.95 4.32
Texas 75 8,351,099.43 4.12
Connecticut 59 6,852,023.17 3.38
Michigan 91 6,745,196.20 3.33
Other (Less than 3%) 570 56,163,970.92 27.74
--- ------------- -----
Total 1,788 $202,467,539.65 100.00%
===== =============== =======
No more than approximately 1.02% of the Initial Group I Loans will be
secured by Mortgaged Properties located in any one zip code.
PURPOSES OF GROUP I LOANS
PERCENTAGE OF
STATISTICAL REFERENCE
DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ --------------- ------------------ ---------------
Refinance (Equity Take-Out) 1,098 $118,039,670.89 58.30%
Refinance (Rate/Term) 373 44,444,588.62 21.95
Purchase 316 39,821,780.14 19.67
Construction 1 161,500.00 0.08
- ---------- ----
Total 1,788 $202,467,539.65 100.00%
===== =============== =======
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-45
<PAGE>
OCCUPANCY STATUS
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ------------- ----------------- -----------------
Owner Occupied 1,499 $ 177,960,591.70 87.90%
Non Owner Occupied 289 24,506,947.95 12.10
----- ------------------ ------
Total 1,788 $ 202,467,539.65 100.00%
===== ================== ======
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
$62,880,818.82. 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 79.62% of the Initial Group II Loans have original terms
to stated maturity of approximately 20 to 30 years. Approximately 20.38% of the
Initial Group II Loans have original terms to stated maturity of approximately
15 years or less.
Approximately 6.39% 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 $12,000.00 or more than
$500,000.00 and the average unpaid principal balance of the Initial Group II
Loans will be approximately $63,260.38. The latest stated maturity date of any
of the Initial Group II Loans will be June 1, 2027; 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 77.07% of the Initial Group II Loans will be secured by Mortgaged
Properties which are owner occupied primary residences, and approximately 22.93%
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-46
<PAGE>
MORTGAGE RATES
PERCENTAGE OF
STATISTICAL REFERENCE DATE
NUMBER OF INITIA AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
7.751% - 8.000% 1 $ 244,388.82 0.39%
8.501% - 8.750% 3 219,266.42 0.35
8.751% - 9.000% 19 1,439,654.08 2.29
9.001% - 9.250% 15 1,120,978.82 1.78
9.251% - 9.500% 10 1,110,618.51 1.77
9.501% - 9.750% 6 494,719.14 0.79
9.751% - 10.000% 39 3,302,865.53 5.25
10.001% - 10.250% 36 2,302,774.91 3.66
10.251% - 10.500% 35 2,421,633.56 3.85
10.501% - 10.750% 57 3,696,351.03 5.88
10.751% - 11.000% 78 5,469,773.43 8.70
11.001% - 11.250% 68 4,619,997.37 7.35
11.251% - 11.500% 73 4,402,725.24 7.00
11.501% - 11.750% 58 3,947,295.52 6.28
11.751% - 12.000% 59 3,694,983.24 5.88
12.001% - 12.250% 50 2,738,943.86 4.36
12.251% - 12.500% 61 3,426,227.37 5.45
12.501% - 12.750% 36 2,056,330.42 3.27
12.751% - 13.000% 58 3,603,526.12 5.73
13.001% - 13.250% 30 1,475,157.65 2.35
13.251% - 13.500% 42 2,544,599.03 4.05
13.501% - 13.750% 35 1,587,350.92 2.52
13.751% - 14.000% 37 1,971,955.89 3.14
14.001% - 14.250% 21 1,476,236.30 2.35
14.251% - 14.500% 18 1,113,229.57 1.77
14.501% - 14.750% 12 798,942.08 1.27
14.751% - 15.000% 10 541,490.44 0.86
15.001% - 15.250% 8 316,588.59 0.50
15.251% - 15.500% 6 319,030.67 0.51
15.501% - 15.750% 3 86,153.43 0.14
15.751% - 16.000% 6 185,259.06 0.29
16.251% - 16.500% 1 31,521.80 0.05
16.501% - 16.750% 1 35,750.00 0.06
16.751% - 17.000% 1 58,500.00 0.09
17.501% - 17.750% 1 26,000.00 0.04
---- --------------- --------
Total 994 $ 62,880,818.82 100.00%
==== =============== ========
The weighted average Mortgage Rate of the Initial Group II Loans will
be approximately 11.773% per annum.
S-47
<PAGE>
REMAINING MONTHS TO STATED MATURITY
PERCENTAGE OF
STATISTICAL
REMAINING MONTHS REFERENCE DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATED MATURITY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------- -------------- ----------------- -----------------
61 - 120 7 $ 392,739.06 0.62%
121 - 180 253 12,419,656.91 19.75
181 - 240 23 1,079,420.90 1.72
241 - 300 2 55,190.04 0.09
301 - 360 709 48,933,811.91 77.82
---- -------------- ----------
Total 994 $62,880,818.82 100.00%
==== ============== ==========
The weighted average remaining term to stated maturity of the Initial
Group II Loans will be approximately 320 months.
YEARS OF ORIGINATION
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
YEARS OF ORIGINATION GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
1994 1 $ 208,602.73 0.33%
1995 3 454,813.09 0.72
1996 10 702,442.93 1.12
1997 980 61,514,960.07 97.83
---- -------------- ---------
Total 994 $62,880,818.82 100.00%
==== ============== ==========
The earliest month and year of origination of any Initial Group II Loan
is November 1994 and the latest month and year of origination is May 1997.
S-48
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
ORIGINAL NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN-TO-VALUE RATIOS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
5.01% - 10.00% 1 $ 19,920.32 0.03%
10.01% - 15.00% 2 45,000.00 0.07
20.01% - 25.00% 4 75,450.74 0.12
25.01% - 30.00% 5 117,496.22 0.19
30.01% - 35.00% 5 138,745.43 0.22
35.01% - 40.00% 12 883,349.35 1.40
40.01% - 45.00% 9 357,712.25 0.57
45.01% - 50.00% 15 869,748.35 1.38
50.01% - 55.00% 30 1,528,597.34 2.43
55.01% - 60.00% 82 4,747,126.08 7.55
60.01% - 65.00% 193 10,492,525.45 16.69
65.01% - 70.00% 191 12,159,219.90 19.34
70.01% - 75.00% 167 10,744,526.26 17.09
75.01% - 80.00% 161 11,623,385.50 18.48
80.01% - 85.00% 77 5,678,037.22 9.03
85.01% - 90.00% 40 3,399,978.41 5.41
----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group II Loans were approximately 5.48% and 90.00%, respectively, and
the weighted average Loan-to-Value Ratio at origination of the Initial Group II
Loans was approximately 71.40%.
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
Full Documentation 650 $ 39,167,677.92 62.29%
Stated Income 191 13,033,094.08 20.73
Quick Qualification 101 6,593,345.29 10.49
Limited Documentation 45 3,854,355.99 6.13
No Income Qualifier 5 168,095.54 0.27
Alternative Documentation 2 64,250.00 0.10
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
See "--Underwriting" below and Appendix A to the Prospectus Supplement
for a description of SPFC's and MorCap's mortgage loan documentation programs.
Each Mortgage Loan underwritten by a Strategic Partner or the Unaffiliated
Originator was placed into the above categories based upon a representation by
the related Strategic Partner or Unaffiliated Originator upon the sale thereof
to SPFC.
S-49
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
STATISTICAL
ORIGINAL REFERENCE DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$0.01 - $ 25,000.00 71 $ 1,495,086.78 2.38%
$25,000.01 - $ 50,000.00 409 15,735,806.11 25.02
$50,000.01 - $ 75,000.00 275 16,798,424.63 26.71
$75,000.01 - $100,000.00 124 10,629,957.69 16.90
$100,000.01 - $125,000.00 44 4,927,407.53 7.84
$125,000.01 - $150,000.00 26 3,574,196.02 5.68
$150,000.01 - $175,000.00 16 2,569,798.41 4.09
$175,000.01 - $200,000.00 13 2,427,810.04 3.86
$200,000.01 - $225,000.00 4 837,310.09 1.33
$225,000.01 - $250,000.00 3 739,179.87 1.18
$250,000.01 - $275,000.00 1 251,273.14 0.40
$275,000.01 - $300,000.00 2 579,833.85 0.92
$325,000.01 - $350,000.00 2 681,033.79 1.08
$350,000.01 - $375,000.00 1 368,938.03 0.59
$375,000.01 - $400,000.00 2 764,762.84 1.22
$475,000.01 - $500,000.00 1 500,000.00 0.80
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
The average original principal balance of the Initial Group II Loans
will be approximately $63,315.05.
PROPERTY TYPE
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
Single Family 664 $ 42,002,347.69 66.80%
2-4 Family 108 8,712,908.81 13.86
Manufactured Housing 67 3,692,598.49 5.87
Mobile Home 79 3,544,042.97 5.64
Condominium 46 2,547,778.38 4.05
Mixed Use 11 1,011,865.89 1.61
PUD 8 774,814.27 1.23
Townhouse 9 515,536.82 0.82
Deminimus PUD 1 40,790.93 0.06
Rowhouse 1 38,134.57 0.06
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
S-50
<PAGE>
RISK CATEGORIES
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CATEGORY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
A 151 $ 10,582,004.53 16.83%
A- 363 24,021,534.87 38.20
B 233 14,556,962.76 23.15
C 116 5,874,436.87 9.34
D 131 7,845,879.79 12.48
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
See "--Underwriting" below and Appendix A to this Prospectus Supplement
for a description of SPFC's and MorCap's risk classifications. Each Mortgage
Loan originated by a Strategic Partner or the Unaffiliated Originator was
classified by credit grade to SPFC's guidelines.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
Florida 160 $ 9,088,853.07 14.45%
California 62 5,721,532.34 9.10
Alabama 111 5,328,315.81 8.47
Georgia 91 4,863,190.80 7.73
Oregon 63 4,408,630.83 7.01
New York 23 3,093,009.10 4.92
Washington 42 2,854,435.94 4.54
Ohio 40 2,693,170.45 4.28
Texas 41 2,396,167.27 3.81
Tennessee 31 1,957,654.43 3.11
Other (Less than 3%) 330 20,475,858.78 32.56
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
No more than approximately 1.13% of the Initial Group II Loans will be
secured by Mortgaged Properties located in any one zip code.
S-51
<PAGE>
PURPOSES OF GROUP II LOANS
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
Refinance (Equity Take-Out) 719 $ 43,991,714.85 69.96%
Refinance (Rate/Term) 132 9,932,741.61 15.80
Purchase 142 8,928,301.90 14.20
Construction 1 28,060.46 0.04
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
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.
OCCUPANCY STATUS
PERCENTAGE OF
STATISTICAL
REFERENCE DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
Owner-Occupied 762 $ 48,465,274.11 77.07%
Non-Owner Occupied 232 14,415,544.71 22.93
--- ----------------- ------
Total 994 $ 62,880,818.82 100.00%
=== ================= ======
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 liens on fee simple interests in
one- to four-family residential real 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 the applicable Pre-Funding Account (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 the related Pre-Funding Account on each
Subsequent Transfer Date will not 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
S-52
<PAGE>
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 $63,912,883.80 with respect
to Loan Group I (the "Original Group I PreFunded Amount") and $20,619,181.18
with respect to Loan Group II (the "Original Group II Pre-Funded 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) July 15, 1997, the related Pre-Funded Amount will be maintained in the
related Pre-Funding Account. The PreFunding Accounts are intended to comply with
the requirements set forth under "ERISA Considerations" in this Prospectus
Supplement.
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; (c) the Company will deliver certain opinions of counsel
with respect to the validity of the conveyance of such Subsequent Mortgage
Loans; (d) as of the respective Subsequent Cut-off 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 greater than 90%; 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 of not more than 90.00% with respect to both Loan Group I
and Loan Group II, each by aggregate principal balance of the related Mortgage
Loans as of the Cut-off Date or Subsequent Cut-off Date, as applicable; (iii)
have no related Mortgage Loan with a principal balance in excess of $700,000;
and (iv) have a weighted average Gross Margin not less than 5.75% with respect
to the Group I Loans; in each case by aggregate principal balance of the related
Mortgage Loans as of the Cut-off Date or Subsequent Cut-off Date, as applicable.
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 March 31, 1997 in excess of $389 million.
S-53
<PAGE>
During the year ending December 31, 1996, SPFC originated or purchased
7,165 loans, with a principal balance of approximately $789.9 million. During
the three month period ending March 31, 1997, SPFC originated or purchased 3,314
loans, with a principal balance of approximately $317 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, AS OF MARCH 31,
------------------------------------------------------------------------ --------------------
1994 1995 1996 1997
----------------------- ----------------------- ------------------------ --------------------
% OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN
SERVICING SERVICING SERVICING SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Serviced........... $ 100.0% $270,193 100.0% 908,220 100.0% $1,139,972 100.0%
30-59 days delinquent.... 321 0.5 3,072 1.1 23,486 2.6 27,639 2.4
60-89 days delinquent.... 199 0.3 1,896 0.7 16,183 1.8 12,601 1.1
90 days or more delinquent 383 0.5 4,396 1.6 22,751 2.5 46,829 4.1
==== ======== ==== ======== ==== ========== ====
Total delinquencies...... $903 1.3% $ 9,364 3.4 $ 62,420 6.9% $ 87,069 7.6%
==== ===== ======== ==== ======== ==== ========== ====
Delinquent loans in foreclosure $383 0.5% 4,883 1.8 $ 20,546 2.3% $ 39,235 3.4%
Total real estate owned.. -- -- 141 -- 1,227 0.1% 1,552 0.1%
</TABLE>
As of March 31, 1997, statements to certificateholders prepared by the
trustee for each of the seven securitizations in which loans originated and
purchased by the Seller were included reported losses of approximately $249,000
and such statements reported no losses for the quarter ended March 31, 1997;
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. In addition, the Seller
has securitized a greater amount of loans in recent years than previously.
The information above does not include information with respect to
MorCap.
MORCAP, INC.
MorCap is a Delaware corporation. MorCap's residential lending division
underwrites first and second lien mortgage loans primarily secured by one- to
four-family residences. MorCap acquires mortgage loans through a network of
approved mortgage brokers. MorCap 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. MorCap began originating and acquiring mortgage
loans as of March 1, 1995. On December 31, 1996, SPFC acquired a 95% ownership
interest in MorCap.
S-54
<PAGE>
During the three month period ending March 31, 1997, MorCap originated or
purchased 732 loans, with a principal balance of approximately $60.9 million.
During the year ending December 31, 1996, MorCap originated or purchased 1,136
loans, with a principal balance of approximately $90.8 million. In the year
ended December 31, 1995, MorCap originated or purchased loans with a principal
balance of approximately $10 million.
Because MorCap has only been originating mortgage loans for a short period
of time, there is no material loss or delinquency information available with
respect to mortgage loans which it has originated.
UNDERWRITING
SPFC'S STANDARD NON-CONFORMING PROGRAM AND MORCAP'S NON-CONFORMING LOAN
PROGRAM
The Mortgage Loans underwritten by SPFC were underwritten in accordance
with SPFC's "Standard Non-Conforming Program." The Mortgage Loans underwritten
by MorCap were underwritten in accordance with MorCap's "Non-Conforming Loan
Program." The Mortgage Loans underwritten by the Strategic Partners or the
Unaffiliated Originator were underwritten in accordance with their own
underwriting programs, which are similar to those of SPFC and MorCap. SPFC
credit graded each of the Initial Group I Loans and Initial Group II Loans
originated by the Strategic Partners or the Unaffiliated Originator to its own
underwriting standards. None of these programs meet the credit underwriting
standards of FNMA or FHLMC. The programs of SPFC and MorCap are described
separately in detail in Appendix A to this Prospectus Supplement.
Each of the Originators' current single family mortgage loan volume is
generally based on loan packages submitted through mortgage broker networks.
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 the respective Originator 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, each Originator 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, each Originator reviews the performance of each of their respective
mortgage brokers for poor processing, misrepresentation and 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. The Originators
do not approve all of their respective appraisers but instead rely 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
the respective Originator, the related appraisal will be reviewed by an approved
appraiser of such Originator for conformance with its guidelines. Each
Originator 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
S-55
<PAGE>
Standards of Professional Appraisal Practice and FIRREA and must be on forms
acceptable to FNMA and FHLMC or on similar forms containing the same
information. Every appraisal is reviewed by a non-affiliated appraisal review
firm, or by another review appraiser acceptable to the respective Originator
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 and one month following such date.
Prior to the issuance of the Offered Certificates, Mortgage Loans may be removed
from either Loan Group 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 either Loan Group prior to the issuance of
the Offered Certificates. The Company believes that the information set forth
herein will be substantially representative of the characteristics of each Loan
Group as it will be constituted at the time the Offered Certificates are issued
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in either Loan Group may vary.
A Current Report on Form 8-K will be filed on the Delivery Date to reflect
the Additional Loans. A Current Report on Form 8-K will be available to
purchasers of the Offered 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 Offered 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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1997-2 Mortgage Loan Asset-Backed Pass-Through Certificates (the
"Certificates") will include the following seventeen classes (the
"Certificates"): (i) the Class A-1 Certificates, Class A-2 Certificates, Class
A-3 Certificates and Class A-4 Certificates; (ii) the Class A-5 Certificates
(the "Lockout Certificates"); (iii) the Class A-IO Certificates (the "Fixed
Strip Certificates"); (iv) the Class M-1A Certificates and Class M-1F
Certificates (together, the "Class M-1 Certificates"); (v) the Class M- 2A
Certificates and Class M-2F Certificates (together, the "Class M-2
Certificates," and together with the Class M-1 Certificates, the "Class M
Certificates"); (vi) the Class B-1A Certificates and Class B-1F Certificates
(together, the "Class B-1 Certificates"); (vii) the Class S-1A Certificates and
Class S-1F Certificates (together, the "Subordinated IO Certificates"); and
(viii) the Class R-I Certificates, Class R-II Certificates and Class R-III
Certificates (collectively, the "Residual Certificates"). The Fixed Strip
Certificates will be divided into four components (each, a "Component"), the
Class A-IO Component A, B and C (collectively, the "Group I Fixed Strip
Components") and the Class A-IO Component D (the "Group II Fixed Strip
Component"). The Class A-1 Certificates and the Group I Fixed Strip Components
are also referred to herein as the "Group I Class A Certificates." The Class
A-2, Class A-3, Class A-4 and Lockout Certificates and the Group II Fixed Strip
Component are also referred to herein as the "Group II Class A Certificates."
The Group I Class A, Class M-1A, Class M-2A and Class B-1A Certificates are also
referred to herein as the "Group I Certificates," and together with the Group I
Class A Certificates, the "Class A Certificates." The Group II Class A, Class
M-1F, Class M-2F and Class B-1F Certificates are also referred to herein as the
"Group II Certificates." Only the Certificates other than the Residual
Certificates and the Subordinated IO Certificates are offered hereby
(collectively, the "Offered Certificates").
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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
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 Offered 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 July 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 Offered 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-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificates will be issued in minimum denominations of $1,000 and
integral multiples of $1 in excess thereof. The Class M-1, Class M-2 and Class
B-1 Certificates will be issued in minimum denominations of $25,000 and integral
multiples of $1 in excess thereof. The Fixed Strip Certificates will be issued
in registered, certificated form in minimum denominations of a 20% Percentage
Interest and integral multiples of 0.01% in excess thereof.
The Offered Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC (Offered 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 Offered 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 Offered
Certificates--Definitive Certificates." Unless and until Definitive Certificates
are issued for the Offered Certificates under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the Offered 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
Offered Certificates shall refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Offered Certificates,
for distribution to Beneficial Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF THE OFFERED 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 Offered 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
Offered 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 Offered Certificates, it is anticipated that the only
registered Certificateholder of such Offered 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
Offered Certificates among Participants and
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to receive and transmit distributions of principal of, and interest on, such
Offered Certificates. Participants and Intermediaries with which Beneficial
Owners have accounts with respect to such Offered 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 Offered 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
Offered 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 Offered
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
Offered Certificates as indicated on the records of DTC of the availability of
Definitive Certificates for their Offered Certificates. Upon surrender by DTC of
the definitive certificates representing the Offered Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Offered 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 Offered 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 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 Chase 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
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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 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
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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 and certain
banks, the ability of a Beneficial Owner to pledge Offered 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 BookEntry
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.
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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 with respect to the Group I Loans will be allocated solely among
the Group I Certificates, Class S-1A Certificates and Class R-I Certificates.
All distributions with respect to the Group II Loans will be allocated solely
among the Group II Certificates, the Class S-1F Certificates and the Class R-I
Certificates.
OVERCOLLATERALIZATION PROVISIONS
The Pooling and Servicing Agreement requires that, on each Distribution
Date, the Net Monthly Excess Interest Amount with respect to each Loan Group, if
any, be applied on such Distribution Date as an accelerated payment of principal
on the related Offered Certificates, but only to the limited extent hereafter
described. The "Net Monthly Excess Interest Amount" for any Distribution Date
and any Loan Group is equal to the portion of the related Interest Remittance
Amount remaining after payment of the related Trustee's Fee and Accrued
Certificate Interest (and unpaid Accrued Certificate Interest on the related
Class A Certificates) to the related Offered Certificates (as described below
under "-Interest Distributions"). This application has the effect of
accelerating the amortization of the related Offered 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 and the amount of funds in the related PreFunding Account each as of the
close of business on the last day of the related Due Period (as defined herein)
over (y) the Certificate Principal Balance of the related Offered 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
Interest Amounts will be applied as an accelerated payment of principal on the
related Offered Certificates until the related Subordinated Amount (without
giving effect to the application of any related Net Monthly Excess Interest
Amounts) has increased to the level equal to the related Required Subordinated
Amount for such Distribution Date. The required level of the Subordinated Amount
with respect to a Distribution Date is the "Required Subordinated Amount" with
respect to such Distribution Date. Prior to the related Step-Down Date (as
defined herein), the Required Subordinated Amount will be approximately
$13,117,500 with respect to Loan Group I and approximately $1,878,750 with
respect to Loan Group II. In addition, the Required Subordination Amount may be
increased by the Rating Agencies at the time of delivery of any Subsequent
Mortgage Loans. On or after the related Step-Down Date, the Required
Subordinated Amount will be permitted, so long as no Trigger Event is in effect
with respect to such Loan Group, to decrease to levels equal to 9.00%, with
respect to Loan Group I, and 4.50%, with respect to Loan Group II, of the then
current aggregate outstanding Principal Balance of the related Loan Group as of
the last day of the related Due Period (subject to a floor of approximately
$1,457,500 with respect to Loan Group I and approximately $417,500 with respect
to Loan Group II). So long as a Trigger Event has occurred and is continuing,
the Required Subordinated Amount with respect to such Distribution Date will
remain equal to the amount required as of the Distribution Date immediately
preceding the date on which such Trigger Event occurred.
In the event that the Required Subordinated Amount with respect to either
Loan Group 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
Offered Certificates on such Distribution Date shall be applied to the payment
of any Unpaid Accrued
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Certificate Interest Carry-Forward Amount, reimbursement of Liquidated Loan
Losses, and any Group I Available Funds Cap Carry-Forward Amount (in the case of
the Group I Certificates), or distributed to the Holders of the Subordinated IO
Certificates or Residual Certificates on such Distribution Date. These payments
will have the effect of decelerating the amortization of the Offered
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
related Principal Remittance Amount is the related "Subordination Reduction
Amount."
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 Group I 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 Group I 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 Group
I Certificates. If no such quotations can be obtained, the rate will be
One-Month LIBOR for the prior Distribution Date. Notwithstanding the foregoing,
if, under the priorities described above, One-Month LIBOR for a Distribution
Date would be based on LIBOR for the previous Distribution Date for the second
consecutive Distribution Date, the Trustee shall select an alternative
comparable index (over which the Trustee has no control), used for determining
one-month Eurodollar lending rates that is calculated and published (or
otherwise made available) by an independent party. "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 Group I Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding.
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INTEREST DISTRIBUTIONS
On each Distribution Date, the Trustee shall make the following
distributions, to the extent of the related Interest Remittance Amount, with
respect to each Loan Group:
(a) first, to the Trustee, an amount equal to the Trustee's Fees then due
to it with respect to such Loan Group;
(b) second, from amounts then on deposit in the related Certificate
Account, to the related Class A Certificateholders an amount equal to the
related Accrued Certificate Interest (as defined below), plus any Accrued
Certificate Interest remaining unpaid from prior Distribution Dates (plus
interest on any such unpaid amount at the related Pass-Through Rate);
(c) third, from amounts then on deposit in the related Certificate Account,
to the related Class M-1 Certificateholders an amount equal to the related
Accrued Certificate Interest;
(d) fourth, from amounts then on deposit in the related Certificate
Account, to the related Class M-2 Certificateholders an amount equal to the
related Accrued Certificate Interest;
(e) fifth, from amounts then on deposit in the related Certificate Account,
to the related Class B-1 Certificateholders an amount equal to the related
Accrued Certificate Interest; and
(f) sixth, any amount remaining (the "Net Monthly Excess Interest Amount")
shall be included in the Net Monthly Excess Cashflow for the related Loan Group
as described in "-Net Monthly Excess Cashflow Distributions" below and applied
as described therein.
On each Distribution Date, holders of each class of Offered Certificates
will be entitled to receive interest distributions in an amount (such amount,
the related "Accrued Certificate Interest") equal to interest accrued for the
related Accrual Period (as defined below) on the related Certificate Principal
Balance thereof (or related Notional Amounts thereof, in the case of the
Components of the Fixed Strip Certificates) immediately prior to such
Distribution Date at the then-applicable related Pass-Through Rate, 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
Offered Certificates in proportion to their respective amounts of related
Accrued Certificate Interest which would have resulted absent such reductions.
Accrued Certificate Interest with respect to the Group I Certificates (other
than the Group I Fixed Strip Components) 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 definition of Pass-Through Rate on the Group I
Certificates is applicable, Accrued Certificate Interest will be calculated on
the basis of a 360-day year and a 30-day month. Accrued Certificate Interest
with respect to the Group I Fixed Strip Components and the Group II Certificates
is calculated on the basis of a 360-day year and a 30-day month.
For each Distribution Date, (i) with respect to the Group I Certificates
(other than the Group I Fixed Strip Components), 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 June 19, 1997 to July 24, 1997 and (ii)
with respect to the Group I Fixed Strip Components and the Group II
Certificates, the "Accrual Period" is the previous calendar month.
For each Distribution Date, the "Interest Remittance Amount" with respect
to each Loan Group is the sum of the following: (i) all interest received or
advanced during the related Due Period on the related Mortgage Loans (less the
Servicing Fees), (ii) all unscheduled recoveries on the related Mortgage
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Loans that became Liquidated Mortgage Loans in a prior Due Period received by
the Master Servicer during the related Due Period, (iii) any amounts paid by the
Master Servicer on the immediately preceding Master Servicer Remittance Date to
cover Prepayment Interest Shortfalls, (iv) any amounts in respect of interest
delivered by the Company on the Master Servicer Remittance Date (as defined
herein) in connection with a substitution of a Mortgage Loan in such Loan Group,
(v) the net Liquidation Proceeds (as defined in the Prospectus) collected by the
Master Servicer of all Mortgage Loans in such Loan Group during the prior
calendar month (to the extent such net Liquidation Proceeds are related to
interest), (vi) the proceeds received by the Trustee of any termination of such
Loan Group (to the extent such proceeds are related to interest), (vii) with
respect to the Distribution Date occurring in July 1997, any amounts in the
related Interest Coverage Account (to the extent required to be withdrawn from
such account) and (viii) with respect to the Distribution Date occurring in July
1997, any amount deposited with respect to such Loan Group for related Mortgage
Loans with first Monthly Payments due on August 1, 1997.
If on any Distribution Date the Interest Remittance Amount is insufficient
to pay Accrued Certificate Interest on any class of Offered Certificates, the
shortfall will be allocated through the priority of payment set forth above;
provided, however, that the aggregate amount of interest allocable to the Group
I Class A Certificates and Group II Class A Certificates will be allocated on a
pro rata basis, based on the respective amount of Accrued Certificate Interest
thereon. Such shortfalls could occur, for example, if delinquencies on the
related Mortgage Loans were exceptionally high and were concentrated in a
particular month and Advances by the Master Servicer did not cover the
shortfall. Any such amounts so carried forward will bear interest at the related
Pass-Through Rate and be payable on future Distribution Dates to the extent of
funds available therefor (such amount, including interest thereon, as of any
Distribution Date, the related "Unpaid Accrued Certificate Interest
Carry-Forward Amount"). Such amounts payable to the Class A Certificates will be
paid currently with Accrued Certificate Interest thereon pursuant to clause (a)
above or prior to the payment of, such amounts owed to the Class M-1, Class M-2
and Class B-1 Certificates which will be payable solely from the related Net
Monthly Excess Cashflow as described in "-Net Monthly Excess Cashflow
Distributions" below.
The "Group I Formula Pass-Through Rate," as determined for each of the
Group I Certificates (other than the Group I Fixed Strip Components) for any
Distribution Date, is the lesser of (x) the rate determined by clause (i) of the
definition of Pass-Through Rate for the such Group I Certificates on such
Distribution Date and (y) the weighted average of the 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 (i) the Servicing Fee Rate and
the per annum rate at which the related Trustee's Fee accrues and (ii) the Group
I Fixed Strip Effective Rate times a fraction equal to (x) the Notional Amount
of the Group I Fixed Strip Components divided by (y) the aggregate Principal
Balance of the Group I Loans as of the beginning of the related Due Period.
The Pooling and Servicing Agreement provides that if the Pass-Through Rate
on any Group I Certificate is less than the related Group I 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 defined herein) then the
amount of any such shortfall will be carried forward and paid to the extent of
the related Net Monthly Excess Cashflow, as described herein, to the Holders of
the applicable Group I Certificates on future Distribution Dates and shall
accrue interest at the applicable Group I Formula Pass-Through Rate, until paid
(such shortfall as determined with respect to each class of Group I
Certificates, together with such accrued interest, the "Group I Available Funds
Cap Carry-Forward Amount"). The ratings assigned to the Group I Certificates do
not address the payment of the Group I Available Funds Cap Carry-Forward Amount.
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
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on the Mortgage Loans during the preceding calendar month. Such shortfalls will
result because interest on prepayments in full is paid only to the date of
prepayment, and because no interest is paid 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.
The "Pass-Through Rate" on each Group I Certificate is adjustable and is
calculated as follows: on each Distribution Date, the Pass-Through Rate
applicable to each class of Group I Certificates (other than Fixed Strip
Certificates) will be adjusted to equal the lesser of (i) One-Month LIBOR (as
defined herein) plus the related Pass-Through Margin (as defined below) and (ii)
the related Group I Available Funds Pass-Through Rate.
The "Pass-Through Margin" on the Class A-1, Class M-1A, Class M-2A and
Class B-1A Certificates is equal to (i) 0.225%, 0.36%, 0.56% and 0.99%,
respectively, with respect to any Distribution Date which occurs on or prior to
the date on which the aggregate Principal Balance of the Group I Loans is less
than 10% of the sum of the aggregate Principal Balance of the Group I Loans as
of the Cut-off Date and the related Original Pre-Funded Amount and (ii) with
respect to any Distribution Date thereafter, 0.45%, 0.54%, 0.84% and 1.485%,
respectively.
The "Group I Net Weighted Average Rate," as of any Distribution Date and
the Class A-1, Class M-1A, Class M-2A and Class B-1A Certificates, is equal to
the product of (i)(A) the weighted average of the Mortgage Rates of the Group I
Loans (as of the beginning of the related Due Period), minus (B) the sum of the
Servicing Fee Rate and the per annum rate at which the related Trustee's Fee (as
defined herein) accrues, and minus (C) the product of the Group I Fixed Strip
Effective Rate and a fraction equal to (x) the Notional Amount of the Group I
Fixed Strip Components divided by (y) the aggregate Principal Balance of the
Group I Loans (as of the beginning of the related Due Period) and, (ii) a
fraction equal to (A) the aggregate Principal Balance of the Group I Loans (as
of the beginning of the related Due Period) over (B) the aggregate Certificate
Principal Balance of the Group I Certificates immediately prior to such
Distribution Date. The "Group I Fixed Strip Effective Rate" is equal to 5.50%
for the first 12 Distribution Dates, 4.00% for the 13th through the 24th
Distribution Dates, 2.50% for the 25th through 30th Distribution Dates, and
0.00% thereafter. Because the Pass-Through Margin is different for each such
class of Group I Certificates, it is possible that the related Group I Formula
Pass-Through Rate (as defined below) may be less than the related Group I Net
Weighted Average Rate, while the related Group I Formula Pass-Through Rate or
Rates applicable to certain other classes of Group I Certificates may exceed
such Group I Net Weighted Average Rate. In such event, the Pooling and Servicing
Agreement will provide that the excess moneys resulting from the classes having
Group I Formula Pass-Through Rates less than the related Group I Net Weighted
Average Rate shall be applied to increase the maximum rate of interest payable
with respect to any class or classes having Group I Formula Pass-Through Rates
greater than the related Group I Net Weighted Average Rate. The Group I Net
Weighted Average Rate, increased by the amount of such excess moneys (converted
to a per annum rate), is the "Group I Available Funds Pass-Through Rate" as
determined separately for the Class A-1, Class M-1A, Class M- 2A and Class B-1A
Certificates and any Distribution Date.
The Pass-Through Rates with respect to the Class A-2, Class A-3, Class A-4,
Class A-5, Class M- 1F, Class M-2F and Class B-1F Certificates are equal to the
fixed rates set forth on the cover hereof.
The Pass-Through Rate for the Group I Fixed Strip Component A will be equal
to of 2.50% for the first 30 Distribution Dates, and 0.00% thereafter. The
Pass-Through Rate for the Group I Fixed Strip
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Component B will be equal to of 1.50% for the first 24 Distribution Dates, and
0.00% thereafter. The Pass-Through Rate for the Group I Fixed Strip Component C
will be equal to of 1.50% for the first 12 Distribution Dates, and 0.00%
thereafter.
The Pass-Through Rate for the Group II Fixed Strip Component will be equal
to 6.50% for the first 36 Distribution Dates, and 0.00% thereafter.
The Components of the Fixed Strip Certificates have no Certificate
Principal Balance, are not entitled to distributions in respect of principal,
and will accrue interest at the related Pass-Through Rate on the related
Notional Amount (as defined herein).
As described herein, Accrued Certificate Interest on each class of Offered
Certificates is based on the Certificate Principal Balances or Notional Amounts
of the related Certificates (or Components thereof) immediately prior to the
related Distribution Date. The Certificate Principal Balance of any class of the
Class A Certificates is the initial Certificate Principal Balance thereof as
reduced by all amounts actually distributed to the holders of such class of
Class A Certificates in reduction of the Certificate Principal Balance thereof
on all prior Distribution Dates. The Certificate Principal Balance of any class
of Class M-1, Class M-2 or Class B-1 Certificates means the initial Certificate
Principal Balance thereof as reduced by the sum of (x) all amounts actually
distributed to the holders of such Certificates on all prior Distribution Dates
on account of principal and (y) the aggregate, cumulative amount of Liquidated
Loan Losses allocated thereto (upon which interest will no longer accrue) on all
prior Distribution Dates. The "Notional Amount" of the Group I Fixed Strip
Components as of any Distribution Date is equal to the lesser of (i)
$29,150,000.00 and (ii) the aggregate Certificate Principal Balance of the Group
I Certificates immediately prior to such date. The "Notional Amount" of the
Group II Fixed Strip Component as of any Distribution Date is equal to the
lesser of (i) $8,350,000.00 and (ii) the aggregate Certificate Principal Balance
of the Group II Certificates immediately prior to such date.
PRINCIPAL DISTRIBUTIONS
On each Distribution Date, the related Principal Distribution Amount,
as determined for each Loan Group, will be distributed to the Offered
Certificates (other than the Fixed Strip Certificates) as follows:
(a) first, with respect to the Group I Class A Certificates, the lesser
of (x) the related Principal Distribution Amount and (y) the related Class A
Principal Distribution Amount shall be distributed to the holders of the Group I
Class A Certificates, until the Certificate Principal Balance of the Group I
Class A Certificates has been reduced to zero; and with respect to the Group II
Class A Certificates, the lesser of (x) the related Principal Distribution
Amount and (y) the related Class A Principal Distribution Amount shall be
distributed to the holders of the Group II Class A Certificates in the manner
and priority as described below;
(b) second, the lesser of (x) the excess of (i) the related Principal
Distribution Amount over (ii) the amount distributed to the holders of the
related Class A Certificates in clause (a) above and (y) the related Class M-1
Principal Distribution Amount shall be distributed to the holders of the related
Class M-1 Certificates, until the Certificate Principal Balance of such Class
M-1 Certificates has been reduced to zero;
(c) third, the lesser of (x) the excess of (i) the related Principal
Distribution Amount over (ii) the sum of the amount distributed to the holders
of the related Class A Certificates in clause (a) above and the amount
distributed to the holders of the related Class M-1 Certificates in clause (b)
above and (y) the related Class M-2 Principal Distribution Amount shall be
distributed to the holders of the related Class
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M-2 Certificates, until the Certificate Principal Balance of such Class M-2
Certificates has been reduced to zero;
(d) fourth, the lesser of (x) the excess of (i) the related Principal
Distribution Amount over (ii) the sum of the amount distributed to the holders
of the related Class A Certificates pursuant to clause (a) above, the amount
distributed to the holders of the related Class M-1 Certificates pursuant to
clause (b) above and the amount distributed to the holders of the related Class
M-2 Certificates pursuant to clause (c) above and (y) the related Class B-1
Principal Distribution Amount shall be distributed to the holders of the related
Class B-1 Certificates, until the Certificate Principal Balance of such Class
B-1 Certificates has been reduced to zero; and,
(e) fifth, any amount remaining shall be included in the Net Monthly
Excess Cashflow as described in "-Net Monthly Excess Cashflow Distributions"
below and applied as described therein.
The "Principal Remittance Amount" for either Loan Group and on any
Distribution Date shall equal the sum of (i) all scheduled installments of
principal in respect of the Mortgage Loans in such Loan Group received or
advanced during the related Due Period, together with all unscheduled payments
of principal on such Mortgage Loans received by the Master Servicer during the
prior calendar month, (ii) the Principal Balance of each Mortgage Loan in such
Loan Group that was repurchased by either the Seller or by the Company, (iii)
any amounts in respect of principal delivered by the Company on the Master
Servicer Remittance Date (as defined herein) in connection with a substitution
of a Mortgage Loan in such Loan Group, (iv) the net Liquidation Proceeds (as
defined in the Prospectus) collected by the Master Servicer of all Mortgage
Loans in such Loan Group during the prior calendar month (to the extent such net
Liquidation Proceeds are related to principal), (v) the proceeds received by the
Trustee of any termination of such Loan Group (to the extent such proceeds are
related to principal), and (vi) with respect to the Distribution Date occurring
in July 1997, any amounts in the related Pre-Funding Account after giving effect
to any purchase of related Subsequent Mortgage Loans.
The "Principal Distribution Amount" means, as of any Distribution Date
and for either Loan Group, the sum of (i) the related Principal Remittance
Amount, minus, on any Distribution Date occurring on or after the applicable
Stepdown Date, the related Subordination Reduction Amount, if any, and (ii) the
related Extra Principal Distribution Amount, if any, for such Distribution Date.
The "Class A Principal Distribution Amount" means, with respect to each
Loan Group, as of any Distribution Date (a) occurring prior to the related
Stepdown Date, the lesser of (i) 100% of any remaining Principal Distribution
Amount and (ii) the aggregate Certificate Principal Balance of the related Class
A Certificates, and (b) on or after the related Stepdown Date, the excess, if
any, of (x) the aggregate Certificate Principal Balance of the related Class A
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) the lesser of (1) the related Stepped Up Enhancement
Percentage and (2) 58.5%, with respect to Loan Group I, and 69.5%, with respect
to Loan Group II, and (ii) the aggregate outstanding Principal Balance of the
related Mortgage Loans as of the last day of the related Due Period and (B) the
aggregate outstanding Principal Balance of the related Mortgage Loans as of the
last day of the related Due Period minus $1,457,500 for the Group I Loans and
$417,500 for the Group II Loans.
The "Class M-1 Principal Distribution Amount" means, with respect to
each Loan Group, as of any Distribution Date (a) occurring prior to the related
Stepdown Date, 0% of any remaining Principal Distribution Amount or, in the
event that the related Class A Certificates have been retired, 100% thereof, and
(b) on or after the related Stepdown Date, the excess, if any, of (x) the sum of
(i) the aggregate Certificate Principal Balance of the related Class A
Certificates (after taking into account the payment of the related Class A
Principal Distribution Amount on such Distribution Date) and (ii) the aggregate
Certificate Principal Balance of the related Class M-1 Certificates immediately
prior to such
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Distribution Date over (y) the lesser of (A) the product of (i) 71.5%, with
respect to Loan Group I, and 81.0%, with respect to Loan Group II, and (ii) the
aggregate outstanding Principal Balance of the related Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate outstanding Principal
Balance of the related Mortgage Loans as of the last day of the related Due
Period minus $1,457,500 for the Group I Loans and $417,500 for the Group II
Loans.
The "Class M-2 Principal Distribution Amount" means, with respect to
each Loan Group, as of any Distribution Date (a) occurring prior to the related
Stepdown Date, 0% of any remaining Principal Distribution Amount or, in the
event that the related Class A Certificates and Class M-1 Certificates have been
retired, 100% thereof, and (b) on or after the related Stepdown Date, the
excess, if any, of (x) the sum of (i) the aggregate Certificate Principal
Balance of the related Class A Certificates (after taking into account the
payment of the related Class A Principal Distribution Amount on such
Distribution Date), (ii) the aggregate Certificate Principal Balance of the
related Class M-1 Certificates (after taking into account the payment of the
related Class M-1 Principal Distribution Amount on such Distribution Date) and
(iii) the aggregate Certificate Principal Balance of the related Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 81.5%, with respect to Loan Group I, and 86.0%, with
respect to Loan Group II, and (ii) the aggregate outstanding Principal Balance
of the related Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate outstanding Principal Balance of the related Mortgage Loans as
of the last day of the related Due Period minus $1,457,500 for the Group I Loans
and $417,500 for the Group II Loans.
The "Class B-1 Principal Distribution Amount" means, with respect to
each Loan Group, as of any Distribution Date (a) occurring prior to the related
Stepdown Date, 0% of the related Principal Distribution Amount or, in the event
that the related Class A Certificates and Class M Certificates have been
retired, 100% thereof, and (b) on or after the related Stepdown Date, the
excess, if any, of (x) the sum of (i) the aggregate Certificate Principal
Balance of the related Class A Certificates (after taking into account the
payment of the related Class A Principal Distribution Amount on such
Distribution Date), (ii) the aggregate Certificate Principal Balance of the
related Class M-1 Certificates (after taking into account the payment of the
related Class M-1 Principal Distribution Amount on such Distribution Date),
(iii) the aggregate Certificate Principal Balance of the related Class M-2
Certificates (after taking into account the payment of the related Class M-2
Principal Distribution Amount on such Distribution Date) and (iv) the aggregate
Certificate Principal Balance of the related Class B-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
91.0%, with respect to Loan Group I, and 95.5%, with respect to Loan Group II,
and (ii) the aggregate outstanding Principal Balance of the related Mortgage
Loans as of the last day of the related Due Period and (B) the aggregate
outstanding Principal Balance of the related Mortgage Loans as of the last day
of the related Due Period minus $1,457,500 for the Group I Loans and $417,500
for the Group II Loans.
A "Trigger Event" is in effect with respect to a Loan Group on or after
the Stepdown Date if upon a Distribution Date the rolling three-month average of
the related Mortgage Loans which are 60 days or more delinquent (stated as a
percentage of the outstanding Principal Balance of such Mortgage Loans) equals
or exceeds one-half of the related Senior Enhancement Percentage.
The "Stepped Up Enhancement Percentage" means, as determined for each
Loan Group on any Distribution Date, a percentage equal to (x) 100% minus (y)
two times the rolling three-month average of related Mortgage Loans which are 60
days or more delinquent (stated as a percentage of the outstanding Principal
Balance of such related Mortgage Loans); but not less than zero.
The "Stepdown Date" means, as determined for each Loan Group, the later
to occur of (x) the Distribution Date in July 2000 and (y) the first
Distribution Date on which the related Senior Enhancement Percentage (calculated
for this purpose only after taking into account principal payments received on
the related Mortgage Loans that will be distributed on such Distribution Date,
but prior to
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any payment of the related Principal Distribution Amount to the related
Certificates) is greater than or equal to the related Senior Specified
Enhancement Percentage.
The "Senior Enhancement Percentage," as determined for each Loan Group
for any Distribution Date, is the percentage obtained by dividing (x) the sum of
(i) the aggregate Certificate Principal Balance of the related Class M-1, Class
M-2 and Class B-1 Certificates (after distributions on such Distribution Date)
and (ii) the related Subordinated Amount by (y) the aggregate Principal Balance
of the related Mortgage Loans as of the last day of the related Due Period.
"Senior Specified Enhancement Percentage" on any date of determination
thereof means 41.5% with respect to Loan Group I, and 30.5% with respect to Loan
Group II.
"Extra Principal Distribution Amount" means, as determined for each
Loan Group, as of any Distribution Date, the lesser of (x) the Net Monthly
Excess Interest Amount for such Distribution Date and (y) the excess, if any, of
(i) the related Required Subordinated Amount for such Distribution Date over
(ii) the related Subordinated Amount (calculated for this purpose after taking
into account the reduction on such Distribution Date of the Certificate
Principal Balances of all Classes of Certificates relating to such Loan Group
resulting from the distribution of the related Principal Remittance Amount) for
such Distribution Date.
In no event will any Principal Distribution Amount paid with respect to
any Distribution Date and any class of Offered Certificates be less than zero or
greater than the then outstanding Certificate Principal Balance of such Offered
Certificate.
Distributions of the Class A Principal Distribution Amount with respect
to the Group II Class A Certificates (other than the Group II Fixed Strip
Component) will be allocated as follows:
(i) first, to the Lockout Certificates, the Lockout Distribution
Percentage of the related Class A Principal Distribution Amount, in
reduction of the Certificate Principal Balance thereof, until such
Certificate Principal Balance has been reduced to zero;
(ii) second, to the Class A-2 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(iii) third, to the Class A-3 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(iv) fourth, to the Class A-4 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero; and
(v) fifth, to the Lockout Certificates in reduction of the Certificate
Principal Balance thereof, until such Certificate Principal Balance has
been reduced to zero;
provided, however, that if on any Distribution Date the Certificate Principal
Balance of the Class M-1F, Class M-2F and Class B-1F Certificates and the
related Subordinated Amount has been reduced to zero, the Class A Principal
Distribution Amount payable to the Group II Class A Certificates will be
allocated to the Group II Class A Certificates on a pro rata basis based on the
Certificate Principal Balances thereof, in reduction of the Certificate
Principal Balances thereof, until the Certificate Principal Balances thereof
have been reduced to zero.
The "Lockout Certificate Percentage" will be calculated for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Lockout Certificates divided by the
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sum of the aggregate Certificate Principal Balances of the Group II Class A
Certificates. The "Lockout Distribution Percentage" for any Distribution Date
occurring prior to the Distribution Date in July 2000 will be equal to 0%. The
"Lockout Distribution Percentage" for any Distribution Date occurring after the
first three years following the Delivery Date will be as follows: for any
Distribution Date during the fourth and fifth years after the Delivery Date, 45%
of the Lockout Certificate Percentage for such Distribution Date; for any
Distribution Date during the sixth year after the Delivery Date, 80% of the
Lockout Certificate Percentage for such Distribution Date; for any Distribution
Date during the seventh year after the Delivery Date, 100% of the Lockout
Certificate Percentage for such Distribution Date, and for any Distribution Date
thereafter, the lesser of (x) 100% and (y) 300% of the Lockout Certificate
Percentage. Notwithstanding the foregoing, if the Certificate Principal Balances
of the Group II Class A Certificates (other than the Lockout Certificates) have
been reduced to zero, the Lockout Distribution Percentage will be equal to 100%.
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.
NET MONTHLY EXCESS CASHFLOW DISTRIBUTIONS
On any Distribution Date, for each Loan Group, the sum of the related Net
Monthly Excess Interest Amount and the related Subordination Reduction Amount is
the related "Net Monthly Excess Cashflow" for such Distribution Date.
On any Distribution Date, the Net Monthly Excess Cashflow, as so determined
separately for each Loan Group, will be applied in the following order of
priority on such Distribution Date:
(a) first, to fund the related Extra Principal Distribution Amount for such
Distribution Date;
(b) second, to pay any Unpaid Accrued Certificate Interest Carry-Forward
Amount on the related Class A, Class M-1, Class M-2 and Class B-1
Certificates, in that order, until reduced to zero;
(c) third, to reimburse the related Class M-1, Class M-2 and Class B-1
Certificates, in that order, for Liquidated Loan Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(d) fourth, with respect to the Net Monthly Excess Cashflow related to
the Group I Loans, to the Class A-1, Class M-1A, Class M-2A and Class B-1A
Certificates, in that order, the related Group I Available Funds Cap
Carry-Forward Amount, until such amount has been reduced to zero; and
(e) fifth, any remaining amounts will be distributed to the
Subordinated IO Certificates and Residual Certificates.
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ALLOCATION OF LOSSES; SUBORDINATION
As to such Distribution Date, if any Mortgage Loan became a Liquidated
Mortgage Loan (as defined below) 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"), 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 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.
On each Distribution Date following the application of all amounts
distributable on such date, to the extent the aggregate Principal Balance of the
Mortgage Loans in any Loan Group is less than the aggregate Certificate
Principal Balances of the related Offered Certificates due to Liquidated Loan
Losses, the Certificate Principal Balances of the related Class B-1 Certificates
and Class M Certificates shall be reduced as follows, until such deficiency is
fully allocated: first, the Certificate Principal Balance of the related Class
B-1 Certificates shall be reduced, until the related Certificate Principal
Balance has been reduced to zero; second, the Certificate Principal Balance of
the related Class M-2 Certificates shall be reduced, until the related
Certificate Principal Balance has been reduced to zero; and third, the
Certificate Principal Balance of the related Class M-1 Certificates shall be
reduced, until the related Certificate Principal Balance has been reduced to
zero. The Certificate Principal Balances of the related Class A Certificates
shall not be so reduced; such Certificates will continue to receive Accrued
Certificate Interest on their balance. Any loss allocated to a Class B-1
Certificate or Class M Certificate may be repaid through the mechanics of the
payment of the related Net Monthly Excess Cashflow as described above.
In order to maximize the likelihood of distribution in full of Accrued
Certificate Interest on the Class A Certificates and the Class A Principal
Distribution Amounts, on each Distribution Date, holders of the related Class A
Certificates have a right to distributions that is prior to the rights of the
holders of the related Class M Certificates and Class B-1 Certificates, to the
extent necessary to satisfy the payment of Accrued Certificate Interest on the
Class A Certificates and the related Class A Principal Distribution Amount.
Similarly, holders of the Class M Certificates have a right to distributions
that is prior to the rights of the holders of the related Class B-1
Certificates, and holders of the Class M Certificates with a higher payment
priority have a right to distributions that is prior to the rights of the
holders of any Class M Certificates with a lower payment priority.
The priority of payment provisions herein will accelerate the amortization
of the Class A Certificates relative to the actual amortization of the Mortgage
Loans. To the extent that the Class A Certificates are amortized faster than the
related Mortgage Loans, in the absence of offsetting Liquidated Loan Losses, the
percentage interest evidenced by such Class A Certificates in the related Loan
Group will be decreased, thereby increasing, relative to the Certificate
Principal Balances of the related Class M Certificates and Class B-1
Certificates and the related Subordinated Amount, the subordination afforded the
Class A Certificates by the related Class M Certificates and Class B-1
Certificates and the related Subordinated Amount.
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
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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
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 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 or, upon a determination that such Advances are
not recoverable from receipts on the related Mortgage Loan, such Advances will
be reimbursable from other amounts on deposit in the related Collection Account.
MANDATORY PREPAYMENTS ON GROUP I CERTIFICATES AND GROUP II CERTIFICATES
The Group I Certificates and Group II Certificates will be prepaid on the
Distribution Date occurring in July 1997 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
Group I Certificateholders and Group II 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 PreFunded Amount.
INTEREST COVERAGE ACCOUNTS
The Company will establish for the benefit of the Group I
Certificateholders and Group II 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 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 Accrued Certificate Interest attributable to the pre-funding
feature during the related Funding Period. Such shortfall initially will exist
during the Funding Period because the aggregate Certificate Principal Balance of
the Group I Certificates and Group II Certificates, and interest accrued
thereon, during the Funding Period will be greater than the aggregate principal
balance of the related Mortgage Loans, and interest accrued thereon, during such
period. 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.
S-72
<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on the
Offered 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 Offered 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 Offered
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 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) on the Mortgage Loans (particularly, the
Group II Loans) 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.
If the Subordinated Amount is reduced to zero with respect to either Loan
Group, the yield to maturity on the related Class B-1 Certificates will be
extremely sensitive to losses on the related Mortgage Loans (and the timing
thereof) to the extent such losses are not covered by the related Net Monthly
Excess Cashflow, because the entire amount of losses will be allocated to such
class of Class B-1 Certificates. If the Subordinated Amount is reduced to zero
with respect to either Loan Group and the Certificate Principal Balance of the
related Class B-1 Certificates has been reduced to zero, the yield to maturity
on the related Class M Certificates then outstanding with the lowest payment
priority will be extremely sensitive to losses on the related Mortgage Loans
(and the timing thereof) to the extent such losses are not covered by the
related Net Monthly Excess Cashflow, because the entire amount of losses will be
allocated to such class of Class M Certificates. Furthermore, because interest
and principal distributions are paid to certain classes of Offered Certificates
before other classes, holders of classes having a later priority of payment bear
a greater risk of losses than holders of classes having earlier priorities for
distribution of interest and principal.
Because the Mortgage Rates on the Group II Loans and the Pass-Through Rates
on the Group II Certificates are fixed, such rates will not change in response
to changes in market interest rates.
S-73
<PAGE>
Accordingly, if market interest rates or market yields for securities similar to
the Group II Certificates were to rise, the market value of the Group II
Certificates may decline.
The effective yield to maturity to each holder of a Group II Certificate
will be below that otherwise produced by the related Pass-Through Rate and the
purchase price of such Certificate because, while interest will accrue on each
Group II Loan from the first day of each month, the distribution of such
interest will be made on the 25th day (or if such day is not a business day, the
next succeeding business day) of the month following the month of accrual.
The Group II 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 Offered Certificates and thereby
extend the weighted average life of the related Offered Certificates and, if the
related Offered Certificates were purchased at a discount, reduce the yield
thereon.
In addition, the yield to maturity on the Offered Certificates will depend
on, among other things, the price paid by the holders of the Offered
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of a Offered 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 Offered Certificates is purchased at a premium (including
the Fixed Strip Certificates) 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 Offered 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. The rate and timing of principal payments
on the Certificates may be affected by any changes in the Required Subordination
Amount. 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.
Investors in the Lockout Certificates should be aware that because the
Lockout Certificates do not receive any portion of principal payments prior to
the Distribution Date occurring in July 2000 and
S-74
<PAGE>
thereafter will receive a disproportionately small or large portion of principal
payments (unless the Certificate Principal Balances of the Class A-2, Class A-3
and Class A-4 Certificates have been reduced to zero), the weighted average life
of the Lockout Certificates will be longer or shorter than would otherwise be
the case, and the effect on the market value of the Lockout Certificates of
changes in market interest rates or market yields for similar securities may be
greater or lesser than for other classes of Group II Class A Certificates
entitled to such distributions.
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 Offered Certificates
(other than the Fixed Strip 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 Offered 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 PreFunding Accounts and that there
will be no material amount of principal prepaid to such 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 Offered Certificates is
May 25, 2027 except as follows: Class A-2 Certificates, January 25, 2017; Class
A-3 Certificates, January 25, 2026; and Class A-IO Certificates, June 25, 2000.
Such Final Scheduled Maturity Dates were calculated assuming (i) 0% CPR with
respect to the Group I Mortgage Loans, (ii) 0% of the Prepayment Assumption with
respect to the Group II Mortgage Loans and (iii) no Net Monthly Excess Cashflows
are used to make accelerated payments of principal on such classes of Offered
Certificates. The weighted average lives of the Offered Certificates are 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 any class of Offered 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) Net Monthly Excess Cashflow Amounts will be used to accelerate the payment
of the balances of the Offered Certificates and (iii) the holder of a majority
interest in the Class R-I Certificates or the Master Servicer may cause a
liquidation of the Mortgage Loans in the related Loan Group when the aggregate
outstanding principal amount of such Mortgage Loans is less than 10% (5% with
respect to the Master Servicer) of the sum of the aggregate principal balance of
such Mortgage Loans as of the Cut-off Date and the aggregate principal balance
of the related 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 lives of the Offered Certificates will be influenced by the
rate at which principal of the Mortgage Loans in the related Loan Group 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 Group I 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 Group II Certificates is a prepayment assumption (the "Prepayment
Assumption" or "PPA"), 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
constant prepayment rate of 3% per annum of the outstanding principal balance of
such
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<PAGE>
mortgage loans in the first month of the life of the mortgage loans and an
additional approximate 1.545% (precisely 17/11) (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:
S-76
<PAGE>
LOAN GROUP I
- ------------
<TABLE>
<CAPTION>
NUMBER OF
ORIGINAL TERM REMAINING TERM TO MONTHS TO NEXT RATE ADJUSTMENT
MORTGAGE NET MORTGAGE TO MATURITY MATURITY RATE ADJUSTMENT FREQUENCY GROSS PERIODIC
PRINCIPAL BALANCE RATE RATE (IN MONTHS) (IN MONTHS) DATE (IN MONTHS) GROSS MARGIN CAP
- ----------------- ---- ---- ----------- ----------- ---- ----------- ------------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,466,171.00 10.377 9.877 360 354 1 6 6.171 1.0000%
1,380,161.21 9.889 9.389 360 356 2 6 5.988 1.0000
6,914,941.17 9.706 9.206 360 357 3 6 6.404 1.0623
26,958,658.44 10.158 9.658 360 358 4 6 6.401 1.0116
23,135,104.43 9.957 9.457 359 358 5 6 6.525 1.0325
27,496,902.74 9.867 9.367 359 359 6 6 6.165 1.0335
860,237.26 9.924 9.424 360 355 19 6 5.671 1.3420
410,184.57 10.562 10.062 360 356 20 6 6.127 1.1449
4,340,527.70 11.265 10.765 360 357 21 6 6.502 1.3588
18,020,003.70 10.819 10.319 360 358 22 6 6.439 1.4889
35,980,832.70 10.705 10.205 360 359 23 6 6.431 1.4935
50,386,683.72 10.709 10.209 360 360 24 6 6.274 1.6131
135,756.14 10.000 9.500 360 356 32 6 6.125 1.5000
249,110.94 9.278 8.778 360 357 33 6 5.545 1.5000
14,300.00 13.900 13.400 180 180 36 6 9.500 1.5000
4,717,963.93 9.648 9.148 360 359 23 12 5.761 2.9486
89,032,460.35 10.384 9.884 360 360 6 6 6.338 1.3515
</TABLE>
LOAN GROUP II
<TABLE>
<CAPTION>
ORIGINAL AMORTIZING REMAINING AMORTIZING REMAINING TERM TO
PRINCIPAL BALANCE MORTGAGE RATE NET MORTGAGE RATE TERM (IN MONTHS) TERM (IN MONTHS) MATURITY (IN MONTHS)
- ----------------- ------------- ----------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 392,739.06 10.226 9.726 120 119 119
8,402,087.33 11.479 10.979 180 179 179
1,079,420.90 11.172 10.672 240 239 239
48,989,001.95 11.772 11.272 360 359 359
4,017,569.58 12.712 12.212 360 358 178
130,913.02 10.226 9.726 120 120 120
2,800,695.78 11.479 10.979 180 180 180
359,806.97 11.172 10.672 240 240 240
16,329,667.32 11.772 11.272 360 360 360
998,098.10 12.712 12.212 360 360 180
</TABLE>
S-77
<PAGE>
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 July 15, 1997, resulting in no mandatory prepayment from the
Pre-Funding Accounts on the Distribution Date occurring in July 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 Offered
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 July
1997, and prepayments are assumed to be received on the last day of each month,
commencing in June 1997; (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 Offered Certificates are made on the 25th day of each month, commencing
in July 1997; (ix) the Delivery Date is June 19, 1997; (x) Six-Month LIBOR
remains constant at 5.96094% per annum and One-Month LIBOR remains constant at
5.6875% per annum; (xi) the Required Subordinated Amounts are as set forth
herein; (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) with regard to the weighted average lives in years to
maturity neither the holder of a majority percentage interest of the Class R-I
Certificates or the 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) of the aggregate
Principal Balance of the Mortgage Loans in the related Loan Group as of the
Cut-off Date and the aggregate Principal Balance of the related Subsequent
Mortgage Loans as of the related Subsequent Cut-off Dates.
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 Offered 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.
S-78
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR OR THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES (CPR) CLASS A-2 CERTIFICATES (PPA)
DISTRIBUTION DATE 0% 18% 20% 25% 30% 35% 40% 0% 75% 100% 115% 125% 150% 200%
- ----------------- -------------- ----- ----- ----- ------------ ----- ------------------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 95 74 72 66 60 54 49 91 62 52 47 43 33 13
June 25, 1999.......... 94 55 51 42 33 25 18 88 19 0 0 0 0 0
June 25, 2000.......... 93 40 36 25 16 8 1 86 0 0 0 0 0 0
June 25, 2001.......... 92 31 28 22 16 8 1 83 0 0 0 0 0 0
June 25, 2002.......... 92 25 22 16 11 8 1 79 0 0 0 0 0 0
June 25, 2003.......... 91 21 18 12 8 5 1 76 0 0 0 0 0 0
June 25, 2004.......... 90 17 14 9 6 3 1 72 0 0 0 0 0 0
June 25, 2005.......... 89 14 11 7 4 2 1 69 0 0 0 0 0 0
June 25, 2006.......... 88 11 9 5 3 1 1 66 0 0 0 0 0 0
June 25, 2007.......... 87 9 7 4 2 1 0 62 0 0 0 0 0 0
June 25, 2008.......... 85 7 6 3 1 0 0 58 0 0 0 0 0 0
June 25, 2009.......... 84 6 4 2 1 0 0 53 0 0 0 0 0 0
June 25, 2010.......... 82 5 3 1 0 0 0 47 0 0 0 0 0 0
June 25, 2011.......... 80 4 3 1 0 0 0 40 0 0 0 0 0 0
June 25, 2012.......... 78 3 2 1 0 0 0 20 0 0 0 0 0 0
June 25, 2013.......... 75 2 2 0 0 0 0 16 0 0 0 0 0 0
June 25, 2014.......... 72 2 1 0 0 0 0 10 0 0 0 0 0 0
June 25, 2015.......... 69 2 1 0 0 0 0 4 0 0 0 0 0 0
June 25, 2016.......... 65 1 1 0 0 0 0 0 0 0 0 0 0 0
June 25, 2017.......... 61 1 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2018.......... 56 1 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2019.......... 51 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2020.......... 45 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2021.......... 38 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2022.......... 32 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2023.......... 27 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2024.......... 21 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2025.......... 15 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026.......... 8 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years to Maturity(1) 20.14 3.84 3.44 2.70 2.14 1.68 1.23 10.77 1.34 1.09 1.00 0.94 0.84 0.70
Weighted Average Life
in Years to Call(1).. 20.11 3.55 3.18 2.48 1.96 1.53 1.19 10.77 1.34 1.09 1.00 0.94 0.84 0.70
</TABLE>
<TABLE>
<CAPTION>
CLASS A-3 CERTIFICATES (PPA)
DISTRIBUTION DATE 0% 75% 100% 115% 125% 150% 200%
- ----------------- ----- ------------------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 100 100 100 100 100 100 100
June 25, 1999.......... 100 100 98 86 78 58 22
June 25, 2000.......... 100 83 55 39 29 7 0
June 25, 2001.......... 100 56 31 19 12 0 0
June 25, 2002.......... 100 37 15 4 0 0 0
June 25, 2003.......... 100 26 5 0 0 0 0
June 25, 2004.......... 100 17 0 0 0 0 0
June 25, 2005.......... 100 15 0 0 0 0 0
June 25, 2006.......... 100 11 0 0 0 0 0
June 25, 2007.......... 100 7 0 0 0 0 0
June 25, 2008.......... 100 2 0 0 0 0 0
June 25, 2009.......... 100 0 0 0 0 0 0
June 25, 2010.......... 100 0 0 0 0 0 0
June 25, 2011.......... 100 0 0 0 0 0 0
June 25, 2012.......... 100 0 0 0 0 0 0
June 25, 2013.......... 100 0 0 0 0 0 0
June 25, 2014.......... 100 0 0 0 0 0 0
June 25, 2015.......... 100 0 0 0 0 0 0
June 25, 2016.......... 97 0 0 0 0 0 0
June 25, 2017.......... 90 0 0 0 0 0 0
June 25, 2018.......... 81 0 0 0 0 0 0
June 25, 2019.......... 72 0 0 0 0 0 0
June 25, 2020.......... 65 0 0 0 0 0 0
June 25, 2021.......... 56 0 0 0 0 0 0
June 25, 2022.......... 46 0 0 0 0 0 0
June 25, 2023.......... 34 0 0 0 0 0 0
June 25, 2024.......... 21 0 0 0 0 0 0
June 25, 2025.......... 7 0 0 0 0 0 0
June 25, 2026.......... 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
Weighted Average Life
in Years to Maturity(1) 24.25 5.12 3.56 3.06 2.80 2.27 1.72
Weighted Average Life
in Years to Call(1).. 24.25 5.12 3.56 3.06 2.80 2.27 1.72
</TABLE>
- -----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(TABLE CONTINUED ON NEXT PAGE)
S-79
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR OR THE PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES (PPA) CLASS A-5 CERTIFICATES (PPA)
---------------------------- ----------------------------
DISTRIBUTION DATE 0% 75% 100% 115% 125% 150% 200% 0% 75% 100% 115% 125% 150% 200%
- ----------------- ------------ ----- ----- ----- ------------ ----- ------------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 1999.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 0 100 100 100 100 100 100 90
June 25, 2001.......... 100 100 100 100 100 84 0 99 90 89 89 89 90 89
June 25, 2002.......... 100 100 100 100 90 40 0 99 82 80 79 78 77 53
June 25, 2003.......... 100 100 100 82 62 22 0 97 71 66 63 61 57 31
June 25, 2004.......... 100 100 92 62 46 15 0 96 60 52 48 45 39 19
June 25, 2005.......... 100 100 92 62 46 15 0 90 34 26 25 24 23 11
June 25, 2006.......... 100 100 82 58 44 15 0 83 20 13 10 10 12 5
June 25, 2007.......... 100 100 69 48 37 15 0 76 11 6 4 4 5 1
June 25, 2008.......... 100 100 57 38 29 13 0 69 6 3 2 1 1 0
June 25, 2009.......... 100 90 45 29 21 8 0 62 3 1 1 1 0 0
June 25, 2010.......... 100 75 35 22 16 4 0 54 2 1 0 0 0 0
June 25, 2011.......... 100 62 27 16 11 1 0 47 1 0 0 0 0 0
June 25, 2012.......... 100 47 20 11 6 0 0 29 0 0 0 0 0 0
June 25, 2013.......... 100 39 15 7 3 0 0 26 0 0 0 0 0 0
June 25, 2014.......... 100 32 12 4 0 0 0 23 0 0 0 0 0 0
June 25, 2015.......... 100 26 8 1 0 0 0 19 0 0 0 0 0 0
June 25, 2016.......... 100 21 5 0 0 0 0 16 0 0 0 0 0 0
June 25, 2017.......... 100 17 2 0 0 0 0 13 0 0 0 0 0 0
June 25, 2018.......... 100 14 0 0 0 0 0 10 0 0 0 0 0 0
June 25, 2019.......... 100 10 0 0 0 0 0 8 0 0 0 0 0 0
June 25, 2020.......... 100 7 0 0 0 0 0 6 0 0 0 0 0 0
June 25, 2021.......... 100 4 0 0 0 0 0 4 0 0 0 0 0 0
June 25, 2022.......... 100 2 0 0 0 0 0 3 0 0 0 0 0 0
June 25, 2023.......... 100 0 0 0 0 0 0 2 0 0 0 0 0 0
June 25, 2024.......... 100 0 0 0 0 0 0 1 0 0 0 0 0 0
June 25, 2025.......... 100 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026.......... 64 0 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life 6.05
in Years to Maturity(1) 29.25 1 12.20 9.98 8.69 5.93 2.68 13.92 7.35 6.89 6.73 6.67 6.60 5.56
Weighted Average Life 8.81
in Years to Call(1).. 2 12.94 9.63 7.83 6.81 5.07 2.68 13.92 7.32 6.81 6.59 6.41 5.84 4.53
</TABLE>
<TABLE>
<CAPTION>
CLASS M-1A CERTIFICATES (CPR)
-----------------------------
DISTRIBUTION DATE 0% 18% 20% 25% 30% 35% 40%
- ----------------- ----- ------------------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 100 100 100 100 100 100 100
June 25, 1999.......... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 89 80 62 58 95 100
June 25, 2002.......... 100 72 64 46 33 27 75
June 25, 2003.......... 100 59 51 35 23 15 41
June 25, 2004.......... 100 48 40 26 16 9 21
June 25, 2005.......... 100 39 32 19 11 6 8
June 25, 2006.......... 100 32 25 14 8 4 0
June 25, 2007.......... 100 26 20 11 5 0 0
June 25, 2008.......... 100 21 16 8 4 0 0
June 25, 2009.......... 100 17 13 6 0 0 0
June 25, 2010.......... 100 14 10 4 0 0 0
June 25, 2011.......... 100 11 8 2 0 0 0
June 25, 2012.......... 100 9 6 0 0 0 0
June 25, 2013.......... 100 7 5 0 0 0 0
June 25, 2014.......... 100 6 4 0 0 0 0
June 25, 2015.......... 100 4 1 0 0 0 0
June 25, 2016.......... 100 3 0 0 0 0 0
June 25, 2017.......... 100 1 0 0 0 0 0
June 25, 2018.......... 100 0 0 0 0 0 0
June 25, 2019.......... 100 0 0 0 0 0 0
June 25, 2020.......... 100 0 0 0 0 0 0
June 25, 2021.......... 100 0 0 0 0 0 0
June 25, 2022.......... 93 0 0 0 0 0 0
June 25, 2023.......... 78 0 0 0 0 0 0
June 25, 2024.......... 62 0 0 0 0 0 0
June 25, 2025.......... 43 0 0 0 0 0 0
June 25, 2026.......... 22 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
Weighted Average Life
in Years to Maturity(1) 27.54 8.13 7.29 5.87 5.19 5.10 6.04
Weighted Average Life
in Years to Call(1).. 27.47 7.36 6.59 5.30 4.73 4.71 4.52
</TABLE>
- -----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(TABLE CONTINUED ON NEXT PAGE)
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR OR THE PREPAYMENT ASSUMPTION
CLASS M-1F CERTIFICATES (PPA) CLASS M-2A CERTIFICATES (CPR)
----------------------------- -----------------------------
DISTRIBUTION DATE 0% 75% 100% 115% 125% 150% 200% 0% 18% 20% 25% 30% 35% 40%
- ----------------- ------------ ----- ----- ----- ------------ ----- ------------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 1999.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 86 75 68 53 31 100 89 80 62 47 35 66
June 25, 2002.......... 100 90 68 57 51 37 18 100 72 64 46 33 23 15
June 25, 2003.......... 100 75 54 43 37 25 11 100 59 51 35 23 15 9
June 25, 2004.......... 100 63 42 33 28 18 6 100 48 40 26 16 9 5
June 25, 2005.......... 100 53 33 25 20 12 1 100 39 32 19 11 6 0
June 25, 2006.......... 100 44 26 19 15 8 0 100 32 25 14 8 1 0
June 25, 2007.......... 100 36 20 14 11 6 0 100 26 20 11 5 0 0
June 25, 2008.......... 100 30 16 11 8 2 0 100 21 16 8 0 0 0
June 25, 2009.......... 100 25 12 8 6 0 0 100 17 13 6 0 0 0
June 25, 2010.......... 100 20 10 6 2 0 0 100 14 10 2 0 0 0
June 25, 2011.......... 100 17 7 3 0 0 0 100 11 8 0 0 0 0
June 25, 2012.......... 100 13 5 0 0 0 0 100 9 6 0 0 0 0
June 25, 2013.......... 100 10 2 0 0 0 0 100 7 3 0 0 0 0
June 25, 2014.......... 100 9 0 0 0 0 0 100 6 0 0 0 0 0
June 25, 2015.......... 100 7 0 0 0 0 0 100 3 0 0 0 0 0
June 25, 2016.......... 100 6 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2017.......... 100 3 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2018.......... 100 1 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2019.......... 98 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2020.......... 90 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2021.......... 81 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2022.......... 71 0 0 0 0 0 0 93 0 0 0 0 0 0
June 25, 2023.......... 60 0 0 0 0 0 0 78 0 0 0 0 0 0
June 25, 2024.......... 47 0 0 0 0 0 0 62 0 0 0 0 0 0
June 25, 2025.......... 33 0 0 0 0 0 0 43 0 0 0 0 0 0
June 25, 2026.......... 17 0 0 0 0 0 0 22 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years to Maturity(1) 26.52 9.59 7.38 6.46 5.97 5.10 4.37 27.54 8.07 7.23 5.78 4.97 4.57 4.51
Weighted Average Life 6.40
in Years to Call(1).. 2 8.86 6.77 5.92 5.46 4.68 4.06 27.47 7.36 6.59 5.26 4.54 4.22 4.21
</TABLE>
<TABLE>
<CAPTION>
CLASS M-2F CERTIFICATES (PPA)
-----------------------------
DISTRIBUTION DATE 0% 75% 100% 115% 125% 150% 200%
- ----------------- ----- ------------------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 100 100 100 100 100 100 100
June 25, 1999.......... 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100
June 25, 2001.......... 100 100 86 75 68 53 31
June 25, 2002.......... 100 90 68 57 51 37 18
June 25, 2003.......... 100 75 54 43 37 25 11
June 25, 2004.......... 100 63 42 33 28 18 4
June 25, 2005.......... 100 53 33 25 20 12 0
June 25, 2006.......... 100 44 26 19 15 8 0
June 25, 2007.......... 100 36 20 14 11 1 0
June 25, 2008.......... 100 30 16 11 8 0 0
June 25, 2009.......... 100 25 12 8 2 0 0
June 25, 2010.......... 100 20 10 2 0 0 0
June 25, 2011.......... 100 17 7 0 0 0 0
June 25, 2012.......... 100 13 0 0 0 0 0
June 25, 2013.......... 100 10 0 0 0 0 0
June 25, 2014.......... 100 9 0 0 0 0 0
June 25, 2015.......... 100 7 0 0 0 0 0
June 25, 2016.......... 100 2 0 0 0 0 0
June 25, 2017.......... 100 0 0 0 0 0 0
June 25, 2018.......... 100 0 0 0 0 0 0
June 25, 2019.......... 98 0 0 0 0 0 0
June 25, 2020.......... 90 0 0 0 0 0 0
June 25, 2021.......... 81 0 0 0 0 0 0
June 25, 2022.......... 71 0 0 0 0 0 0
June 25, 2023.......... 60 0 0 0 0 0 0
June 25, 2024.......... 47 0 0 0 0 0 0
June 25, 2025.......... 33 0 0 0 0 0 0
June 25, 2026.......... 17 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0
Weighted Average Life
in Years to Maturity(1) 26.51 9.49 7.32 6.40 5.90 5.02 4.14
Weighted Average Life
in Years to Call(1).. 26.40 8.86 6.77 5.92 5.45 4.64 3.87
</TABLE>
- -----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(TABLE CONTINUED ON NEXT PAGE)
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR OR THE PREPAYMENT ASSUMPTION
CLASS B-1A CERTIFICATES (CPR) CLASS B1-F CERTIFICATES (PPA)
DISTRIBUTION DATE 0% 18% 20% 25% 30% 35% 40% 0% 75% 100% 115% 125% 150% 200%
- ----------------- ------------ ----- ----- ----- ------------ ----- ------------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 1998.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 1999.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000.......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2001.......... 100 89 80 62 47 35 25 100 100 86 75 68 53 31
June 25, 2002.......... 100 72 64 46 33 23 15 100 90 68 57 51 37 16
June 25, 2003.......... 100 59 51 35 23 15 7 100 75 54 43 37 25 5
June 25, 2004.......... 100 48 40 26 16 8 0 100 63 42 33 28 15 0
June 25, 2005.......... 100 39 32 19 11 1 0 100 53 33 25 19 7 0
June 25, 2006.......... 100 32 25 14 4 0 0 100 44 26 17 12 2 0
June 25, 2007.......... 100 26 20 10 0 0 0 100 36 19 10 6 0 0
June 25, 2008.......... 100 21 16 5 0 0 0 100 30 13 5 1 0 0
June 25, 2009.......... 100 17 13 1 0 0 0 100 25 8 1 0 0 0
June 25, 2010.......... 100 14 9 0 0 0 0 100 20 3 0 0 0 0
June 25, 2011.......... 100 11 5 0 0 0 0 100 14 0 0 0 0 0
June 25, 2012.......... 100 7 1 0 0 0 0 100 8 0 0 0 0 0
June 25, 2013.......... 100 3 0 0 0 0 0 100 5 0 0 0 0 0
June 25, 2014.......... 100 0 0 0 0 0 0 100 2 0 0 0 0 0
June 25, 2015.......... 100 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2016.......... 100 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2017.......... 100 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2018.......... 100 0 0 0 0 0 0 100 0 0 0 0 0 0
June 25, 2019.......... 100 0 0 0 0 0 0 98 0 0 0 0 0 0
June 25, 2020.......... 100 0 0 0 0 0 0 90 0 0 0 0 0 0
June 25, 2021.......... 100 0 0 0 0 0 0 81 0 0 0 0 0 0
June 25, 2022.......... 93 0 0 0 0 0 0 71 0 0 0 0 0 0
June 25, 2023.......... 78 0 0 0 0 0 0 60 0 0 0 0 0 0
June 25, 2024.......... 62 0 0 0 0 0 0 47 0 0 0 0 0 0
June 25, 2025.......... 43 0 0 0 0 0 0 33 0 0 0 0 0 0
June 25, 2026.......... 22 0 0 0 0 0 0 14 0 0 0 0 0 0
June 25, 2027.......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years to Maturity(1) 27.53 7.93 7.10 5.65 4.79 4.29 4.03 26.48 9.22 7.10 6.20 5.72 4.84 3.92
Weighted Average Life 7.47
in Years to Call(1).. 2 7.36 6.59 5.24 4.45 4.01 3.79 26.40 8.85 6.77 5.92 5.45 4.62 3.76
</TABLE>
- -----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(TABLE CONTINUED ON NEXT PAGE)
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<PAGE>
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables 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 tables at the various percentages of CPR 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.
FIXED STRIP CERTIFICATES YIELD CONSIDERATIONS
INVESTORS SHOULD NOTE THAT THE FIXED STRIP CERTIFICATES ARE ONLY
ENTITLED TO DISTRIBUTIONS PRIOR TO THE DISTRIBUTION DATE IN JULY 2000. The yield
to investors on the Fixed Strip Certificates, to the extent of the Component
related to such Loan Group, will be extremely sensitive to the rate and timing
of principal payments on the Mortgage Loans of such Loan Group (including
prepayments, defaults and liquidations), which rate may fluctuate significantly
over time. In addition, if at such time the Master Servicer, or holder a
majority interest in the Class R-I Certificates effects an optional termination
of the Mortgage Loans of either Loan Group, the Fixed Strip Certificates will
receive no further distributions with respect to such Loan Group. Investors in
the Fixed Strip Certificates should fully consider the risk that an extremely
rapid rate of prepayments on the Mortgage Loans could result in the failure of
such investors to fully recover their investments.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
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 June 1, 1997,
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 March
31, 1997 of approximately $6.2 billion. Advanta Parent, through its subsidiaries
(including the Master Servicer), had managed assets (including mortgage loans)
in excess of $20.1 billion as of March 31, 1997.
As of March 31, 1997, the Master Servicer and its subsidiaries were
servicing approximately 50,000 mortgage loans in the Owned and Managed Servicing
Portfolio (as defined below) representing an aggregate outstanding principal
balance of approximately $3.1 billion, and approximately 86,700
S-83
<PAGE>
mortgage loans in the Third-Party Servicing Portfolio (as defined below)
representing an aggregate outstanding principal balance of approximately $5.6
billion.
On March 17, 1997, Advanta Parent issued a press release (the "Press
Release"), announcing that it expects to report 1997 results well below previous
expectations. The Press Release stated that for the first quarter, Advanta
Parent currently expects to report a loss in the area of $20 million compared to
earnings of $41 million in the first quarter of 1996. On April 16, 1997, Advanta
Parent reported a loss of $19.8 million for the first quarter of 1997. The
losses are attributed to a number of factors, including increases in consumer
bankruptcies and charge-offs and lower receivables balances than originally
anticipated in its credit card business. Advanta Parent has retained BT
Wolfensohn, a division of the Bankers Trust New York Corporation, to explore all
strategic alternatives, with the aim of maximizing the company's value for its
shareholders and other constituents. There is no assurance that any such
alternatives will be pursued. The result of pursuing such alternatives may
positively or adversely affect the financial ability of the Master Servicer to
perform its financial and other obligations or to service the Mortgage Loans.
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.
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 March 31,
1997, and for each of the four prior years ended December 31. 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 March 31, 1997, approximately 86,700 mortgage loans with an
aggregate principal balance as of such date of approximately $5.6 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>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
Three Months Ending
March 31
---------------------------- ---------------------------
1997 1996
---------------------------- ---------------------------
Number Dollar Number Dollar
of Amount of Amount
LOANS (000) LOANS (000)
------------ -------------- ------------- -------------
Portfolio 49,998 $3,102,904 43,303 $2,595,981
Delinquency
Percentage(1)
30-59 days 2.58% 2.46% 3.07% 2.90%
60-89 days 0.72 0.72 0.85 0.90
90 days or more 1.45 1.80 1.45 1.26
----- ----- ---- ----
Total 4.75% 4.98% 5.37% 5.06%
Foreclosure Rate(2) 1.58% 1.78% 1.62% 1.92%
REO Properties(3) 0.37% -- 0.42% --
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ----------------
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 32,592 $1,797,582 26,446 $1,346,100 25,460 $1,149,864
Delinquency
Percentage(1)
30-59 days 2.67% 2.44% 2.01% 1.57% 2.43% 2.22%
60-89 days 0.72 0.71 0.57 0.45 0.77 0.63
90 days or more 1.69 1.23 1.85 1.51 2.19 2.12
---- ---- ---- ---- ---- ----
Total 5.08% 4.38% 4.43% 3.53% 5.39% 4.97%
Foreclosure Rate(2) 1.29% 1.53% 1.35% 1.38% 1.32% 1.62%
REO Properties(3) 0.52% -- 0.47% -- 0.42% --
</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.
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<PAGE>
<TABLE>
LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS*
<CAPTION>
Three Months Ending
March 31, Year Ending December 31,
---------------------- ------------------ ----------------- ------------------ ----------
1997 1996 1995 1994 1993
---------------------- ------------------ ----------------- ------------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $2,779,224 $2,102,643 $1,540,238 $1,225,529 $1,049,447
Gross losses(2) $3,966 $15,184 $13,978 $20,886 $14,115
Recoveries(3) $21 $117 $148 $179 $123
Net losses(4) $3,945 $15,067 $13,830 $20,707 $13,992
Net losses as a percentage of
average amount outstanding 0.56(5) 0.72% 0.90% 1.69% 1.33%
</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) March 31, 1997 percentage has been based on annualized net losses.
- --------
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
S-86
<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 1.42% and 0.88% for the periods
ending December 31, 1994 and December 31, 1993, 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.
The Pooling and Servicing Agreement provides that in the event the
losses on the Mortgage Loans in a Loan Group exceed certain specified levels,
the Master Servicer may be terminated with respect to such Loan Group by
Certificateholders holding 51% of the related voting rights.
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 do not constitute a
portion of the Interest Remittance Amount and 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.
* 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 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 the
Mortgage Loans in each Loan Group (with respect to each Loan Group, the related
"Trustee's Fee"). See "The Pooling Agreement" in the Prospectus.
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 Trustee or (b) mutual consent of the Master Servicer 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-I Certificates or the 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 in
either Loan Group is less than 10% (5% with respect to the exercise of this
option by the Master Servicer) of the sum of the aggregate principal balance of
such Mortgage Loans as of the Cut-off Date and the aggregate principal balance
of the related Subsequent Mortgage Loans as of the related Subsequent Cutoff
Date, purchase from the Trust Fund all of the outstanding related Mortgage Loans
at a price equal to the sum of (a) 100% of the Principal Balance of each
outstanding Mortgage Loan (including any REO Properties) in the related Loan
Group, (b) the aggregate amount of accrued and unpaid interest on the Mortgage
Loans in the related Loan Group 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 excess of the actual stated principal balance of each such Mortgage Loan in
such Loan Group 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 (d) any other unpaid or
unreimbursed amounts owed to the Master Servicer and not included in clauses (a)
through (c) 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. See "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered 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, REMIC I, REMIC II and REMIC III (exclusive of
the Interest Coverage Accounts and the Pre-Funding Accounts) will each qualify
as a REMIC under the Code.
For federal income tax purposes, (a) the Class R-I Certificates will be the
sole class of "residual interests" in REMIC I, (b) the Class R-II Certificates
will be the sole class of "residual interests" in REMIC II, (c) each class of
the Certificates (other than the Residual Certificates), will represent
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ownership of "regular interests" in REMIC III and will generally be treated as
representing ownership of debt instruments of REMIC III and (d) the Class R-III
Certificates will constitute the sole class of "residual interests" in REMIC
III.
For federal income tax reporting purposes, the Offered Certificates (other
than the Fixed Strip Certificates) will not, and the Fixed Strip Certificates
will, be treated as having been issued with original issue discount. The
prepayment assumption that will be used with respect to the Group I Certificates
and the Group II 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 Group I 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 Group I 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, such as the
Group I Certificates. 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 Group I 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 Group I Certificates are advised
to consult their tax advisors concerning the tax treatment of such Certificates.
A reasonable application of the principles of the OID Regulations to the
Group I Certificates 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 each such class of Certificates and projecting future distributions on 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.
The OID Regulations suggest that original issue discount with respect to
securities such as the Class A-IO Certificates that represent multiple REMIC
regular interests in which ownership interests will be issued simultaneously to
the same buyer and which are required under the Pooling and Servicing Agreement
to be transferred together, should be computed on an aggregate method. In the
absence of further guidance from the IRS, original issue discount with respect
to the regular interests represented by the Class A-IO Certificates will be
reported to the IRS and the Class A-IO Certificateholders on an aggregate method
based on a single overall constant yield and the prepayment assumption stated
above, treating all such regular interests as a single debt instrument as set
forth in the OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, in particular a Class A-IO Certificateholder,
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the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Class A-IO
Certificateholder may be permitted to deduct a loss to the extent that its
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Any such loss might be treated as a capital
loss.
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 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 Offered 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 Offered 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 Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered 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 Offered 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 June 16, 1997 (the "Underwriting Agreement"), among Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Morgan Stanley & Co. Incorporated
("Morgan") and Greenwich Capital Markets, Inc. ("Greenwich"; DLJ, Morgan Stanley
and Greenwich 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 Offered Certificates. It is expected that delivery of the
Offered Certificates will be made only in book-entry form through the Same Day
Funds Settlement System of DTC, on or about June 19, 1997, 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 Offered 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.
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The distribution of the Offered 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. Net proceeds to the
Company from the sale of the Offered Certificates, before deducting expenses
payable by the Company, will be approximately 100.83% of the aggregate initial
Certificate Principal Balance of the Class A Certificates plus accrued interest
on the Offered Certificates (other than the Class A-1, Class M-1A, Class M-2A
and Class B-1A Certificates). The Underwriters may effect such transactions by
selling the Offered 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 Offered
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
Offered Certificates may be deemed to be underwriters and any profit on the
resale of the Offered Certificates positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
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 Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
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 Offered
Certificates. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered 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 Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Class A Certificates (other than the Fixed Strip Certificates) be rated "AAA" by
Standard & Poor's Ratings Services ("S&P"), Duff & Phelps Credit Rating Co.
("DCR") and Fitch Investors Service, L.P. ("Fitch") as follows:
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CLASS S&P DCR FITCH
Class A-1 Certificates AAA AAA AAA
Class A-2 Certificates AAA AAA AAA
Class A-3 Certificates AAA AAA AAA
Class A-4 Certificates AAA AAA AAA
Class A-J Certificates AAA AAA AAA
Class A-IO Certificates AAAr AAA AAA
Class M-1A Certificates AA AA+ AA
Class M-1F Certificates AA AA+ AA
Class M-2A Certificates A A A
Class M-2F Certificates A AA- A
Class B-1A Certificates BBB BBB BBB
Class B-1F Certificates BBB BBB+ BBB
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. 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 Fitch on payment of principal and interest do not
cover the payment of the Group I Available Funds Cap Carry-Forward Amount. See
"Certain Yield and Prepayment Considerations" and "Ratings" herein and "Yield
Considerations" and "Rating" in the Prospectus.
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 "r" of the "AAAr" rating of the Fixed
Strip Certificates by S&P is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
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. DCR's ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying mortgages.
Furthermore, DCR's ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield resulting from
funds remaining in the Pre-Funding Accounts at the end of the Funding Period.
The ratings assigned by Fitch 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.
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The Company has not requested a rating on the Offered Certificates by any
rating agency other than S&P, DCR and Fitch. However, there can be no assurance
as to whether any other rating agency will rate the Offered 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 Offered Certificates by S&P, DCR and Fitch.
The ratings assigned to the Group I Certificates do not cover the payment
of any Group I 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
Offered 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 Offered Certificates.
LEGAL INVESTMENT
The Group I Class A, Group II Class A, Class M-1A and Class M-1F
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 M-2A, Class M-2F,
Class B-1A and Class B-1F Certificates will not constitute "mortgage related
securities for purposes of SMMEA.
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 Offered Certificates constitute a legal investment or are subject to
investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to ERISA or Section 4975 of the Code (each, a "Plan") or any person
investing Plan Assets of any Plan (as defined in the Prospectus under "ERISA
Considerations") should carefully review with its legal advisors whether the
purchase, sale or holding of Certificates will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code.
The U.S. Department of Labor ("DOL") has granted to DLJ an administrative
exemption (Prohibited Transaction Exemption 90-83; Exemption Application D-8346;
55 Fed. Reg. 50250 (1990)) (the "DLJ Exemption"); to Morgan Stanley an
administrative exemption (Prohibited Transaction Exemption 90-24; Exemption
Application D-8019; 55 Fed. Reg. 20,548 (1990)) (the "Morgan Stanley
Exemption"); and to Greenwich an administrative exemption (Prohibited
Transaction Exemption 90-59, as amended; Exemption Application No. D-8374; 55
Fed. Reg. 36,724 (1990)) (the "Greenwich Exemption"; the DLJ
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Exemption, the Morgan Stanley Exemption and the Greenwich Exemption
collectively, the "Exemptions"), as described in the Prospectus under "ERISA
Considerations." The Exemptions generally exempt from the application of certain
of the prohibited transaction provisions of Section 406 of ERISA, and the excise
taxes imposed on such prohibited transactions by Section 4975(a) and (b) of the
Code and Section 502(i) of ERISA, transactions relating to the purchase, sale
and holding of pass-through certificates underwritten by the Underwriters, such
as the Class A Certificates, and the servicing and operation of asset pools such
as the Trust Fund, provided that certain conditions are satisfied, which
conditions are described in the Prospectus under "ERISA Considerations."
On May 23, 1997, the DOL published in the Federal Register proposed
amendments to the Exemptions, which will extend exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendments will generally allow Mortgage Loans supporting
payments to Certificateholders, and having a value equal to no more than 25% of
the total principal amount of the Certificates being offered by the Trust Fund,
to be transferred to the Trust Fund within a Funding Period no longer than 90
days or three months following the Cut-off Date instead of requiring that all
such Mortgage Loans be either identified or transferred on or before the Cut-off
Date. The relief, if granted as a final exemption, is proposed to be made
effective for transactions occurring on or after May 23, 1997, and will apply to
the purchase, sale and holding of the Class A Certificates, provided that the
following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding Limit")
must not exceed 25%;
(2) all Subsequent Mortgage Loans must meet the same terms and conditions
for eligibility as the original Mortgage Loans used to create the Trust Fund,
which terms and conditions have been approved by S&P, DCR, Fitch or Moody's
Investors Service, Inc. (collectively, the "Exemption Rating Agencies");
(3) the transfer of such Subsequent Mortgage Loans to the Trust Fund during
the Funding Period must not result in the Certificates to be covered by the
Exemptions receiving a lower credit rating from an Exemption Rating Agency upon
termination of the Funding Period than the rating that was obtained at the time
of the initial issuance of the Certificates by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of the
Mortgage Loans and Subsequent Mortgage Loans in the Trust Fund at the end of the
Funding Period must not be more than 100 basis points lower than the Average
Interest Rate for the Mortgage Loans which were transferred to the Trust Fund on
the Cut-off Date;
(5) either:
(i) the characteristics of the Subsequent Mortgage Loans must be
monitored by an insurer or other credit support provider which is
independent of the Company; or
(ii) an independent accountant retained by the Company must provide the
Company with a letter (with copies provided to the Exemption Rating Agency
rating the Certificates, the Underwriter and the Trustee) stating whether
or not the characteristics of the Subsequent Mortgage Loans conform to the
characteristics described in the Prospectus or Prospectus Supplement and/or
Pooling and Servicing Agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable to the
Mortgage Loans which were transferred to the Trust Fund as of the Cut-off
Date;
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(6) the Funding Period must end no later than three months or 90 days after
the Cut-off Date or earlier in certain circumstances if the Pre-Funding Accounts
falls below the minimum level specified in the Pooling and Servicing Agreement
or an event of default occurs;
(7) amounts transferred to any Pre-Funding Accounts and/or capitalized
interest account used in connection with the pre-funding may be invested only in
investments which are permitted by the Exemption Rating Agencies rating the
Certificates and must:
(i) be direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by such Exemption Rating Agencies
("Permitted Investments");
(8) the Prospectus or Prospectus Supplement must describe:
(i) any Pre-Funding Account and/or capitalized interest account used
in connection with a Pre- Funding Account;
(ii) the duration of the Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit for
the Funding Period that will be remitted to Certificateholders as
repayments of principal; and
(iv) that the amounts remaining in the Pre-Funding Account at the end
of the Funding Period will be remitted to Certificate holders as repayments
of principal; and
(9) the Pooling and Servicing Agreement must described the Permitted
Investments for the PreFunding Account and/or capitalized interest account and,
if not disclosed in the Prospectus or Prospectus Supplement, the terms and
conditions for eligibility of Subsequent Mortgage Loans.
The Underwriters believe that all of the conditions for exemptive relief
under the proposed amendments to the Exemptions with respect to pre-funding have
been or will be satisfied. Therefore, if the relief granted under the final
amendment conforms to that proposed by the DOL, the purchase, sale and holding
of Class A Certificates would be eligible for relief under the Exemptions, as
amended, and such relief would be applicable retroactively to the Cut-off Date.
Although there can be no assurance that the final amendment will be adopted, or
if adopted, that they will be identical to that proposed, it is not anticipated
that any changes will be made which would adversely affect that applicability of
the Exemptions to the purchase, sale or holding of the Class A Certificates by,
on behalf of or with Plan Assets of a Plan. However, any Plan investor that
proposes to acquire the Class A Certificates in reliance upon the Exemptions
should consult with its counsel and make its own determination as to the
applicability of the Exemptions and the advisability of investing in the Class A
Certificates in reliance upon the proposed pre-funding amendment.
The purchase of the Class A Certificates by, on behalf of or with the Plan
Assets of any Plan may qualify for exemptive relief under the Exemptions.
However, the Exemptions contain a number of conditions which must be met for the
Exemptions to apply (as described in the Prospectus under "ERISA
Considerations"), including the requirement that any such Plan must be 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, as amended.
A fiduciary of a Plan contemplating purchasing a Class A Certificate must make
its own determination that the conditions set forth in the Exemptions will be
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satisfied with respect to the Class A Certificates. 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.
Because the Exemptions will not likely apply to the purchase, sale or
holding of the Class M Certificates or Class B Certificates (due to the
subordinate nature thereof), the purchaser of any Class M Certificates or Class
B Certificates will be deemed to have represented by such purchase that either:
(i) such purchaser is not a Plan and is not purchasing such Certificates by, on
behalf of, or with Plan Assets of any Plan; or (ii) the purchase, sale and
holding of such Certificates by, on behalf of or with Plan Assets of any Plan is
permissible under applicable law, will not result in any non-exempt prohibited
transaction under ERISA or the Code, will not subject the Company, the Trustee
or the Master Servicer to any obligation in addition to those undertaken in the
Pooling and Servicing Agreement and the exemptive relief granted by the DOL for
transactions involving insurance company general accounts pursuant to Prohibited
Transaction Class Exemption 95-60 is available with respect to the purchase,
sale and holding of such Certificates.
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 Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Offered 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. See "ERISA Considerations" in
the Prospectus.
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APPENDIX A
UNDERWRITING GUIDELINES APPLICABLE TO THE MORTGAGE LOANS
SOUTHERN PACIFIC FUNDING CORPORATION
The Mortgage Loans originated by SPFC were originated under SPFC's
Standard NonConforming 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.
SPFC'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 SPFC's 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, it also considers,
among other things, a mortgagor's credit history and repayment ability, as well
as the type and use of the mortgaged property. The Mortgage Loans underwritten
under this program are adjustable and fixed 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 Lite Documentation" and "Non-Conforming Stated Income"
residential loan programs. Under each of 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 SPFC's
standards. In determining the ability of the applicant to repay the Mortgage
Loan, SPFC uses a rate (the "Qualifying Rate") which, for the mortgage loans
that adjust approximately six months after the date of origination is a rate
equal to the Mortgage Rate at origination plus the amount of the Periodic Rate
Cap and for the mortgage loans which adjust approximately two years after the
date of origination is a rate equal to the starting Mortgage Rate. 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 or
verification of employment. A telephone confirmation of employment is made
regardless of the origination program. Under the NonConforming Stated Income
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 and one year's bank
statements. A business credit report, if applicable, is obtained. Verification
of the source of funds (if any) required to be deposited by the applicant into
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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, SPFC may waive certain documentation requirements for individual
borrowers. 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 three 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 Stated Income 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 Stated Income 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 a single-family owner-occupied property,
regardless of the documentation program. Exceptions to the maximum loan amount
for a single-family, owner occupied property are considered by SPFC on a limited
basis. The maximum loan amount is $350,000 (or $300,000 for mortgage loans
originated under the Non-Conforming Stated Income Program) for a mortgage loan
on a single-family non-owner-occupied property or second home.
"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 $1,000 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
Stated Income 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% 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 a single-family owner-occupied property, under the Non-Conforming Full
Documentation Program. Exceptions to the maximum loan amount for a
single-family, owner occupied property are considered by SPFC on a limited
basis. The maximum loan amount is $500,000 for a mortgage loan on a
single-family owner-occupied property under the NonConforming Stated Income
Program. The maximum loan amount is $400,000 (or $350,000 for mortgage loans
originated under the Non-Conforming Stated Income Program) for mortgage loans on
a single-family non-owner-occupied properties or second homes.
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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 $2,000 are acceptable. However, for mortgage loans with a
Loan-to-Value ratio of 80% or less, collection accounts, unpaid charge-offs or
judgments are not required to be paid from the proceeds of the mortgage loan,
provided the mortgagor accepts a 25 basis point increase on the Mortgage Loan
Rate. 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% 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 Non-Conforming Stated Income Program) is permitted for a mortgage loan on a
nonowner 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 a single-family owner-occupied property, 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 Stated
Income Program) for a mortgage loan 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 45 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. However, collection accounts, unpaid
charge-offs or judgments are not required to be paid from the proceeds of the
mortgage loan, provided the mortgagor accepts a 25 basis point increase on the
Mortgage Loan Rate. 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 Stated Income
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 Stated
Income 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 a mortgage loan originated
under the Non-Conforming Stated Income Program) for a mortgage loan on a
single-family owner-occupied property. The maximum loan amount is $300,000 (or
$200,000 for mortgage loans originated under the Non-Conforming Stated Income
Program) for a mortgage loan on a non-owner-occupied property or second home.
"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 disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, such mortgage
loan may be in foreclosure. 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.
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Bankruptcy or notice of default filings by the borrower may be present at the
time of the loan. A maximum Loan-to-Value Ratio of 65% is permitted for a
mortgage loan on a single-family owner-occupied property. The maximum loan
amount is $350,000 under all programs. The debt service-toincome ratio generally
is 60% or less based on the Qualifying Rate.
EXCEPTIONS. As described above, SPFC 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; good maintenance; 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, SPFC 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.
MORCAP, INC.
The Mortgage Loans originated by MorCap, Inc. ("MorCap") were
originated under MorCap's Non-Conforming Loan Program. The Non-Conforming Loan
Program is applicable to residential loans which, for credit reasons, do not
conform to FNMA or FHLMC underwriting guidelines.
THE NON-CONFORMING LOAN PROGRAM
The Mortgage Loans underwritten under the Non-Conforming Loan Program
were underwritten in accordance with the underwriting criteria of MorCap. MorCap
began underwriting mortgage loans in accordance with such standards in March,
1996.
MorCap's underwriting standards under the Non-Conforming Loan 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 a mortgage loan. While MorCap's 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, MorCap also considers, among other
things, a mortgagor's credit history and repayment ability, as well as the type
and use of the mortgaged property. Each of the Mortgage Loans underwritten under
the Non-Conforming Loan Program were underwritten pursuant to the "Full
Documentation," "Limited Documentation," or "Lite Documentation," the stated
income from the application (the "Stated 1003") and the "Quick Documentation"
residential loan programs. Under each of the these programs, MorCap 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
MorCap's standards. MorCap's underwriting standards are applied in a
standardized procedure which complies with applicable federal and state laws and
regulations.
MorCap'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. Under the Full
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Documentation program borrowers are generally required to submit written
verification of income signed by the employer covering the most recent two-year
period or a current paystub and two years' W-2 forms covering the time period
for the credit grade. MorCap also performs a verbal verification of employment
prior to funding the mortgage loan. Under the Limited Documentation program,
which was developed for self-employed borrowers, a standard form of verification
of income is not required. However, reasonable assets in relation to the stated
income and verification that the borrower has been self-employed for a minimum
of one year is required. The following documentation must also be provided: (1)
A business license (only required when using personal bank statements) and (2)
the most recent 12 months, bank statements from the borrowers bank account.
Business or personal bank statements can be used as directed by the underwriter.
Under the Stated 1003 program, no verification of income is required. However,
reasonable assets in relation to stated income is required. The following
documentation is also required: (1) Proof the business has been in existence for
a minimum of one year for self-employed borrowers; (2) verification of
employment if not self-employed, and (3) income must be deemed reasonable and be
consistent with the borrower's profession. Under the Quick Documentation
program, which is designed to offer brokers a quick and easy way to fund lower
Loan-to-Value ("LTV") loans the following criteria must be met: For A risk and
A- risk borrowers a maximum LTV of 70% (or 65% for B risk and C risk borrowers
or 60% for D risk borrowers) for owner occupied single family residences,
one-four unit attached family residences, manufactured homes which are 10 years
old or newer, condominiums, townhouses and planned unit developments. For
non-owner occupied residences the respective LTV is reduced by 5% in each risk
category and is not available for the D risk category. Additionally, only
refinances are permitted under the Quick Documentation program and seasoning of
the purchase is not permitted. If the market value exceeds the purchase price by
more than 10%, a satisfactory explanation is required. Under all of the
foregoing programs all documentation must be no more than 90 days old at the
time of the underwriting and no more than 120 days old (except in-house credit
reports generated by MorCap may be no more than 30 days old) at the time of the
funding of the related loan .
MorCap 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 repaid installment or revolving debt according to its terms with a maximum
number 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 two 30-day late payments is
permitted on an existing mortgage loan on the subject property, or no 30-day
late payments within the last 12 months. 25 basis points are added to the
interest rate of the mortgage loan if there is a 30-day late payment within the
last 12 months on an existing mortgage loan on the subject property. The
existing mortgage obligation must be current. Any collection accounts or unpaid
charge-offs or judgments will be required to be paid from the proceeds of the
mortgage loan. Non-creditor judgments and past due child support and alimony are
permitted, but must be paid at the closing or brought current. No bankruptcy or
foreclosures may have occurred during the preceding three years commencing from
the date of discharge or the date the foreclosure was filed. A maximum
Loan-to-Value Ratio of 90% for mortgage loans originated under the Full
Documentation program, (or 80% for a mortgage loan originated under the Lite
Documentation program and 75% if the mortgage loan is originated under the
Stated 1003 program) is permitted for a mortgage loan on an owner-occupied
property. A maximum Loan-to-Value Ratio of 80% for a mortgage loan originated
under the Full Documentation (or 75% for a mortgage loan originated under the
Lite Documentation program and 70% if the mortgage loan is originated under the
Stated 1003 program) is permitted for a loan on a non-owner occupied property.
The maximum debt service-to-income ratio is 45%. The maximum loan amount is
$600,000 (or $500,000 for a mortgage loan originated under the Lite
Documentation program and $400,000 for a mortgage loan originated under the
Stated 1003
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program) for an owner-occupied property for a mortgage loan originated under the
Full Documentation program. The maximum loan amount is $350,000 (or $300,000 for
a mortgage loan originated under the Stated 1003 program) for a non-owner
occupied property or second home under the Full Documentation program and the
Lite Documentation program. The maximum cash-out loan amount is $50,000 under
the Full documentation, Lite Documentation and the Stated 1003 programs for an
owner occupied residence and $25,000 for a non-owner occupied residence or
second home. The maximum cash-out loan amount can be doubled on an owner or a
non-owner occupied residence with the acceptance of a 25 basis point increase on
the Mortgage Loan rate.
"A-" RISK. Under the "A-" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms with a maximum
number of five 30-day late payments within the last 12 months or two 60-day late
payments within the last 12 months. Within this 12 month period, however, a
maximum of two 30-day late payments is permitted on an existing mortgage loan on
the subject property. The existing mortgage obligation must be current. Any
collection accounts or unpaid charge-offs or judgments may be required to be
paid from the proceeds of the mortgage loan. Noncreditor judgments and past due
child support and alimony are permitted, but must be paid at the closing or
brought current. No bankruptcy or foreclosures may have occurred during the
preceding two years commencing from the date of discharge (except that in the
case of discharged Chapter 13 bankruptcies ("Discharged Chapter 13
Bankruptcies") the date of filing is used, provided the bankruptcy plan lasted
at least three years and no 30-day late payments were incurred within the last
12 months) or the date the foreclosure was filed. A maximum Loan-to-Value Ratio
of up to 90% for a mortgage loan originated under the Full Documentation
program, (or 80% for a mortgage loan originated under the Lite Documentation
program and 75% if the mortgage loan is originated under the Stated 1003
program) is permitted for a mortgage loan on an owner-occupied property. A
maximum Loan-to-Value Ratio of 75% for a mortgage loan originated under the Full
Documentation program or the Lite Documentation program (or 70% for a mortgage
loan originated under the Stated 1003 program) is permitted for a loan on a
nonowner occupied property or second home property. The maximum debt
service-to-income ratio is 45% for a mortgage loan with a Loan-to-Value Ratio
greater than 75% and increases as follows: (1) to 50% when the Loan-to-Value
Ratio less than or equal to 75% but greater than 70%; (2) to 55% when the
Loan-to-Value Ratio is less than or equal to 70% but greater than 65%, and (3)
60% when the Loan-toValue Ratio is less than or equal to 65%. The maximum loan
amount is $650,000 (or $500,000 for a mortgage loan originated under the Lite
Documentation program or the Stated 1003 program) for an owner-occupied property
for a mortgage loan originated under the Full Documentation program. The maximum
loan amount is $400,000 for a mortgage loan originated under the Full
Documentation Program and 350,000 for a mortgage loan originated under the Lite
Documentation program or the Stated 1003 program for a non-owner occupied
property or second home. The maximum cash-out loan amount is $250,000 under the
Full documentation, Lite Documentation and the Stated 1003 programs for an owner
occupied residence and $50,000 for a non-owner occupied residence or a second
home. The maximum cash-out loan amount can be doubled on a non-owner occupied
residence with the acceptance of a 25 basis point increase on the Mortgage Loan
rate, the margin and the mortgage issuance fee.
"B" RISK. Under the "B" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms with a maximum
number of eight 30-day late payments or four 60-day late payments; within the
last 12 months or two 90-day late payments within the last 12 months. The
existing mortgage obligation can be up to 40 days past due at the funding of the
loan, but must be paid off at the time of the funding. Any collection accounts
or unpaid charge-offs or judgments may be required to be paid from the proceeds
of the mortgage loan. However, for mortgage loans with a Loan-toValue ratio of
80% or less, collection accounts, unpaid charge-offs or judgments are not
required to be paid from the proceeds of the mortgage loan, provided the
mortgagor accepts a 25 basis point increase
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on the Mortgage Loan Rate. Non-creditor judgments and past due child support and
alimony are permitted, but must be paid at the closing or brought current. No
bankruptcy or foreclosures may have occurred during the preceding 24 months (or
previous 18 months if the mortgagor accepts a 50 basis point increase on the
Mortgage Loan rate) commencing from the date of discharge (except that in the
case of Discharged Chapter 13 Bankruptcies, the date of filing is used, provided
the bankruptcy plan lasted at least three years and no 30-day late payments were
incurred within the last 12 months) or the date the foreclosure was filed. A
maximum Loan-to-Value Ratio of up to 85% for a mortgage loan originated under
the Full Documentation program, (or 75% for a mortgage loan originated under the
Lite Documentation program and 70% if the mortgage loan is originated under the
Stated 1003 program) is permitted for a mortgage loan on an owner-occupied
property. A maximum Loan-to-Value Ratio of 75% for a mortgage loan originated
under the Full Documentation program (or 70% for a mortgage loan originated
under the Lite Documentation program or 65% for a mortgage loan originated under
the Stated 1003 program) is permitted for a loan on a non-owner occupied
property or second home property. The maximum debt service-to-income ratio is
50-60%. The maximum loan amount is $600,000 for an owner-occupied property for a
mortgage loan originated under the Full Documentation program and $500,000 for a
mortgage loan originated under the Lite Documentation program or the Stated 1003
program. The maximum loan amount is $300,000 for a non-owner occupied property
or second home under the Full Documentation program, the Lite Documentation
program and the Stated 1003 program. The maximum cash-out loan amount is
$200,000 under the Full documentation, Lite Documentation and the Stated 1003
programs for an owner occupied residence and $50,000 for a non-owner occupied
residence or second home. The maximum cash-out loan amount can be doubled on a
non-owner occupied residence with the acceptance of a 25 basis point increase on
the Mortgage Loan rate, the margin and the mortgage issuance fee.
"C" RISK. Under the "C" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms within the last
12 months. A maximum of twelve 30-day late payments or six 60-day late payments
or four 90-day late payments within the last 12 months is permitted. On an
existing mortgage loan on the subject property, a mortgagor can roll any number
of consecutive 30-day late payments one time only. Non-consecutive 30, 60 and
90-day late payments are considered using the conversion rule (60-day = 2 x
30-day, 90-day = 3 x 30-day) of converting 60 and 90-day late payments into
30-day late payments. Using this conversion formula, a maximum of six 30-day
late payments is permitted within the last 12 months. The existing mortgage
obligation can be no more than 45 days past due at the time of the funding and
must be paid off at such time. Unpaid collection accounts or unpaid charge-offs
or judgments within the last 24 months cannot exceed $6,000 and generally must
be paid from the proceeds of the mortgage loan. However, collection accounts,
unpaid charge-offs or judgments are not required to be paid from the proceeds of
the mortgage loan, provided the mortgagor accepts a 25 basis point increase on
the Mortgage Loan Rate. No bankruptcy or foreclosures may have occurred during
the preceding 12 months commencing from the date of discharge (except that in
the case of Discharged Chapter 13 Bankruptcies, the date of filing is used,
provided the bankruptcy plan lasted at least three years and no 30-day late
payments were incurred within the last 12 months) or the date the foreclosure
was filed. A maximum Loan-to-Value Ratio of 75% for a mortgage loan originated
under the Full Documentation program, (or 70% for a mortgage loan originated
under the Lite Documentation program or 65% if the mortgage loan is originated
under the Stated 1003 program) is permitted for a mortgage loan on an
owner-occupied property. A maximum Loan-to-Value Ratio of 70% for a mortgage
loan originated under the Full Documentation program (or 65% for a mortgage loan
originated under the Lite Documentation program or 60% for a mortgage loan
originated under the Stated 1003 program) is permitted for a mortgage loan on a
non-owner occupied property or second home property. The permitted debt
service-to-income ratio is 55-60%. The maximum loan amount is $500,000 for an
owner-occupied property for a mortgage loan originated under the Full
Documentation program and $400,000 under the Lite Documentation program or the
Stated 1003
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program. The maximum loan amount is $300,000 under the Full Documentation
program and the Lite Documentation program (or $200,000 for a mortgage loan
originated under the Stated 1003 program) for a non-owner occupied property or
second home. The maximum cash-out loan amount is $200,000 under the Full
documentation, Lite Documentation and the Stated 1003 programs for an owner
occupied residence and $50,000 for a non-owner occupied residence or second
home.
"D" RISK. Under the "D" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, there is a general disregard for timely payments by the prospective
mortgagor on outstanding installment or revolving debt. A prior history of
bankruptcy or foreclosure by the borrower is also generally disregarded and
buyouts from bankruptcy are permitted. With respect to an existing mortgage on
the subject property, no payment can be more than 149 days past due at the time
of the closing. For payments more than 149 days past due at the time of closing
50 basis points is added to the Mortgage Loan Rate. Selected collection accounts
or unpaid charge-offs or judgments must be paid from the proceeds of the
mortgage loan if they affect the title to the subject property. However,
collection accounts, unpaid charge-offs or judgments are not required to be paid
from the proceeds of the mortgage loan, provided the mortgagor accepts a 25
basis point increase on the Mortgage Loan Rate. A maximum Loan-to-Value Ratio of
up to 65% for a mortgage loan originated under the Full Documentation program,
the Lite Documentation program or the Stated 1003 program is permitted for a
mortgage loan on an owner-occupied property. A maximum Loan-toValue Ratio of 60%
for a mortgage loan originated under the Full Documentation program, the Lite
Documentation program and the Stated 1003 program is permitted for a mortgage
loan on a non-owner occupied property. The permitted debt service-to-income
ratio is 55-65%. The maximum loan amount is $350,000 for a mortgage loan
originated under the Full Documentation program, the Lite Documentation program
or the Stated 1003 program for both owner-occupied properties and non-owner
occupied properties. The maximum cash-out loan amount is $1,000 under the Full
documentation, Lite Documentation or the Stated 1003 programs for an owner
occupied residence and $1,000 for a non-owner occupied residence or second home.
EXCEPTIONS. As described above, MorCap 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;
stable employment; an "A" or "A-" mortgage history; and the length of residence
in the subject property. Accordingly, MorCap 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
Mortgage-Backed Notes
Southern Pacific Secured Assets Corp.
The mortgage pass-through certificates ("Certificates") or mortgage-backed notes
("Notes") offered hereby (the "Offered Securities") and by the supplements
hereto (each, a "Prospectus Supplement") will be offered from time to time in
series. The Offered Securities of each series, together with any other mortgage
pass-through certificates or mortgage-backed notes of such series, are
collectively referred to herein as the "Securities."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of Notes will represent
indebtedness of, 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 Securities (the "Securityholders") pursuant to (i) with respect to
each series of Certificates, a pooling and servicing agreement or other
agreement (in either case, a "Pooling Agreement") or (ii) with respect to each
series of Notes, an indenture (an "Indenture"), in each case as more fully
described herein and in the related Prospectus Supplement. Information regarding
the Offered Securities 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 Securities will include one or more classes. Each class of
Securities 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 Securities,
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 Securities 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 Securities 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 SECURITIES 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 SECURITIES 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 SECURITIES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities 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 Securities. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Securities 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 Securities in the manner
described herein and in the related Prospectus Supplement. See "Yield
Considerations."
With respect to each series of Certificates, one or more separate elections may
be made to treat the related 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 Security.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SECURITIES 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 Securities 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 Securities of any series prior
to the offering thereof. There can be no assurance that a secondary market for
any of the Offered Securities will develop or, if it does develop, that it will
continue. The Offered Securities 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 April __, 1997.
<PAGE>
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 SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
TABLE OF CONTENTS
Caption Page
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 SECURITIES ............................................ 31
General ......................................................... 31
Form of Securities .............................................. 32
Assignment of Trust Fund Assets ................................. 33
Certificate Account ............................................. 35
Distributions ................................................... 39
Distributions of Interest and Principal on the
Securities ...................................................... 39
Distributions on the Securities in Respect of
Prepayment Premiums or in Respect
of Equity Participations ........................................ 41
Allocation of Losses and Shortfalls ............................. 41
Advances ........................................................ 41
Reports to Securityholders ...................................... 42
DESCRIPTION OF CREDIT ENHANCEMENT ........................................ 43
General ......................................................... 43
Subordinate Securities .......................................... 44
Letter of Credit ................................................ 44
Mortgage Pool Insurance Policies ................................ 45
Special Hazard Insurance Policies ............................... 46
Bankruptcy Bonds ................................................ 47
Reserve Funds ................................................... 47
Maintenance of Credit Enhancement ............................... 48
Reduction or Substitution of Credit
Enhancement ..................................................... 50
PURCHASE OBLIGATIONS ..................................................... 50
PRIMARY MORTGAGE INSURANCE, HAZARD
INSURANCE;
CLAIMS THEREUNDER ........................................................ 51
General ................................................ 51
Primary Mortgage Insurance Policies .................... 51
Hazard Insurance Policies .............................. 52
FHA Insurance .......................................... 53
THE COMPANY .............................................................. 54
THE AGREEMENTS ........................................................... 54
General ......................................................... 54
Certain Matters Regarding the Master Servicer
and the Company ................................................. 55
Events of Default and Rights Upon Event
Default ......................................................... 55
Amendment ....................................................... 58
Termination; Retirement of Securities ........................... 59
The Trustee ..................................................... 60
Duties of the Trustee ........................................... 60
Certain Matters Regarding the Trustee ........................... 60
Resignation and Removal of the Trustee .......................... 61
YIELD CONSIDERATIONS ..................................................... 61
MATURITY AND PREPAYMENT
CONSIDERATIONS ........................................................... 63
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS .................................................................... 64
Single Family Loans and Multifamily Loans ....................... 64
Contracts ....................................................... 65
Foreclosure on Mortgages ........................................ 66
Repossession with respect to Contracts .......................... 68
Rights of Redemption ............................................ 69
Anti-Deficiency Legislation and Other
Limitations on Lenders .......................................... 69
Junior Mortgages ................................................ 71
Consumer Protection Laws with respect to
Contracts ....................................................... 71
Environmental Legislation ....................................... 72
Enforceability of Certain Provisions ............................ 72
Subordinate Financing ........................................... 73
Applicability of Usury Laws ..................................... 73
Alternative Mortgage Instruments ................................ 74
Formaldehyde Litigation with respect to
Contracts ....................................................... 74
Soldiers' and Sailors' Civil Relief Act of
1940 ............................................................ 74
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ............................................................. 75
General ......................................................... 75
REMICS .......................................................... 76
Notes ........................................................... 89
Grantor Trust Funds ............................................. 90
STATE AND OTHER TAX CONSEQUENCES ......................................... 99
ERISA CONSIDERATIONS ..................................................... 99
Tax Exempt Investors ............................................ 103
Consultation with Counsel ....................................... 103
USE OF PROCEEDS .......................................................... 104
METHODS OF DISTRIBUTION .................................................. 104
LEGAL MATTERS ............................................................ 105
FINANCIAL INFORMATION .................................................... 106
RATING ................................................................... 106
INDEX OF PRINCIPAL DEFINITIONS ........................................... 107
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UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http://www.sec.gov). The
Company does not intend to send any financial reports to Securityholders.
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 SECURITYHOLDERS
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 Securities of the related series. See "Description of the
Securities--Reports to Securityholders."
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 Securities 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 Securities,
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 Securities, 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 Securities.
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<PAGE>
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 Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Offered Securities 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.
Securities Offered.................. Mortgage pass-through certificates or
mortgage-backed notes. The mortgage
pass-through certificates (the "Offered
Certificates") or mortgage-backed notes
(the "Offered Notes"; the Offered Notes or
the Offered Certificates, the "Offered
Securities") offered hereby and by the
various Prospectus Supplements with
respect hereto will be offered from time
to time in series. The Offered Securities
of each series, together with any other
mortgage pass-through certificates or
mortgage- backed notes of such series, are
collectively referred to herein as the
"Securities."
Company............................. Southern Pacific Secured Assets Corp. (the
"Company"), a wholly-owned subsidiary of
Southern Pacific Funding Corporation
("SPFC"). See "The Company."
Master Servicer..................... The master servicer (the "Master
Servicer"), if any, for a series of
Securities will be specified in the
related Prospectus Supplement and may be
SPFC or another affiliate of the Company.
See "Servicing of Mortgage Loans--The
Master Servicer."
Special Servicer.................... The special servicer (the "Special
Servicer"), if any, for a series of
Securities 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."
Issuer.............................. With respect to each series of Notes, the
issuer (the "Issuer") will be the Company
or an owner trust established by it for
the purpose of issuing such series of
Notes. Each such owner trust will be
created pursuant to a trust agreement (the
"Owner Trust Agreement") between the
Company, acting as depositor, and the
Owner Trustee. Each series of Notes will
represent indebtedness of the Issuer and
will be issued pursuant to an indenture
between the Issuer and the Trustee (the
"Indenture") whereby the Issuer
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<PAGE>
will pledge the Trust Fund to secure the
Notes under the lien of the Indenture. As
to each series of Notes where the Issuer
is an owner trust, the ownership of the
Trust Fund will be evidenced by
certificates (the "Equity Certificates")
issued under the Owner Trust Agreement,
which are not offered hereby. The Notes
will represent nonrecourse obligations
solely of the Issuer, and the proceeds of
the Trust Fund will be the sole source of
payments on the Notes, except as described
herein under "Description of Credit
Enhancement" and in the related Prospectus
Supplement.
Trustees............................ The trustee or indenture trustee (each,
the "Trustee") for each series of
Certificates and Notes, respectively, will
be named in the related Prospectus
Supplement. The Owner Trustee (the "Owner
Trustee") for each series of Notes will be
named in the related Prospectus
Supplement. See "The Agreements--The
Trustee."
The Securities...................... Each series of Securities will include one
or more classes of Securities which will
represent either (i) with respect to each
series of Certificates, in the aggregate
the entire beneficial ownership interest
in, or (ii) with respect to each series of
Notes, indebtedness of, 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 other assets as
described below (collectively, a "Trust
Fund"), and will be issued pursuant to
either (i) with respect to each series of
Certificates, a pooling and servicing
agreement or other agreement specified in
the related Prospectus Supplement (in
either case, a "Pooling Agreement") or
(ii) with respect to each series of Notes,
an indenture specified in the related
Prospectus Supplement (the "Indenture").
Except for certain Strip Securities and
REMIC Residual Certificates (each as
hereinafter described), each series of
Securities, or class of Securities 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
"Security Interest Rate"). The Security
Interest Rate of each Security offered
hereby will be stated in the related
Prospectus Supplement as the "Pass-Through
Rate" with respect to a Certificate and
the "Note Interest Rate" with respect to a
Note. Each series or class of Securities
may have a different
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<PAGE>
Security Interest Rate, which may be a
fixed, variable or adjustable Security
Interest Rate, or any combination of two
or more such Security Interest Rates. The
related Prospectus Supplement will specify
the Security Interest Rate or Rates for
each series or class of Securities, or the
initial Security Interest Rate or Rates
and the method for determining subsequent
changes to the Security Interest Rate or
Rates.
A series may include one or more classes
of Securities ("Strip Securities")
entitled (i) to principal distributions,
with disproportionate, nominal or no
interest distribu- tions, or (ii) to
interest distributions, with dispropor-
tionate, nominal or no principal
distributions. In addition, a series may
include two or more classes of Securities
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 Securities ("Accrual
Securities"), 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 Securities may
include one or more classes of Securities
(collectively, the "Senior Securities")
which are senior to one or more classes of
Securities (collectively, the "Subordinate
Securities") in respect of certain
distributions of principal and interest
and allocations of losses on Mortgage
Loans. In addition, certain classes of
Senior (or Subordinate) Securities may be
senior to other classes of Senior (or
Subordinate) Securities in respect of such
distributions or losses. As to each series
of Certificates, 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 (the "Code"). See
"Description of the Securities."
The Securities will not be guaranteed or
insured by any governmental agency or
instrumentality, by the Company, the
Master Servicer or any of their
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<PAGE>
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.
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.
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<PAGE>
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 Securities of the related
series and will be filed, together with
the related Pooling Agreement, with
respect to each series of Certificates,
and the related Servicing Agreement, Owner
Trust Agreement and Indenture, with
respect to each series of Notes, 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
Securities of each series, other than
Strip Securities or Accrual Securities
(prior to the time when accrued interest
becomes payable thereon), will accrue at
the applicable Security Interest 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 Securities
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 Securities 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 Securities (or, in the
case of a class of Accrual Securities,
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
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<PAGE>
Prospectus Supplement. See "Yield
Considerations" and "Description of the
Securities."
Principal Distributions............. Except as otherwise specified in the
related Prospectus Supplement, principal
distributions on the Securities 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 Securities
of such series, or of the class or classes
of Securities then entitled thereto, on a
pro rata basis among all such Securities
or among the Securities 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
Securities with no principal balance will
not receive distributions in respect of
principal. Distributions of principal with
respect to any series of Securities, 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 Considerations"
and "Desc- ription of the Securities."
Credit Enhancement.................. If so specified in the Prospectus
Supplement, the Trust Fund with respect to
any series of Securities may include any
one or any combination of a letter of
credit, mortgage pool insurance policy,
special hazard insurance policy,
bankruptcy bond, 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
Securities in a series under which losses
are first allocated to any Subordinate
Securities up to a specified limit. With
respect to any series of Notes, the
related Equity Certificates, insofar as
they represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes. 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 described in the related
Prospectus Supplement. Losses not covered
by any form of credit enhancement will be
borne by the holders of the related
Securities (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
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<PAGE>
in the Prospectus Supplement relating to a
series of Securities. 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
Securities--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
Securities, which may include the holders
of any Senior Securities of such series.
If and to the extent provided in the
Prospectus Supplement for a series of
Securities, 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 Securities 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 with respect to a
series of Certificates or the holder of
the Equity Certificates with respect to a
series of Notes, may at its option either
(i) effect early retirement of a series of
Securities through the purchase of the
assets in the related Trust Fund or (ii)
purchase, in whole but not in part, the
Securities specified in the related
Prospectus Supplement; in each case under
the circumstances and in the manner set
forth herein under "The
Agreements--Termination; Retirement of
Securities" and in the related Prospectus
Supplement.
Legal Investment.................... At the date of issuance, as to each
series, each class of Offered Securities
will be rated at the request of the
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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 Securities 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 Securities 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 Securities
could give rise to a transaction that is
prohibited or is not otherwise permissible
either under ERISA or Section 4975 of the
Code. Investors are advised to consult
their counsel and to review "ERISA
Considerations" herein and in the related
Prospectus Supplement.
Certain Federal Income
Tax Consequences.................. Offered Certificates of each series of
Certificates 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. Offered Notes of each series of
Notes will represent indebtedness of the
related Trust Fund.
Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" 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 Securities:
LIMITED LIQUIDITY. There can be no assurance that a secondary market
for the Offered Securities of any series will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or that it
will continue for the life of the Offered Securities of any series. The
Prospectus Supplement for any series of Offered Securities may indicate that an
underwriter specified therein intends to establish a secondary market in such
Securities, however no underwriter will be obligated to do so. The Offered
Securities will not be listed on any securities exchange.
LIMITED OBLIGATIONS. The Offered Securities 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 Securities, 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 Securities 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 Securities (including the Mortgage Loans
or Mortgage Securities and any form of credit enhancement) will be the sole
source of payments on the Securities, 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 Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With
respect to each series of Securities, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: subordination of other classes of
Securities 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 Securities (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 Securities, 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 Securities 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 Securities. See "Description
of Credit Enhancement--Reduction of Credit Enhancement."
INVESTMENT IN THE MORTGAGE LOANS. An investment in securities such as
the Securities 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 Securities of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans. 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 Securities 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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<PAGE>
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 Securities 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 Securityholders. Such yield may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. The yield to maturity on Strip Securities will be
extremely sensitive to the rate of prepayments on the related Mortgage Loans. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities, Securities with a Security Interest Rate which
fluctuates inversely with an index or certain other classes in a series
including more than one class of Securities, may be relatively more sensitive to
the rate of prepayment on the related Mortgage Loans than other classes of
Securities. 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 Securities 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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<PAGE>
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 Securities 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 SPFC, the parent of the Company, and its affiliates ("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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<PAGE>
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 Securities (a
"Designated Seller Transaction"). Such Securities 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, SPFC 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 Securities 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 Securities offered hereunder.
As to any such series of Securities, 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
- --------
* 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 index described in the related Prospectus
Supplement.
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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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<PAGE>
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 Securities 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 Securities 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 Securities, 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 Securities--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 Securities 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
Securities 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 Securities and will be filed, together with the related
Pooling Agreement, with respect to each series of Certificates, or the related
Servicing Agreement, Trust Agreement and Indenture, with respect to each series
of Notes, with the Securities and Exchange Commission within fifteen days after
the initial issuance of such Securities. 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 Securities 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 or Servicing
Agreement and will receive a fee for such services. See "Servicing of Mortgage
Loans," "Description of the Securities" and "The Agreements." 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 or Servicing 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 or Servicing 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 Securities--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 Securities--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 Securities 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 Securities. 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 Securityholders 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 Securities 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 Securities. 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
Securities 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 Securities--Assignment of Trust Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it 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 Securityholders 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 or
Servicing 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, with respect to a series of
Certificates for which no REMIC election is to be made, 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 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 Securityholders), (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
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related Prospectus Supplement, an Unaffiliated Seller will have no option to
substitute for a Mortgage Loan that it 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 or Servicing Agreement to use reasonable efforts to enforce this
purchase or substitution obligation for the benefit of the Trustee and the
Securityholders, 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 Securities. 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 Securityholders 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 Securities--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 Securities.
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 either a Pooling Agreement or
a Servicing Agreement. Forms of Pooling Agreements and a form of Servicing
Agreement have been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. However, the provisions of each Pooling Agreement or
Servicing Agreement will vary depending upon the nature of the related Mortgage
Pool. The following summaries describe certain servicing-related provisions that
may appear in a Pooling Agreement or Servicing Agreement for a Mortgage Pool
that includes Mortgage Loans. The related Prospectus Supplement will describe
any servicing-related provision of such a Pooling Agreement or Servicing
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
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Pooling Agreement or Servicing 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 to, all of the provisions of the
related Pooling Agreement or Servicing Agreement and the description of such
provisions in the related Prospectus Supplement.
With respect to any series of Securities 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
Securities will be named in the related Prospectus Supplement and may be SPFC 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 or a Servicing
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 or Servicing Agreement to service and
administer the Mortgage Loans in such Mortgage Pool for the benefit of the
related Securityholders, in accordance with applicable law and the terms of such
Pooling Agreement or Servicing 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 or Servicing 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 or a Servicing 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 or Servicing Agreement and described in
the related Prospectus Supplement, to modify, waive
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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.
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 Securityholders 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.
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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 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 Securityholders, and/or to preserve the security of the related
Mortgage Loan, subject to the application of the REMIC Provisions, if
applicable. 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 Securityholders 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 or Servicing 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 or Servicing
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 Securities--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 Servicing 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
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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 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 Securityholders 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 or Servicing 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 Securityholders 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 Securityholders 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 Securities 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 Securityholders, 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
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with such defaulted Mortgage Loan. With respect to certain series of Securities,
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 or Servicing 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 Securities 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 Securityholders to principal and interest thereon, will be
specified in the related Prospectus Supplement), any Mortgage Loan as to which a
specified number of scheduled payments are delinquent. Furthermore, a Pooling
Agreement or a Servicing 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 Securityholders 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
Securityholders 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
Securityholders 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 non-permitted 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 Securityholders,
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
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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."
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 Securities 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 or Servicing 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
Security 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 Securityholders 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 Securityholders or as otherwise provided in the related Pooling
Agreement or Servicing Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for a series of Securities 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 or Servicing 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 Securities entitled to payments of interest as provided in
the related Prospectus Supplement and the applicable Pooling Agreement or
Servicing 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 and Servicing 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 or
Servicing Agreement) substantially similar to each
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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 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 and Servicing 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
or Servicing 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 or Servicing 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 Securityholders without charge upon written
request to the Master Servicer or Trustee.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities 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. Each series of Notes (or, in certain
instances, two or more series of Notes) will be issued pursuant to an Indenture
between the related Issuer and the Trustee, similar to the form filed as an
exhibit to the Registration Statement of which this Prospectus is a part. Such
Trust Fund will be created pursuant to an Owner Trust Agreement (the "Owner
Trust Agreement"; an Owner Trust Agreement, Servicing Agreement, Indenture or
Pooling Agreement, an "Agreement") between the Company and the Owner Trustee.
Each Indenture, along with the related Servicing Agreement and Owner Trust
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 Agreements" below) describe certain provisions
relating to the Securities common to each Agreements. 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 related Agreements for each series
and the related Prospectus Supplement. Wherever particular sections or defined
terms of the Agreements are referred to herein, such sections or defined terms
are thereby incorporated herein by reference.
Unless otherwise specified in the related Prospectus Supplement, each
series of Certificates covered by a particular Pooling Agreement will evidence
specified beneficial ownership interests in a separate Trust Fund created
pursuant to such Pooling Agreement. Unless otherwise specified in the related
Prospectus Supplement, each series of Notes covered by a particular Indenture
will evidence indebtedness of a separate Trust Fund created pursuant to the
related Owner Trust Agreement. A Trust Fund will consist of, to the extent
provided in the Pooling Agreement or Owner Trust Agreement: (i) such Mortgage
Loans (and the related mortgage documents) or interests therein (including any
Mortgage Securities) underlying a particular series of Securities as from time
to time are subject to the Pooling Agreement or Servicing 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
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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 Securities 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 "Pre-Funding 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 will be distributed as a
principal prepayment to the holders of the related series of Securities at the
time and in the manner set forth in the related Prospectus Supplement.
Each series of Securities may consist of any one or a combination of
the following: (i) a single class of Securities; (ii) two or more classes of
Securities, one or more classes of which will be senior ("Senior Securities") in
right of payment to one or more of the other classes ("Subordinate Securities"),
and as to which certain classes of Senior (or Subordinate) Securities may be
senior to other classes of Senior (or Subordinate) Securities, as described in
the respective Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); (iii) two or more classes of Securities, one or more classes ("Strip
Securities") 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 Securities 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 Securities ("Accrual Securities") 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 Securities,
as described in the related Prospectus Supplement. With respect to any series of
Notes, the Equity Certificates, insofar as they represent the beneficial
ownership interest in the Issuer, will be subordinate to the related Notes. As
to each series, all Securities offered hereby (the "Offered Securities") will be
rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the Offered Securities 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 Securities 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 SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Offered Securities of each series will be issued as physical certificates or
notes 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
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"Security Registrar") named in the related Prospectus Supplement. With respect
to each series of Certificates or Notes, the Security Registrar will be referred
to as the "Certificate Registrar" or "Note Registrar," respectively. No service
charge will be made for any registration of exchange or transfer of Offered
Securities, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge. The term "Securityholder" or "Holder" as used
herein refers to the entity whose name appears on the records of the Security
Registrar (consisting of or including the "Security Register") as the registered
holder of a Security, except as otherwise indicated in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Securities ("DTC Registered Securities"), the record Holder of such Securities
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.
Unless otherwise specified in the related Prospectus Supplement, no
person acquiring an interest in any DTC Registered Securities (each such person,
a "Beneficial Owner") will be entitled to receive a Security 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 Securities 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 Securities for purposes of the related Pooling Agreement or Indenture,
and Beneficial Owners will be able to exercise their rights as owners of such
Securities only indirectly through DTC, Participants and Intermediaries. Any
Beneficial Owner that desires to purchase, sell or otherwise transfer any
interest in DTC Registered Securities 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 Securities 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 Securities to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Securities, may be limited
because of the lack of physical certificates or notes evidencing such Securities
and because DTC may act only on behalf of Participants.
Distributions in respect of the DTC Registered Securities 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 Securities.
Under DTC's procedures, DTC will take actions permitted to be taken by Holders
of any class of DTC Registered Securities under the Pooling Agreement or
Indenture only at the direction of one or more Participants to whose account the
DTC Registered Securities 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 Securities 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 Securities, 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 Securities, 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
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Trustee will, concurrently with such assignment, deliver the Securities 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 or Servicing 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 or
Servicing Agreement. Such assignments may be blanket assignments covering
Mortgages on Mortgaged Properties located in the same county, if permitted 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 or Servicing
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 or
Servicing 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
Securities. 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 Securityholders 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 or note 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 Securityholders, 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 or Indenture, and within the time period specified in the
related Pooling Agreement or Indenture 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
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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 Securityholders 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 Securityholders 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 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 Securities 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
Loan-to-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 Securityholders 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 Securityholders 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 or Servicing 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 or Servicing 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
Securities 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 or the
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related Servicing Agreement and Indenture ("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 or
the related Servicing Agreement and Indenture 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 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
Securities 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 Securityholders, 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 or Servicing 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
Agreements--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";
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(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 or the
related Servicing Agreement and Indenture 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 Securityholders may be affected. With
respect to each Buydown Mortgage 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
or the related Servicing Agreement and Indenture 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 Securityholders on
each Distribution Date;
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(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 or the
related Servicing Agreement and Indenture and described in the related
Prospectus Supplement, only from that portion of amounts collected on
such other Mortgage Loans that is otherwise distributable on one or
more classes of Subordinate Securities 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 Agreements--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 Agreements--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
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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 or the related
Servicing Agreement and Indenture for the benefit of the related
Securityholders;
(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 or the related Servicing
Agreement and Indenture 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 or the related Servicing Agreement and Indenture and
described in the related Prospectus Supplement; and
(xvii) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
DISTRIBUTIONS
Distributions on the Securities 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 Securities 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
Securityholders 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 Securities of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Securities 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 Securities on each Distribution Date
will be allocated PRO RATA among the outstanding Securities in such class.
Payments will be made either by wire transfer in immediately available funds to
the account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder 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 Securityholder holds Securities in the requisite
amount or denomination specified therein), or by check mailed to the address of
such Securityholder as it appears on the Security Register; provided, however,
that the final distribution in retirement of any class of Securities will be
made only upon presentation and surrender of such Securities at the location
specified in the notice to Securityholders of such final distribution.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE SECURITIES
Each class of Securities of each series (other than certain classes of
Strip Securities and certain REMIC Residual Certificates that have no Security
Interest Rate) may have a different Security Interest Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Security Interest Rate or, in the
case of a variable or adjustable Security Interest Rate, the method for
determining the Security Interest Rate, for each class. Unless otherwise
specified in the related Prospectus
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Supplement, interest on the Securities 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 Securities of any class
(other than any class of Securities 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
Securities"), and other than any class of Strip Securities 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
Securities, 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 Securities (other than certain
classes of Strip Securities and REMIC Residual Certificates), "Accrued
Certificate Interest" for each Distribution Date will be equal to interest at
the applicable Security Interest 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
Securities 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 Securities of the same series. Reference to such a
notional amount with respect to a class of Strip Securities 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 related Prospectus
Supplement, the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the principal balance of) one or more classes of the Securities 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 Securities 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 Securities, that
may otherwise be added to the principal balance of) a class of Offered
Securities 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 Securities 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 Securities will be made
on each Distribution Date to the holders of the class or classes of Securities
of such series entitled thereto until the principal balance(s) of such
Securities have been reduced to zero. In the case of a series of Securities
which includes two or more classes of Securities, the timing, sequential order,
priority of payment or amount of distributions in respect of principal, and any
schedule or formula or other provisions applicable to the determination thereof
(including distributions among multiple classes of Senior Securities or
Subordinate Securities), shall be as set forth in the related Prospectus
Supplement. Distributions of principal with respect to one or more classes of
Securities 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 Securities 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
Securities may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of
Securities, 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.
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DISTRIBUTIONS ON THE SECURITIES 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 Securities 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 Securities 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 Securities, or may be effected simply by a prioritization of payments among
such classes of Securities.
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
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 Securities 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 Securities 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 Securities, 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 Securities. 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 Securityholders.
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 Securityholders 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.
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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 Securityholders or as otherwise
provided in the related Pooling Agreement or Servicing Agreement and described
in such Prospectus Supplement.
As specified in the related Prospectus Supplement with respect to any
series of Securities 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 or Servicing Agreement, and may differ
from the provisions described above.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class of
Offered Securities, the related Master Servicer or Trustee will forward or cause
to be forwarded to each holder of record of such class of Securities a statement
or statements with respect to the related Trust Fund setting forth the
information specifically described in the related Pooling Agreement or the
related Servicing Agreement or Indenture, which generally will include the
following as applicable except as otherwise provided therein:
(i) the amount, if any, of such distribution allocable to
principal;
(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;
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(xiii) in the case of Securities 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 Securities 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 Securities or per a specified portion of such
minimum denomination. In addition to the information described above, reports to
Securityholders will contain such other information as is set forth in the
applicable Pooling Agreement or the applicable Servicing Agreement or Indenture,
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 Securities 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
Securities during a portion of such calendar year, for the applicable portion of
such a year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Unless otherwise provided in the applicable Prospectus Supplement,
credit support with respect to the Offered Securities 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 Securities 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
Securities to provide credit support to one or more classes of Senior
Securities, or in the form of a specified entity's agreement to repurchase
certain Mortgage Loans or fund certain losses pursuant to a Purchase
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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 Securities 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 or
Indenture, 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 Securities
of one series may cover the Offered Securities 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 Securities, 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 SECURITIES
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions from the Certificate Account on
any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Securities. 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 Securities in a
series and the circumstances under which such subordination will be available.
The Offered Securities of any series may include one or more classes of
Subordinate Securities.
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
Securities of the related series, credit enhancement may be provided by
cross-support provisions requiring that distributions be made on Senior
Securities evidencing interests in one group of Mortgage Loans and/or Mortgage
Securities prior to distributions on Subordinate Securities 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 Securities 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
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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 Securityholders. 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.
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 Securityholders, 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. Securityholders will experience a shortfall in the amount of
interest payable on the related Securities 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
Securityholders will also experience losses with respect to the related
Securities 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 Securityholders. 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 Securityholders 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
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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
Securityholders 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 Securities 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 Securities. 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 Securities--Advances."
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 Securityholders.
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 Securities from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies ("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
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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
Securityholders, 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 Securities may be
provided, in whole or in part, by a type of Special Hazard 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 Securities, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Securities, 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 Securities as to which credit enhancement includes a
Letter of Credit, if so specified in the related Prospectus Supplement, under
certain circumstances the remaining amount of the Letter of Credit may be drawn
by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Securityholders, or applied to reimburse the Master Servicer for
outstanding advances, or may
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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 Securities.
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 Securityholders 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 Securityholders which could adversely
affect the yield to investors on the related Securities.
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.
If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Securities, 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 or Indenture, 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
Securities is scheduled to expire prior to the date the final distribution on
such Securities 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
Securityholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Securities, 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 or Servicing 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 or
Servicing 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.
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Any losses associated with any reduction or withdrawal in rating by an
applicable Rating Agency shall be borne by the related Securityholders.
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
Securities 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
Securities by such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Securities, 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 or Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise or substitution therefor is made as described below under
"--Reduction or Substitution of Credit Enhancement." 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
Securities that such substitution shall not adversely affect the then-current
ratings assigned to such Securities by such Rating Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Securities, 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 or Servicing 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 Securities that such substitution shall not adversely
affect the then-current ratings assigned to such Securities by such Rating
Agency or Agencies. See "--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and
Securityholders, 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 Securityholders 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
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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 Securityholders 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 or Indenture. 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 Securityholders, upon the written assurance
from each applicable Rating Agency that the then-current rating of the related
series of Securities will not be adversely affected. Furthermore, in the event
that the credit rating of any obligor under any applicable credit enhancement is
downgraded, the credit rating(s) of the related series of Securities may be
downgraded to 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 Securities. 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 Securities 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 Securities
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 Securityholders 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 Securityholders of the related series and will be nontransferable. Unless
otherwise provided in the related Prospectus Supplement, each
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Purchase Obligation will be a general unsecured obligation of the provider
thereof, and prospective purchasers of Offered Securities 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 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.
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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 Securities 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 Securities that is required to be kept in force under
the applicable Pooling Agreement or Indenture 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 Securities 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 Securities. 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."
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 or Servicing 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 or Servicing 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
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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 or Servicing 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).
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 Securityholders, 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
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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 Southern Pacific Funding
Corporation ("SPFC"). 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.
SPFC may from time to time be a Seller or act as Master Servicer with
respect to a Mortgage Pool. SPFC, a California corporation, is a publicly traded
mortgage banking company that originates or acquires one- to four-family
residential mortgage loans nationwide. SPFC primarily originates or acquires
mortgage loans from approved mortgage brokers through either its wholesale,
correspondent or conduit divisions.
The Company maintains its principal office at One Centerpointe Drive,
Suite 500, Lake Oswego, Oregon 97035. Its telephone number is (503) 684-4700.
THE AGREEMENTS
GENERAL
Each series of Certificates 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 Securities of a
series are issued will be identified in the related Prospectus Supplement. Each
series of Notes will be issued pursuant to an Indenture. The parties to each
Indenture will be the related Issuer and the Trustee. The Issuer will be created
pursuant to an Owner Trust Agreement between the Company and the Owner Trustee.
Forms of the Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. However, the provisions of each
Agreement will vary depending upon the nature of the Securities 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 with respect
to a series of Certificates or in either the Servicing Agreement or Indenture
with respect to a series of Notes. The Prospectus Supplement for a series of
Securities will describe any provision of the related Agreements 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 Agreements for each
series of Securities and the description of such provisions in the related
Prospectus Supplement. As used herein with respect to any series, the term
"Security" refers to all of the Securities 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 Agreement (without
exhibits) that relates to any series of Securities without charge upon written
request of a holder of a Security of such series addressed to it at its
principal executive offices specified herein under "The Company".
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CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement or Servicing Agreement for each series of
Securities 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 Securities. 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 or Servicing Agreement.
Each Pooling Agreement and Servicing 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 Securityholders for any action
taken or for refraining from the taking of any action in good faith pursuant to
such Agreement, or for errors in judgment; provided, however, that neither 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 and
Servicing 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 Servicing Agreement or the
related series of Securities, 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 and Servicing 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 or Servicing 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 or
Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Securityholders 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 Securityholders.
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 related
Pooling Agreement or Servicing 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 Securities 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 or Servicing 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 or Servicing
Agreement, exclusive of liabilities and obligations incurred by it prior to the
time of such assignment.
EVENTS OF DEFAULT AND RIGHTS UPON EVENT DEFAULT
POOLING AGREEMENT
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
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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.
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 FHLMC-approved 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.
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SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a
series of Notes, a "Servicing Default" under the related Servicing Agreement
generally will include: (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 Notes or Equity
Certificates of such series any required payment which continues unremedied for
five business days (or other period of time described in the related Prospectus
Supplement) after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Issuer; (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 Servicing Agreement with respect to such series of Securities
which continues unremedied for 45 days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Issuer; (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 and (iv) any other Servicing Default as set forth in the Servicing
Agreement.
So long as a Servicing Default remains unremedied, either the Company
or the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the 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 an
approved mortgage servicing institution with a net worth of at least $15,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing 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 Servicing
Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a
series of Notes, an Event of Default under the Indenture generally will include:
(i) a default for five days or more (or other period of time described in the
related Prospectus Supplement) in the payment of any principal of or interest on
any Note of such series; (ii) failure to perform any other covenant of the
Company or the Trust Fund in the Indenture which continues for a period of
thirty days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Company or the Trust Fund in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such series having been incorrect in a
material respect as of the time made, and such breach is not cured within thirty
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Company or the Trust Fund; or (v)
any other Event of Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may declare the principal amount (or, if the Notes of that series are Accrual
Securities, such portion of the principal amount as may be specified in the
terms of that series, as provided in the related Prospectus Supplement) of all
the Notes of such series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds
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for the payment of principal of and interest on the Notes of such series as they
would have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default, the Indenture provides that the Trustee will have a
prior lien on the proceeds of any such liquidation for unpaid fees and expenses.
As a result, upon the occurrence of such an Event of Default, the amount
available for payments to the Noteholders would be less than would otherwise be
the case. However, the Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
In the event the principal of the Notes of a series is declared due and
payable, as described above, the holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have
any right under an Owner Trust Agreement or Indenture to institute any
proceeding with respect to such Agreement unless (a) such holder previously has
given to the Trustee written notice of default and the continuance thereof, (b)
the holders of Notes or Equity Certificates of any class evidencing not less
than 25% of the aggregate Percentage Interests constituting such class (i) have
made written request upon the Trustee to institute such proceeding in its own
name as Trustee thereunder and (ii) have offered to the Trustee reasonable
indemnity, (c) the Trustee has neglected or refused to institute any such
proceeding for 60 days after receipt of such request and indemnity and (d) no
direction inconsistent with such written request has been given to the Trustee
during such 60 day period by the Holders of a majority of the Note Balances of
such class. However, the Trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the applicable 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 Notes or Equity
Certificates covered by such Agreement, unless such holders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
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 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
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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.
With respect to each series of Notes, each related Servicing Agreement
or Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Notes covered by the Agreement. Each Agreement may also be amended by
the parties thereto with the consent of the holders of Notes evidencing not less
than 66% of the Voting Rights, for any purpose; provided, however, that no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received on Trust Fund Assets which are required to be distributed on
any Certificate without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of any
class of Notes in a manner other than as described in (i), without the consent
of the holders of Notes of such class evidencing not less than 66% of the
aggregate Voting Rights of such class or (iii) reduce the aforesaid percentage
of Voting Rights required for the consent to any such amendment without the
consent of the holders of all Notes covered by such Agreement then outstanding.
The Voting Rights evidenced by any Certificate will be the portion of the voting
rights of all of the Notes in the related series allocated in the manner
described in the related Prospectus Supplement.
TERMINATION; RETIREMENT OF SECURITIES
The obligations created by the related Agreements for each series of
Securities (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Securityholders 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
Agreements 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 (A) if specified in the related Prospectus
Supplement with respect to each series of Certificates, by the holder of the
REMIC Residual Certificates (see "Certain Federal Income Tax Consequences"
below) or (B) if specified in the Prospectus Supplement with respect to each
series of Notes, by the holder of the Equity Certificates, 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 Securities
specified in the related Prospectus Supplement in the manner set forth in the
related Prospectus Supplement. Upon the purchase of such Securities 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 Securities
and the termination of the Trust Fund, or the Securities 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 Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee which will
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be specified in the notice of termination. If the Securityholders are permitted
to terminate the trust under the applicable Pooling Agreement, a penalty may be
imposed upon the Securityholders 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 Securities shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates or Equity Certificates at the price specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities 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 Securityholders 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
Securities will set forth the amounts that the holders of such Securities will
be entitled to receive upon such early retirement. Such early termination may
adversely affect the yield to holders of certain classes of such Securities. 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 and Indenture 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 Securities will make no representation
as to the validity or sufficiency of the related Agreements, the Securities 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 Securities 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 Securities will be required to
perform only those duties specifically required under the related Pooling
Agreement or Indenture. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related 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 Securities 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 or
Indenture; 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 Securities 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.
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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
Securities 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.
YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the
price paid by the holder for such Certificate, the Security Interest Rate on any
such Certificate entitled to payments of interest (which Security Interest 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 Securities may be entitled to payments of interest at a
fixed Security Interest Rate, a variable Security Interest Rate or adjustable
Security Interest Rate, or any combination of such Security Interest Rates, each
as specified in the related Prospectus Supplement. A variable Security Interest
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
Securities, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Securities (or the rate of reduction in the notional
balance of Securities entitled only to payments of interest) and, in the case of
Securities evidencing interests in ARM Loans, by changes in the Net Mortgage
Rates on the ARM Loans. See "Maturity and Prepayment Considerations" below. The
yield on the Securities 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 Securities--Assignment of Trust Fund Assets" above. Holders
of certain Strip Securities or a class of Securities having a Security Interest
Rate that varies based on the weighted average Mortgage Rate of the underlying
Mortgage Loans will be affected by disproportionate prepayments and repurchases
of Mortgage Loans having higher Net Mortgage Rates or rates applicable to the
Strip Securities, as applicable.
With respect to any series of Securities, 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
Securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Securityholders on or near the date they were due.
In general, if a class of Securities is purchased at initial issuance
at a premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Securities is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance 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 Securities,
including Accrual Securities, Securities with a Security Interest Rate which
fluctuates inversely with or at a multiple of an index or certain other classes
in a series including more than
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one class of Securities, may be relatively more sensitive to the rate of
prepayment on the related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a 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 Securities 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
Securityholders 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 Securities
of the related series. If and to the extent that any such shortfall is allocated
to a class of Offered Securities, the yield thereon will be adversely affected.
The Prospectus Supplement for a series of Securities will describe the manner in
which any such shortfalls will be allocated among the classes of such
Securities. 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
Securities. 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
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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 Securities will lengthen the weighted
average life thereof and may adversely affect yield to holders thereof,
depending upon the price at which such Securities were purchased. In addition,
with respect to certain ARM Loans subject to negative amortization, during a
period of declining interest rates, it might be expected that each minimum
scheduled monthly payment on such a Mortgage Loan would exceed the amount of
scheduled principal and accrued interest on the principal balance thereof, and
since such excess will be applied to reduce the principal balance of the related
class or classes of Securities, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof, depending
upon the price at which such Securities were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the life and yield of the related series of Securities.
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
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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 Securities.
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 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 or Equity Certificates may have the option to purchase the
assets in a Trust Fund and effect early retirement of the related series of
Securities. See "The Agreements--Termination; Retirement of Securities."
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
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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.
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 or Servicing 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 Securityholders. 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 Securityholders, 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.
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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 Securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
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 or Servicing 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 Securityholders 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.
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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, 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.
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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 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
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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.
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
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applicable law, may be of little value to the mortgagee or beneficiary if there
are no trust assets against which such deficiency judgment may be executed.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security; however
in some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, 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-in-Lending 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.
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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 Securityholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority to 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 or Servicing 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 Securityholders.
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
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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
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 Securities 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.
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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 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.
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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 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 Securityholders 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 Securityholders 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
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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 Securities, 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 Securities. 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 Securities in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Mortgage Loans resulting from similar legislation or regulations may
result in delays in payments or losses to Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Securities offered hereunder. This discussion is directed solely to
Securityholders that hold the Securities 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 Securities. See "State and Other Tax Consequences."
Securityholders 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 Securities offered hereunder.
The following discussion addresses securities of three 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, (ii) notes representing indebtedness of a trust
fund and (iii) 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 "Securityholder" or a "holder" are to the beneficial
owner of a Security.
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.
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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 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 income for the period in which the requirements for such status are
not satisfied. The Pooling 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 "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 Section
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 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 "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
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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 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
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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 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
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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 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
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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 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
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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 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
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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, 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.
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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 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
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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."
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 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,
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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-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.
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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 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 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
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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.
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 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 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"
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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 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
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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 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 Agreement.
NOTES
Upon the issuance of each series of Notes, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
for federal income tax purposes, assuming compliance with all provisions of the
Indenture, Owner Trust Agreement and certain related documents, (i) the Notes
will be treated as indebtedness and (ii) the Issuer, as created pursuant to the
terms and conditions of the Owner Trust Agreement, will not be characterized as
an association (or publicly traded partnership within the meaning of Code
section 7704) taxable as a corporation or as a taxable mortgage pool within the
meaning of Code section 7701(i). The following discussion is based in part upon
the OID 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 Notes. For purposes of this tax discussion,
references to a "Noteholder" or a "holder" are to the beneficial owner of a
Note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
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investment trust will not constitute "real estate assets" within the meaning of
Code section 856(c)(5)(A) and interest on Notes will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
ORIGINAL ISSUE DISCOUNT, MARKET DISCOUNT AND PREMIUM
With respect to any series of Notes, the related Notes will be treated
identically with respect to original issue discount, market discount and premium
as REMIC Regular Certificates. See "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount," "-Market Discount" and "-Premium" above.
REALIZED LOSSES
With respect to any series of Notes, the related Notes will be treated
identically with respect to realized losses as REMIC Regular Certificates. See
"-REMICs-Taxation of Owners of REMIC Regular Certificates-Realized Losses"
above.
SALES OF NOTES
With respect to any series of Notes, the related Notes will be treated
identically with respect to realized losses as REMIC Regular Certificates. See
"-REMICs-Sales of REMIC Certificates" above.
BACKUP WITHHOLDING
With respect to any series of Notes, the related Notes will be treated
identically with respect to backup withholding as REMIC Regular Certificates.
See "-REMICs-Backup Withholding With Respect to REMIC Certificates" above.
TAX TREATMENT OF FOREIGN INVESTORS
The tax treatment of foreign investors in any series of Notes will be
identical to such treatment for REMIC Regular Certificates. See "REMICs-Foreign
Investors in REMIC Certificates" above.
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 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 Security Interest 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 Securities 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
Securities offered hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain specified relationships to such Plans ("Parties in
Interest" within the meaning of ERISA or "Disqualified Persons" within the
meaning of the Code, collectively "Parties in Interest"), unless a statutory or
administrative exemption is available with respect to any such transaction.
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), 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 the Securities without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal, state and local 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.
Certain transactions involving the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Plan that purchases the Securities, if the Mortgage Loans and other assets
included in a Trust Fund are deemed to be assets of the Plan. The U.S.
Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
ss.2510.3-101 (the "DOL Regulations") defining the term "Plan Assets" for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under the DOL
Regulations, generally, when a Plan acquires an "equity interest" in another
entity (such as the Trust Fund), the underlying assets of that entity may be
considered to be Plan Assets unless certain exceptions apply. Exceptions
contained in the DOL Regulations provide that a Plan's assets will not include
an undivided interest in each asset of an entity in which such Plan makes an
equity investment if: (1) the entity is an operating company; (2) the equity
investment made by the Plan is either a "publicly-offered security" that is
"widely held," both as defined in the DOL Regulations, or a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended; or (3) Benefit Plan Investors do not own 25% or more in value of any
class of equity securities issued by the entity. For this purpose, "Benefit Plan
Investors" include Plans, as well as any "employee benefit plan" (as defined in
Section 3(3) or ERISA) which is not subject to Title I of ERISA, such as
governmental plans (as defined in Section 3(32) of ERISA) and church plans (as
defined in Section 3(33) of ERISA) which have not made an election under Section
410(d) of the Code, and any
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entity whose underlying assets include Plan Assets by reason of a Plan's
investment in the entity. In addition, the DOL Regulations provide that the term
"equity interest" means any interest in an entity other than an instrument which
is treated as indebtedness under applicable local law and which has no
"substantial equity features." Under the DOL Regulations, Plan Assets will be
deemed to include an interest in the instrument evidencing the equity interest
of a Plan (such as a Certificate or a Note with "substantial equity features"),
and, because of the factual nature of certain of the rules set forth in the DOL
Regulations, Plan Assets may be deemed to include an interest in the underlying
assets of the entity in which a Plan acquires an interest (such as the Trust
Fund). Neither Plans nor persons investing Plan Assets should acquire or hold
Securities in reliance upon the availability of any exception under the DOL
Regulations.
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. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual prohibited transactions exemption
("Exemptions"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the initial purchase, holding and subsequent resale of
mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations",
the term "Underwriter" shall include (a) the underwriter, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with the underwriter and (c) any member of
the underwriting syndicate or selling group of which a person described in (a)
or (b) is a manager or co-manager with respect to a class of Securities.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Securities by a Plan or
with Plan Assets must be on terms that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party. Second,
the Exemption only applies to Securities evidencing rights and interests that
are not subordinated to the rights and interests evidenced by other Securities
of the same trust. Third, the Securities at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Ratings Services, a division of McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating
Co. or Fitch Investors Service, L.P. (collectively, the "Exemption Rating
Agencies"). Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group" which consists of any Underwriter, the Company, the Trustee,
the Master Servicer, the Special Servicer, any Sub-Servicer and any obligor with
respect to assets included in the Trust Fund constituting more than 5% of the
aggregate unamortized principal balance of the assets in the Trust Fund as of
the date of initial issuance of the Securities. Fifth, the sum of all payments
made to and retained by the Underwriter(s) must represent not more than
reasonable compensation for underwriting the Securities; the sum of all payments
made to and retained by the Company pursuant to the assignment of the assets to
the related Trust Fund must represent not more than the fair market value of
such obligations; and the sum of all payments made to and retained by the Master
Servicer, the Special Servicer and any Sub-Servicer must represent not more than
reasonable compensation for such person's services under the related Agreement
and reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the Exemption states that the investing Plan or Plan Asset investor must
be an accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Securities evidencing
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interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Securities by or on behalf of a Plan or
with Plan Assets; and (iii) Securities evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Securities by or on behalf of a Plan
or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth above
will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities by a
Plan or with Plan Assets. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Securities in the initial issuance of Securities between the Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in the
Securities is (a) a mortgagor with respect to 5% or less of the fair market
value of the Trust Fund Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Securities by a Plan and (3) the holding of Securities by a Plan or with Plan
Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust Fund. The Depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Securities so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the Trust Fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through
(D) of the Code if such restrictions are deemed to otherwise apply merely
because a person is deemed to be a Party in Interest with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
the Plan's ownership of Securities.
In addition to the Exemption, a Plan fiduciary or other Plan Asset
investor should consider the availability of certain class exemptions granted by
the DOL ("Class Exemptions"), which may provide relief from certain of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of the Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1,
regarding transactions involving mortgage pool investment trusts; PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager";
PTCE 90-1, regarding transactions by insurance company pooled separate accounts;
PTCE 91-38, regarding investments by bank collective investment funds; PTCE
95-60, regarding transactions by insurance company general accounts; and PTCE
96-23, regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new
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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 Securities 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 Securities after the date
which is 18 months after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN CERTIFICATES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies transfers of any such Securities to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Company, the Trustees and the Master Servicer with
an opinion of counsel satisfactory to the Company, the Trustee (or Indenture
Trustee in the case of transfer of Notes) and the Master Servicer, which opinion
will not be at the expense of the Company, the Trustee (or the Indenture Trustee
in the case of the transfer of Notes) or the Master Servicer, that the purchase
of such Securities by or on behalf of such Plan is permissible under applicable
law, will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Company, the
Trustee (or the Indenture Trustee in the case of the transfer of Notes) or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Company, the Trustees or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
the following statements are correct: (i) the transferee is an insurance
company, (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60),
(iii) the conditions set forth in PTCE 95-60 have been satisfied and (iv) there
is no Plan with respect to which the amount of such general account's reserves
and liabilities for contracts held by or on behalf of such Plan and all other
Plans maintained by the same employer (or any "affiliate" thereof, as defined in
PTCE 95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Securities.
An opinion of counsel or certification will not be required with
respect to the purchase of DTC registered Securities. Any purchaser of a DTC
registered Security will be deemed to have represented by such purchase that
either (a) such purchaser is not a Plan and is not purchasing such Securities on
behalf of, or with Plan Assets of, any Plan or (b) the purchase of any such
Security by or on behalf of, or with Plan Assets of, any Plan is permissible
under applicable law, will not result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Company, the
Trustee or the Master Servicer to any obligation in addition to those undertaken
in the related Agreement.
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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
inclusion" of a REMIC allocated to a REMIC Residual Certificate and 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
There can be no assurance that any DOL exemption will apply with
respect to any particular Plan that acquires the Securities or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the Trust Fund. Prospective Plan investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in the Securities. Neither the Company, the Trustees, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, A FIDUCIARY OF A PLAN OR OTHER PLAN
ASSET INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL
CONDITIONS SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION
401(C) OF ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE
PURCHASED UNDER THE EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR
PURPOSES OF THE EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE
AVAILABILITY OF THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS
EXEMPTIONS OR SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS
GENERAL FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
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.
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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.
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.
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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.
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.
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FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of
Securities, 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 Securities.
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 Securities
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 and mortgage-backed notes
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 and notes, the nature of the underlying mortgage assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and mortgage-backed notes 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,
Securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest securities in extreme cases might fail to recoup
their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
401(c) Regulations...........................................................102
Accrual Certificates...................................................6, 32, 40
Accrued Certificate Interest..................................................40
Affiliated Sellers............................................................15
Agreement ............................................................31
ARM Loans ............................................................16
Available Distribution Amount.................................................39
Balloon Loans ............................................................17
Balloon Payment ............................................................17
Bankruptcy Code ............................................................70
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 Account...........................................................35
Certificate Registrar.........................................................33
Certificates .............................................................1
Class Exemptions ...........................................................101
Closing Date ............................................................77
Code .........................................................6, 75
Commission .............................................................3
Committee Report ............................................................77
Company ..........................................................1, 4
Contracts ............................................................15
Contributions Tax ............................................................86
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 .............................................................8
DOL ............................................................99
DOL Regulations ............................................................99
DTC ............................................................33
DTC Registered Securities.....................................................33
Due Period ............................................................41
Equity Certificates............................................................5
Equity Participation..........................................................18
ERISA ........................................................11, 99
ERISA Plans ............................................................99
Event of Default ............................................................57
Exchange Act .............................................................3
Excluded Plan ...........................................................101
Exemption Rating Agencies....................................................100
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Extraordinary Losses..........................................................43
FDIC ............................................................15
FHA ............................................................15
FHA Loans ............................................................15
FHLMC ............................................................21
FIRREA ............................................................21
FNMA ............................................................21
Fraud Loss ............................................................43
FTC Rule ............................................................71
Garn-St Germain Act...........................................................72
Grantor Trust Certificates................................................11, 75
Grantor Trust Fractional Interest Certificate.................................90
Grantor Trust Fund............................................................75
Grantor Trust Strip Certificate...............................................90
Holder ............................................................33
Housing Act ............................................................22
HUD ............................................................53
Indenture .......................................................1, 4, 5
Index ............................................................16
Insurance Proceeds............................................................36
Intermediaries ............................................................33
IRS ............................................................77
Issue Premium ............................................................82
Issuer .............................................................4
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, 5, 7
Mortgage Notes ............................................................15
Mortgage Pool ..........................................................1, 7
Mortgage Rate ............................................................16
Mortgage Securities........................................................7, 16
Mortgaged Property.............................................................7
Mortgages ............................................................15
Mortgagor ............................................................13
Multifamily Loans ............................................................15
Multifamily Properties........................................................15
Multifamily Property...........................................................7
Net Mortgage Rate ............................................................61
Net Operating Income..........................................................20
Nonrecoverable Advance........................................................41
Note Interest Rate.............................................................5
Note Margin ............................................................16
Note Registrar ............................................................33
Notes .............................................................1
Offered Certificates.......................................................4, 32
Offered Notes .............................................................4
Offered Securities..........................................................1, 4
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OID Regulations ............................................................75
OTS ...........................................................104
Owner Trust .............................................................4
Owner Trustee ..........................................................4, 5
Participants ............................................................33
Parties in Interest...........................................................99
Pass-Through Rate .............................................................5
Permitted Investments.........................................................36
Plan ............................................................11
Plan Assets ............................................................99
Plans ............................................................99
Policy Statement ...........................................................104
Pool Insurer ............................................................37
Pooling Agreement ......................................................1, 5, 54
Pre-Funding Account...........................................................32
Prepayment Assumption.....................................................77, 93
Prepayment Interest Shortfall.................................................62
Prepayment Penalty............................................................18
Primary Insurance Policy......................................................51
Primary Insurer ............................................................51
Prohibited Transactions Tax...................................................86
Proposed Mark-to-Market Regulations...........................................85
Prospectus Supplement..........................................................1
PTCE ...........................................................101
PTCE 83-1 ...........................................................101
Purchase Obligation...........................................................50
Purchase Price ............................................................23
Qualified Substitute Mortgage Loan............................................23
Rating Agency ............................................................11
Realized Losses ............................................................43
Record Date ............................................................39
Related Proceeds ............................................................41
Relief Act ............................................................74
REMIC ......................................................1, 6, 75
REMIC Administrator...........................................................75
REMIC Certificates............................................................75
REMIC Provisions ............................................................75
REMIC Regular Certificates................................................11, 76
REMIC Regulations ............................................................75
REMIC Residual Certificates...............................................11, 76
REO Mortgage Loan ............................................................29
REO Property ............................................................27
Reserve Fund ............................................................47
RTC ............................................................15
Securities ..........................................................1, 4
Securities Act ........................................................3, 105
Security ............................................................54
Security Interest Rate.........................................................5
Security Register ............................................................33
Security Registrar............................................................33
Securityholder ............................................................33
Securityholders .............................................................1
Seller .............................................................8
Sellers .........................................................1, 15
Senior Certificates........................................................6, 32
Senior Liens ............................................................17
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Senior/Subordinate Series.....................................................32
Servicing Default ............................................................57
Servicing Standard............................................................25
Single Family Loans...........................................................15
Single Family Property........................................................15
SMMEA .......................................................11, 103
Special Hazard Instrument.....................................................43
Special Hazard Insurance Policy...............................................46
Special Hazard Insurer........................................................47
Special Hazard Loss...........................................................43
Special Hazard Losses.........................................................46
Special Servicer .........................................................4, 27
SPFC .........................................................4, 54
Spread .............................................................5
Strip Certificates.........................................................6, 32
Subordinate Certificates...................................................6, 32
Subservicer ............................................................27
Subservicers ............................................................20
Tax Favored Plans ............................................................99
Tax-Exempt Investor..........................................................103
Tiered REMICs ............................................................76
Title V ............................................................73
Title VIII ............................................................74
Trust Agreement .............................................................4
Trust Fund ..........................................................1, 5
Trustee .............................................................5
UBTI ...........................................................103
Unaffiliated Sellers..........................................................15
Underwriter ...........................................................100
United States person..........................................................89
Value ............................................................18
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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 UNDERWRITERS. 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
Page
----
Prospectus Supplement
Summary.............................................. S-3
Risk Factors......................................... S-17
Description of the Mortgage Pool..................... S-19
Description of the Certificates...................... S-35
Certain Yield and Prepayment Considerations.......... S-48
Pooling and Servicing Agreement...................... S-54
Certain Federal Income Tax Consequences.............. S-58
Method of Distribution............................... S-59
Legal Opinions....................................... S-60
Ratings.............................................. S-60
Legal Investment..................................... S-61
ERISA Considerations................................. S-61
Experts.............................................. S-64
Appendix A - Underwriting Guidelines
Applicable to the Mortgage Loans................ C-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
================================================================================
SOUTHERN PACIFIC
SECURED ASSETS CORP.
$375,000,000
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES
SERIES 1997-2
$ 244,131,000 CLASS A-1 CERTIFICATES
$ 27,500,000 CLASS A-2 CERTIFICATES
$ 27,500,000 CLASS A-3 CERTIFICATES
$ 7,645,000 CLASS A-4 CERTIFICATES
$ 10,000,000 CLASS A-5 CERTIFICATES
N / A CLASS A-IO CERTIFICATES
$ 18,948,000 CLASS M-1A CERTIFICATES
$ 4,801,000 CLASS M-1F CERTIFICATES
$ 14,575,000 CLASS M-2A CERTIFICATES
$ 2,088,000 CLASS M-2F CERTIFICATES
$ 13,846,000 CLASS B-1A CERTIFICATES
$ 3,966,000 CLASS B-1F CERTIFICATES
------------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
GREENWICH CAPITAL MARKETS, INC.
JUNE 16, 1997
