PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 24, 1997)
$450,000,000
(APPROXIMATE)
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
<TABLE>
<CAPTION>
<C> <C> <C> <C>
$252,306,000 (1) ADJUSTABLE RATE CLASS A-1 CERTIFICATES $34,467,000(1) 6.66% CLASS A-4 CERTIFICATES
$88,232,000 ADJUSTABLE RATE CLASS A-2 CERTIFICATES $24,067,000(1) 7.19%(2) CLASS A-5 CERTIFICATES
$39,982,000 (1) 6.61% CLASS A-3 CERTIFICATES $10,946,000(1) 6.87% CLASS A-6 CERTIFICATES
</TABLE>
$ 0 VARIABLE RATE(3) CLASS A-7 CERTIFICATES
(1) SUBJECT TO A PERMITTED VARIANCE OF PLUS OR MINUS 5%, AS DESCRIBED HEREIN.
(2) SUBJECT TO INCREASE TO 7.94% AS DESCRIBED HEREIN.
(3) BASED ON THE NOTIONAL AMOUNTS AS DESCRIBED HEREIN.
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1997-3
--------------------------------
SOUTHERN PACIFIC FUNDING CORPORATION
SELLER
--------------------------------
THE SERIES 1997-3 MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES (THE
"CERTIFICATES") WILL INCLUDE THE FOLLOWING SEVEN SENIOR CLASSES (THE "CLASS A
CERTIFICATES"): (I) CLASS A-1 CERTIFICATES, CLASS A-2 CERTIFICATES,
CLASS A-3 CERTIFICATES, CLASS A-4 CERTIFICATES AND CLASS A-5
CERTIFICATES, (II) CLASS A-6 CERTIFICATES (THE "LOCKOUT
CERTIFICATES") AND (III) CLASS A-7 CERTIFICATES (THE "FIXED STRIP
CERTIFICATES"). IN ADDITION TO THE CLASS A CERTIFICATES,
THE SERIES 1997-3 MORTGAGE LOAN ASSET-BACKED PASS-THROUGH
CERTIFICATES WILL INCLUDE THE CLASS R-I CERTIFICATES AND CLASS
R-II CERTIFICATES (TOGETHER, THE "RESIDUAL CERTIFICATES"). THE
FIXED STRIP CERTIFICATES WILL BE DIVIDED INTO SEVEN COMPONENTS
(EACH, A "COMPONENT"), THE CLASS A-7 COMPONENT A, B AND
C (COLLECTIVELY, THE "GROUP I FIXED STRIP
COMPONENTS"), THE CLASS A-7 COMPONENT D, E AND F
(COLLECTIVELY, THE "GROUP II FIXED STRIP
COMPONENTS") AND THE CLASS A-7 COMPONENT G (THE
"GROUP III 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 CERTIFICATES AND THE
GROUP II FIXED STRIP COMPONENTS ARE ALSO REFERRED
TO HEREIN AS THE "GROUP II CLASS A CERTIFICATES."
THE CLASS A-3, CLASS A-4, CLASS A-5 AND CLASS
A-6 CERTIFICATES AND THE GROUP III FIXED
STRIP COMPONENT ARE ALSO REFERRED TO HEREIN
AS THE "GROUP III CLASS A CERTIFICATES." ONLY
THE CLASS A CERTIFICATES ARE OFFERED HEREBY.
THE COMPANY HAS CAUSED MBIA INSURANCE CORPORATION
(THE "CERTIFICATE INSURER") TO ISSUE THREE
CERTIFICATE GUARANTY INSURANCE POLICIES (THE
"CERTIFICATE INSURANCE POLICIES") FOR THE
BENEFIT OF THE CLASS A CERTIFICATEHOLDERS
PURSUANT TO WHICH IT WILL GUARANTEE CERTAIN
PAYMENTS TO THE CLASS A CERTIFICATEHOLDERS AS DESCRIBED HEREIN.
(CONTINUED ON FOLLOWING PAGE)
LOGO
--------------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE CERTIFICATE
INSURANCE POLICIES ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES.
THE CLASS ACERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER
THE CLASS A CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE
MASTER SERVICER OR ANY OF THEIR AFFILIATES. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
--------------------------------
THERE IS CURRENTLY NO SECONDARY MARKET FOR THE CLASS A CERTIFICATES.
MORGAN STANLEY & CO. INCORPORATED, DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION AND LEHMAN BROTHERS INC. (COLLECTIVELY, THE "UNDERWRITERS") INTEND
TO MAKE A SECONDARY MARKET IN THE CLASS A CERTIFICATES, BUT ARE NOT OBLIGATED TO
DO SO. THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET FOR THE CLASS A
CERTIFICATES WILL DEVELOP OR, IF IT DOES DEVELOP, THAT IT WILL CONTINUE. THE
CLASS A CERTIFICATES WILL NOT BE LISTED ON ANY SECURITIES EXCHANGE.
THE CLASS A CERTIFICATES WILL BE PURCHASED FROM THE COMPANY BY THE
UNDERWRITERS AND WILL BE OFFERED BY THE UNDERWRITERS FROM TIME TO TIME TO THE
PUBLIC IN NEGOTIATED TRANSACTIONS OR OTHERWISE AT VARYING PRICES TO BE
DETERMINED AT THE TIME OF SALE. THE PROCEEDS TO THE COMPANY FROM THE SALE OF THE
CLASS A CERTIFICATES, BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, WILL BE
EQUAL TO APPROXIMATELY 101.14% OF THE AGGREGATE INITIAL PRINCIPAL BALANCE OF THE
CLASS A CERTIFICATES, PLUS ACCRUED INTEREST ON THE CLASS A CERTIFICATES (OTHER
THAN THE CLASS A-1 CERTIFICATES AND CLASS A-2 CERTIFICATES) FROM SEPTEMBER 1,
1997.
THE CLASS A CERTIFICATES ARE OFFERED BY THE UNDERWRITERS SUBJECT TO PRIOR
SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT
TO CERTAIN OTHER CONDITIONS. THE UNDERWRITERS RESERVE THE RIGHT TO WITHDRAW,
CANCEL OR MODIFY SUCH OFFER AND TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS
EXPECTED THAT DELIVERY OF THE CLASS A CERTIFICATES WILL BE MADE ONLY IN
BOOK-ENTRY FORM THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY, CEDEL
BANK, SOCIETE ANONYME, AND THE EUROCLEAR SYSTEM AS FURTHER DISCUSSED HEREIN, ON
OR ABOUT SEPTEMBER 26, 1997, AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE
FUNDS. THE CLASS A CERTIFICATES WILL BE OFFERED IN EUROPE AND THE UNITED STATES
OF AMERICA.
--------------------------------
MORGAN STANLEY DEAN WITTER
DONALDSON LUFKIN & JENRETTE SECURITIES CORPORATION
LEHMAN BROTHERS
SEPTEMBER 24, 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Certificates will each evidence a beneficial ownership
interest in three 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. The separate Loan Groups are referred to
herein as the "Group I Loans," "Group II Loans" and "Group III Loans." The Group
I Loans and Group II Loans are conventional, adjustable-rate, one- to
four-family, first lien mortgage loans. The Group III Loans are conventional,
fixed-rate, one- to four-family, first lien and second lien mortgage loans. The
interest rate (the "Mortgage Rate") on each Group I Loan and Group II Loan will
be subject to semi-annual adjustment (in the case of certain of the Group I
Loans and Group II 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
III Loan will be fixed. The Index for each of the Group I Loans and Group II
Loans will be based on either (a) the six-month London interbank offered rates
for United States dollar deposits ("Six-Month LIBOR") or (b) the one-year London
interbank offered rates for United States dollar deposits ("One-Year LIBOR") as
described herein. Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool." All distributions (other than
Cross-Collateralization Payments as described herein) with respect to a Loan
Group will be allocated solely among the Certificates related to such Loan
Group. The rights of the holders of the Class R-II Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Class A Certificates to the extent described herein
and in the Prospectus.
It is a condition of the issuance of the Class A 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 "Aaa" by Moody's Investors Service, Inc. ("Moody's") and that
the Fixed Strip Certificates be rated "AAAr" by S&P, "AAA" by DCR and "Aaa" by
Moody's.
The Class A Certificates initially will be represented by
certificates registered in the name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"), as further described herein. The interests of beneficial
owners of the Class A Certificates will be represented by book entries on the
records of DTC and the participating members of DTC. Persons acquiring
beneficial ownership interests in the Class A Certificates may elect to hold
such interests through DTC in the United States, or Cedel or Euroclear (each as
defined herein) in Europe. Definitive certificates will be available for the
Class A Certificates only under the limited circumstances described herein. See
"Description of the Certificates--Book-Entry Registration of the Class A
Certificates" herein.
As described herein, two separate "real estate mortgage
investment conduit" ("REMIC") elections will be made in connection with the
Trust Fund 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 Class A Certificates, will be made on the
25th day of each month or, if such day is not a business day, then on the next
business day, commencing in October 1997 (each, a "Distribution Date"). As
described herein, interest payable with respect to each Distribution Date (i) on
the Class A-1 Certificates and Class A-2 Certificates, will accrue on the basis
of a 360-day year and the actual number of days elapsed (except as described
herein) 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 September 26,
1997 to October 24, 1997 and (ii) on the Class A Certificates (other than the
Class A-1 Certificates and Class A-2 Certificates) will accrue on the basis of a
360-day year and a 30-day month, and
S-2
<PAGE>
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 Class A
Certificates will be made as described herein under "Description of the
Certificates--Class A Principal Distribution Amount."
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-23 OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE 12 OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
If purchased at a price other than par, the yield to maturity on the
Class A Certificates will be sensitive to the rate and timing of principal
payments (including prepayments, defaults and liquidations) on the Mortgage
Loans. The Mortgage Loans generally may be prepaid in full or in part at any
time; however, a prepayment may subject the related Mortgagor to a prepayment
charge with respect to the majority of the Mortgage Loans in each Loan Group.
The yield to investors on the Class A Certificates will be adversely affected by
any shortfalls in interest collected on the Mortgage Loans due to prepayments,
liquidations or otherwise, to the extent not otherwise covered as described
herein. 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.
--------------------------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED SEPTEMBER 24, 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 CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
S-3
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE 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
PROSPECTUS SUPPLEMENT PAGE
-----
SUMMARY................................................................. S-5
RISK FACTORS............................................................ S-23
DESCRIPTION OF THE MORTGAGE POOL........................................ S-25
DESCRIPTION OF THE CERTIFICATES......................................... S-56
MBIA INSURANCE CORPORATION.............................................. S-74
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS............................. S-76
POOLING AND SERVICING AGREEMENT......................................... S-87
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................. S-92
METHOD OF DISTRIBUTION.................................................. S-94
LEGAL OPINIONS.......................................................... S-95
RATINGS................................................................. S-95
LEGAL INVESTMENT........................................................ S-96
ERISA CONSIDERATIONS.................................................... S-97
EXPERTS................................................................. S-98
APPENDIX A--UNDERWRITING GUIDELINES
APPLICABLE TO THE MORTGAGE LOANS.................................... A-1
PROSPECTUS
SUMMARY OF PROSPECTUS................................................... 4
RISK FACTORS............................................................ 12
THE MORTGAGE POOLS...................................................... 15
SERVICING OF MORTGAGE LOANS............................................. 24
DESCRIPTION OF THE SECURITIES........................................... 31
DESCRIPTION OF CREDIT ENHANCEMENT....................................... 43
PURCHASE OBLIGATIONS.................................................... 50
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER......... 51
THE COMPANY............................................................. 54
THE AGREEMENTS.......................................................... 54
YIELD CONSIDERATIONS.................................................... 61
MATURITY AND PREPAYMENT CONSIDERATIONS.................................. 63
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................. 64
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................. 77
STATE AND OTHER TAX CONSEQUENCES........................................ 100
ERISA CONSIDERATIONS.................................................... 100
LEGAL INVESTMENT MATTERS................................................ 106
USE OF PROCEEDS......................................................... 106
METHODS OF DISTRIBUTION................................................. 106
LEGAL MATTERS........................................................... 107
FINANCIAL INFORMATION................................................... 107
RATING.................................................................. 107
INDEX OF PRINCIPAL DEFINITIONS.......................................... 108
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 1997-3.
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.....................September 1, 1997.
Delivery Date....................On or about September 26, 1997.
Denominations....................The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of The Depository Trust Company ("DTC")
and its Participants (as defined in the
Prospectus). The Class A Certificates (other
than the Fixed Strip 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
minimum denominations of a 20.00% Percentage
Interest and integral multiples of 0.01% in
excess thereof.
Certificate Registration.........The Class A Certificates will be represented by
one or more certificates registered in the name
of Cede & Co., as nominee of DTC (Class A
Certificates so registered, "Book- Entry
Certificates"). No person acquiring an interest
in the Book-Entry Certificates (a "Beneficial
Owner") will be entitled to receive a Class A
Certificate in fully registered, certificated
form (a "Definitive Certificate"), except under
the limited circumstances described herein. The
interests of Beneficial Owners of the
Book-Entry Certificates will be represented by
book entries on the records of DTC and
participating members of DTC. Beneficial Owners
may elect to hold their interests in the Class
A Certificates through DTC in the United
States, or Cedel Bank, societe anonyme
("Cedel"), or the Euroclear System
("Euroclear") in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be
in accordance with the usual rules and
operating
S-5
<PAGE>
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 Class A Certificates and Class A
Certificateholders reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations, for so long as such Certificates
remain Book-Entry Certificates. See "Risk
Factors--Book-Entry Certificates" and
"Description of the Certificates--Book-Entry
Registration of the Class A Certificates".
The Mortgage Pool................The Mortgage Pool will consist of three groups
(each a "Loan Group") of mortgage loans (the
"Mortgage Loans"). The separate Loan Groups are
referred to herein as the "Group I Loans,"
"Group II Loans" and "Group III Loans." The
Group I Loans and Group II Loans are
conventional, adjustable-rate, one- to
four-family mortgage loans. The Group III Loans
are conventional, fixed-rate, one- to
four-family mortgage loans. The Initial Group I
Loans (as defined herein) have an aggregate
principal balance as of the Cut-off Date of
approximately $224,112,249. The Group II Loans
have an aggregate principal balance as of the
Cut-off Date of approximately $88,233,125. The
Initial Group III Loans (as defined herein)
have an aggregate principal balance as of the
Cut-off Date of approximately $91,552,303. The
Group I Loans and Group II Loans are secured by
first liens on fee simple interests in one- to
four-family residential real properties (each,
a "Mortgaged Property"). The Group III Loans
are secured by first liens or second liens on
fee simple interests in one- to four-family
Mortgaged Properties.
The statistical information presented in this
Prospectus Supplement concerning the Group I
Loans and Group III Loans describes a sampling
of mortgage loans in Loan Group I and Loan
Group III (with respect to Loan Group I and
Loan Group III, the "Initial Group I Loans" and
"Initial Group III Loans," respectively) and
does not include information regarding the
additional mortgage loans which will be
included in Loan Group I and Loan Group III on
the Delivery Date (the "Additional Group I
Loans" and "Additional Group III Loans,"
respectively). The Initial Group I Loans and
Additional Group I Loans, will constitute
approximately 88.83% and 11.17%, respectively,
of the aggregate of the Principal Balance of
such mortgage loans as of the Delivery Date.
The Initial Group III Loans and Additional
Group III Loans will constitute approximately
83.64% and 16.36%, respectively, of the
aggregate of the Principal Balance of such
mortgage loans as of the Delivery
S-6
<PAGE>
Date. While the statistical distribution of the
final characteristics of the Group I Loans and
Group III Loans transferred to the Trust Fund
on the Delivery Date will vary from the
statistical information presented in this
Prospectus Supplement, the characteristics of
such Mortgage Loans as of the Delivery Date
will not vary materially from the information
presented herein with respect to the Initial
Group I Loans and Initial Group III Loans. The
statistical information presented in this
Prospectus Supplement concerning the Group II
Loans describes all the Group II Loans expected
to be delivered to the Trustee on the Delivery
Date.
The Initial Group I Loans had approximate
individual principal balances at origination of
at least $9,950 but not more than $723,996 with
an average principal balance at origination of
approximately $115,030. The Group II Loans had
approximate individual principal balances at
origination of at least $60,500 but not more
than $211,500 with an average principal balance
at origination of approximately $113,488. The
Initial Group III Loans had approximate
individual principal balances at origination of
at least $6,500 but not more than $500,000 with
an average principal balance at origination of
approximately $61,150. Approximately 99.99% of
the Initial Group I Loans have terms to
maturity from the date of origination or
modification of 30 years and approximately
0.01% of the Initial Group I Loans have terms
to maturity from the date of origination or
modification of 15 years. Approximately 99.76%
of the Group II Loans have terms to maturity
from the date of origination or modification of
30 years and approximately 0.24% of the Group
II Loans have terms to maturity from the date
of origination or modification of 15 years.
Approximately 75.06% of the Initial Group III
Loans have terms to maturity from the date of
origination or modification of 20 to 30 years
and approximately 24.94% of the Initial Group
III Loans have terms to maturity from the date
of origination or modification of 15 years or
less. The Initial Group I Loans have a weighted
average remaining term to stated maturity of
approximately 359 months as of the Cutoff Date.
Approximately 64.47% of the Initial Group I
Loans (by aggregate principal balance as of the
Cut-off Date) are refinance mortgage loans. The
Group II Loans have a weighted average
remaining term to stated maturity of
approximately 358 months as of the Cut-off
Date. Approximately 63.57% of the Group II
Loans (by aggregate principal balance as of the
Cut-off Date) are refinance mortgage loans. The
Initial Group III Loans have a weighted average
remaining term to stated maturity of
approximately 312 months as of the Cut-off
Date. Approximately 82.21% of the Initial Group
III Loans (by aggregate principal balance as of
the Cut-off Date) are refinance mortgage loans.
None of the Initial Group I Loans or Initial
Group III Loans were
S-7
<PAGE>
thirty or more days delinquent in their Monthly
Payments as of the Cut-off Date. Approximately
0.20% of the Group II Loans (by aggregate
principal balance as of the Cut-off Date) were
thirty days or more but less than sixty days
delinquent in their Monthly Payments as of the
Cut-off Date. Prospective investors in the
Class A Certificates should be aware, however,
that only approximately 38.38%, 55.44% and
56.70% of the Initial Group I Loans, Group II
Loans and Initial Group III Loans, respectively
(by aggregate principal balance as of the
Cut-off Date) had a first Monthly Payment due
before September 1, 1997, and therefore, the
remaining Initial Group I Loans, Group II Loans
and Initial Group III Loans could not have been
thirty or more days delinquent as of the
Cut-off Date. No Mortgage Loan was sixty days
or more delinquent as of the Cut-off Date.
Approximately 9.62% of the Initial Group III
Loans (by aggregate principal balance as of the
Cut-off Date) are secured by second liens on
the related Mortgaged Property. Approximately
5.02% of the Initial Group III Loans (by
aggregate principal balance as of the Cut-off
Date) are Balloon Loans (as defined herein).
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein.
The Mortgage Rate (as defined herein) on each
Group I Loan and Group II Loan will be subject
to adjustment, commencing (i) with respect to
approximately 22.67% and 38.70% of the Initial
Group I Loans and Group II Loans, respectively,
approximately six months or one year after the
date of origination, (ii) with respect to
approximately 77.07% and 61.31% of the Initial
Group I Loans and Group II Loans, respectively,
approximately two years after origination (each
such Group I Loan or Group II Loan, a "2/28
Loan") and (iii) with respect to approximately
0.26% of the Initial Group I Loans,
approximately three years after origination
(each such Group I Loan or Group II Loan, a
"3/27 Loan"), on the date (the "Adjustment
Date") specified in the related Mortgage Note
to a rate equal to the sum (rounded as
described herein) of the related Index as
described below and the 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 or Group II 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 Cut-off Date, the Initial Group I Loans
will bear interest at Mortgage Rates of at
least 6.99% per annum but no more than 17.05%
per annum, with a weighted average Mortgage
Rate of approximately 10.57% per annum
S-8
<PAGE>
as of the Cut-off Date. As of the Cut-off Date,
the Group II Loans will bear interest at
Mortgage Rates of at least 6.87% per annum but
no more than 15.28% per annum, with a weighted
average Mortgage Rate of approximately 9.85%
per annum as of the Cut-off Date. The Group I
Loans and Group II 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 III Loan is
fixed. As of the Cut-off Date, the Initial
Group III Loans will bear interest at Mortgage
Rates of at least 7.50% per annum but no more
than 17.50% per annum, with a weighted average
Mortgage Rate of approximately 11.81% per annum
as of the Cut-off Date.
Approximately 77.69% of the Initial Group I
Loans, 85.51% of the Group II Loans and 94.59%
of the Initial Group III Loans were originated
and underwritten or acquired and reunderwritten
by SPFC or its subsidiaries. Approximately
13.37% of the Initial Group I Loans, 12.14% of
the Group II Loans and none of the Initial
Group III Loans were underwritten by BOMAC
Capital Mortgage Inc. ("BOMAC"). The Mortgage
Loans were underwritten in accordance with the
underwriting standards of SPFC and BOMAC
described in "Description of the Mortgage
Pool--Underwriting Standards" and Appendix A to
this Prospectus Supplement. The remaining
Initial Group I Loans, Group II Loans and
Initial Group III Loans were underwritten by
the Strategic Partners (as defined herein) in
accordance with underwriting standards similar
to those of SPFC. In addition, SPFC credit
graded each of such Mortgage Loans underwritten
by the Strategic Partners to its own
underwriting standards. Approximately 9.63% of
the Initial Group III Loans are secured by
Mortgaged Properties located in the State of
Alabama. See also "Risk Factors--Underwriting
Standards" in this Prospectus Supplement.
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein.
The Index........................The Index applicable with respect to the Group
I Loans and Group II Loans will be based upon
either (a) the average of the interbank offered
rates for six-month United States dollar
deposits in the London market ("Six-Month
LIBOR") or (b) the average of the interbank
offered rates for one-year United States dollar
deposits in the London market ("One-Year
LIBOR"), in each case 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 related Adjustment
Date, as specified in the related Mortgage
Note.
S-9
<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 Class A Certificates.........The Class A Certificates will each evidence a
beneficial ownership interest in a trust fund
(the "Trust Fund") consisting primarily of the
Mortgage Pool. The Class A Certificates will be
issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date,
among the Company, the Master Servicer and the
Trustee (the "Pooling and Servicing
Agreement"). The Class A Certificates (other
than the Fixed Strip Certificates) will have
the following approximate Certificate Principal
Balances as of the Delivery Date:
$ 252,306,000 Class A-1 Certificates
$ 88,232,000 Class A-2 Certificates
$ 39,982,000 Class A-3 Certificates
$ 34,467,000 Class A-4 Certificates
$ 24,067,000 Class A-5 Certificates
$ 10,946,000 Class A-6 Certificates
However, the Certificate Principal Balance of
the Class A-1, Class A-3, Class A-4, Class A-5
and Class A-6 Certificates may be increased or
decreased by up to 5% on the Delivery Date,
depending upon the Group I Loans and Group III
Loans actually delivered by the Seller to the
Depositor on the Delivery Date as described
herein. The Fixed Strip Certificates will be
divided into seven components (each, a
"Component"), the Class A-7 Component A, B and
C (collectively, the "Group I Fixed Strip
Components"), the Class A-7 Component D, E and
F (collectively, the Group II Fixed Strip
Components") and the Class A-7 Component G (the
"Group III Fixed Strip Component").
Each Group I Fixed Strip Component will have a
Notional Amount of $25,231,000 as of the
Delivery Date. Each Group II Fixed Strip
Component will have a Notional Amount of
$8,823,000 as of the Delivery Date. The Group
III Fixed Strip Component will have a Notional
Amount of $10,946,000 as of the Delivery 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 Class A
Certificates, see "Summary--Interest
Distributions" and "--Principal Distributions"
below, and "Description of the Certificates--
Class A Interest Distribution Amount" and
"--Class A Principal Distribution Amount"
herein.
S-10
<PAGE>
Each of the Class A Certificates will be
entitled to the benefit of one of three
certificate guaranty insurance policies (the
"Certificate Insurance Policies") to be issued
by MBIA Insurance Corporation (the "Certificate
Insurer"), which will insure the payment of (i)
on each Distribution Date, an amount equal to
(a) the related Class A Interest Distribution
Amount (as defined herein) minus the related
Available Funds (as defined herein) (to the
extent not covered by Cross-Collateralization
Payments) and (b) the related Subordination
Deficit (as defined herein) (to the extent not
covered by Cross-Collateralization Payments)
and (ii) the unpaid related Preference Amount
(as defined herein). The Certificate Insurance
Policies do not insure the payment of the Group
I Class A Available Funds Cap Carry-Forward
Amount or Group II Class A Available Funds Cap
Carry- Forward Amount (each as defined herein).
See "Description of the Certificates."
Pass-Through Rate on the
Class A Certificates...........The Pass-Through Rate on the Class A-1
Certificates is adjustable and is calculated as
follows: beginning on the Distribution Date in
October 1997, and on each Distribution Date
thereafter, the Pass-Through Rate applicable to
the Class A- 1 Certificates will be adjusted to
equal the lesser of (i) (a) with respect to any
Distribution Date which occurs on or prior to
the date on which the aggregate Principal
Balance of the Mortgage Loans is less than 10%
of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date,
One-Month LIBOR (as defined herein) plus 0.21%,
or (b) with respect to any Distribution Date
thereafter, One-Month LIBOR plus 0.42% and (ii)
the Group I Class A Available Funds
Pass-Through Rate.
The "Group I Class A Available Funds
Pass-Through Rate," as of any Distribution
Date, is equal to (i) the weighted average of
the Mortgage Rates of the Group I Loans, minus
(ii) the sum of the Servicing Fee Rate and the
rates per annum at which the Trustee's Fee and
Premium Amount (each as defined herein) accrue,
minus (iii) the Group I Fixed Strip Effective
Rate (as defined below) times a fraction equal
to (x) the Notional Amount of the Group I Fixed
Strip Components divided by (y) the Certificate
Principal Balance of the Class A-1
Certificates, in each case as determined
immediately prior to such Distribution Date and
minus (iv) commencing on the seventh
Distribution Date, 0.50% per annum. 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 24th through 30th Distribution
Dates and 0.00% thereafter.
The "Class A-1 Formula Pass-Through Rate" for a
Distribution Date is the lesser of (x) the rate
determined by clause (i) of the definition of
Pass-Through Rate for the Class A-1
Certificates for such Distribution Date and (y)
the weighted average of the Net Lifetime Rate
Caps of the Group I Loans. The Net Lifetime
S-11
<PAGE>
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 rates per annum
at which the Trustee's Fee and the Premium
Amount accrue 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 Certificate
Principal Balance of the Class A-1
Certificates, in each case as determined
immediately prior to such Distribution Date.
The Pooling and Servicing Agreement provides
that if the Pass- Through Rate on the Class A-1
Certificates is less than the Class A-1 Formula
Pass-Through Rate and any resulting shortfall
in interest is not paid on such Distribution
Date from any available Net Monthly Excess
Cashflow, as defined herein, then the amount of
any such shortfall will be carried forward and
paid to the extent of the related Available
Funds, as described herein, to the Holders of
the Class A-1 Certificates on future
Distribution Dates and shall accrue interest at
the applicable Class A-1 Formula Pass-Through
Rate, until paid (such shortfall, together with
such accrued interest, the "Group I Class A
Available Funds Cap Carry-Forward Amount"). The
Certificate Insurance Policies do not cover the
Group I Class A Available Funds Cap
Carry-Forward Amount, nor do the ratings
assigned to the Class A-1 Certificates address
the payment of the Group I Class A Available
Funds Cap Carry-Forward Amount.
The Pass-Through Rate on the Class A-2
Certificates is adjustable and is calculated as
follows: beginning on the Distribution Date in
October 1997, and on each Distribution Date
thereafter, the Pass-Through Rate applicable to
the Class A- 2 Certificates will be adjusted to
equal the lesser of (i) (a) with respect to any
Distribution Date which occurs on or prior to
the date on which the aggregate Principal
Balance of the Mortgage Loans is less than 10%
of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date,
One-Month LIBOR (as defined herein) plus 0.20%,
or (b) with respect to any Distribution Date
thereafter, One-Month LIBOR plus 0.40% and (ii)
the Group II Class A Available Funds
Pass-Through Rate.
The "Group II Class A Available Funds
Pass-Through Rate," as of any Distribution
Date, is equal to (i) the weighted average of
the Mortgage Rates of the Group II Loans, minus
(ii) the sum of the Servicing Fee Rate and the
rates per annum at which the Trustee's Fee and
Premium Amount (each as defined herein) accrue,
minus (iii) the Group II Fixed Strip Effective
Rate (as defined below) times a fraction equal
to (x) the Notional Amount of the Group II
Fixed Strip Components divided by (y) the
Certificate Principal Balance of the Class A-2
Certificates, in each case as determined
immediately prior to such Distribution Date and
minus (iv) commencing on the seventh
Distribution Date, 0.50% per annum. The "Group
II Fixed Strip Effective Rate" is equal to
5.50% for the first 12 Distribution Dates,
4.00%
S-12
<PAGE>
for the 13th through the 24th Distribution
Dates, 2.50% for the 24th through 30th
Distribution Dates, and 0.00% thereafter.
The "Class A-2 Formula Pass-Through Rate" for a
Distribution Date is the lesser of (x) the rate
determined by clause (i) of the definition of
Pass-Through Rate for the Class A-2
Certificates for such Distribution Date and (y)
the weighted average of the Net Lifetime Rate
Caps of the Group II Loans. The Net Lifetime
Rate Cap on each Group II Loan is equal to the
related Lifetime Rate Cap minus the sum of (i)
the Servicing Fee Rate and the rates per annum
at which the Trustee's Fee and the Premium
Amount accrue and (ii) the Group II Fixed Strip
Effective Rate times a fraction equal to (x)
the Notional Amount of the Group II Fixed Strip
Components divided by (y) the Certificate
Principal Balance of the Class A-2
Certificates, in each case as determined
immediately prior to such Distribution Date.
The Pooling and Servicing Agreement provides
that if the Pass- Through Rate on the Class A-2
Certificates is less than the Class A-2 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 Available
Funds, as described herein, to the Holders of
the Class A-2 Certificates on future
Distribution Dates and shall accrue interest at
the applicable Class A-2 Formula Pass-Through
Rate, until paid (such shortfall, together with
such accrued interest, the "Group II Class A
Available Funds Cap Carry-Forward Amount"). The
Certificate Insurance Policies do not cover the
Group II Class A Available Funds Cap
Carry-Forward Amount, nor do the ratings
assigned to the Class A-2 Certificates address
the payment of the Group II Class A Available
Funds Cap Carry-Forward Amount.
The Pass-Through Rate with respect to the Class
A-3 and Class A-4 Certificates is equal to the
fixed rate set forth on the cover hereof.
On the first 36 Distribution Dates, the
Pass-Through Rate on the Class A-5 Certificates
is equal to: (i) with respect to any
Distribution Date which occurs on or prior to
the date on which the aggregate Principal
Balance of the Mortgage Loans is less than 10%
of the sum of the aggregate Principal Balance
of the Mortgage Loans as of the Cut-off Date,
7.19% per annum and (ii) with respect to any
Distribution Date thereafter, 7.94% per annum.
On each Distribution Date following the first
36 Distribution Dates, the Pass-Through Rate on
the Class A-5 Certificates is equal to the
lesser of: (i)(a) with respect to any
Distribution Date which occurs on or prior to
the date on which the aggregate Principal
Balance of the Mortgage Loans is less than 10%
of the sum of the aggregate Principal Balance
of the Mortgage Loans as of the Cut-off Date,
7.19% per annum and (b) with respect to any
Distribution Date thereafter, 7.94% per
S-13
<PAGE>
annum and (ii) the Group III Weighted Average
Pass-Through Cap. The "Group III Weighted
Average Pass-Through Cap" is equal to (i) the
weighted average of the Mortgage Rates on the
Group III Loans, minus (ii) the sum of the
Servicing Fee Rate and the rates per annum at
which the Trustee's Fee and Premium Amount
accrue.
The Pass-Through Rate on the Class A-6
Certificates is equal to: (i) on the first 36
Distribution Dates, 6.87% per annum, and (ii)
on any Distribution Date thereafter, the lesser
of (a) 6.87% per annum and (b) the Group III
Weighted Average Pass-Through Cap.
See "Description of the Certificates--Class A
Interest Distribution Amounts" herein.
The Pass-Through Rate for the Class A-7
Component A and D will be equal to 2.50% for
the first 30 Distribution Dates, and 0.00%
thereafter. The Pass-Through Rate for the Class
A-7 Component B and E will be equal to 1.50%
for the first 24 Distribution Dates, and 0.00%
thereafter. The Pass-Through Rate for the Class
A-7 Component C and F will be equal to 1.50%
for the first 12 Distribution Dates, and 0.00%
thereafter. The Pass-Through Rate for the Group
III Fixed Component of the Fixed Strip
Certificates 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 (as defined herein).
See "Description of the Certificates--Class A
Interest Distribution Amount" and
"--Calculation of One-Month LIBOR" herein.
Interest Distributions...........On each Distribution Date, the holders of the
Class A Certificates will be entitled to
receive, to the extent of amounts available for
distribution as described herein, interest
distributions in an amount equal to the sum of
(i) interest accrued for the related Accrual
Period (as defined herein) on the Certificate
Principal Balance thereof (or 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 Class A-1 Certificates and Class A-2
Certificates (except as described herein), and
a 360-day year and a 30-day month, with respect
to the Group I Fixed Strip Components, Group II
Fixed Strip Components and the Group III Class
A Certificates), subject to reduction only in
the event of shortfalls caused by the Relief
Act (as defined in the Prospectus and allocated
as described herein) or the failure of the
Master Servicer to cover Prepayment Interest
Shortfalls to the extent described herein and
(ii) the Group I Class A Carry-Forward Amount,
Group II Class A Carry- Forward Amount or Group
III Carry-Forward Amount (each as defined
herein), as applicable, allocable to interest.
The aggregate amount of interest allocable to
the Group I, Group II and Group III Class A
Certificates (the related "Class A Interest
Distribution Amount") will be allocable first
to the Group I Fixed Strip Components, Group II
Fixed Strip Components or Group III Fixed Strip
Component, as applicable, and then to the
related Class A Certificates (other than the
Class A-7 Certificates) on a pro rata basis.
See "Description of the Certificates--Priority
of Payment" and "--Class A Interest
Distribution Amount" herein.
Any Prepayment Interest Shortfalls (as defined
herein) resulting from full or partial
prepayments in any calendar month will be
offset by the Master Servicer on the
Distribution Date in the following calendar
month to the extent such Prepayment Interest
Shortfalls do not exceed the Servicing Fee
payable to the Master Servicer with respect to
such Distribution Date. An amount equal to the
Class A Certificates' pro rata share, based on
the amount of interest payable on each such
class, of any Prepayment Interest Shortfalls
not so covered by the Master Servicer will be
made available by the Certificate Insurer for
distribution to the Class A Certificateholders.
See "Pooling and Servicing Agreement--Servicing
and Other Compensation and Payment of Expenses"
and "Description of the Certificates--Class A
Interest Distribution Amount" herein.
The Notional Amount of each Group I Fixed Strip
Component as of any Distribution Date is equal
to the lesser of (i) $25,231,000 and (ii) the
Certificate Principal Balance of the Class A-1
Certificates immediately prior to such date.
The Notional Amount of each Group II Fixed
Strip Component as of any Distribution Date is
equal to the lesser of (i) $8,823,000 and (ii)
the Certificate Principal Balance of the Class
A-2 Certificates immediately prior to such
date. The Notional Amount of the Group III
Fixed Strip Component as of any Distribution
Date is equal to the Certificate Principal
Balance of the Class A-6 Certificates
immediately prior to such date.
Principal Distributions..........Holders of the Group I, Group II and Group III
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 on each
Distribution Date, to the extent of amounts
available for distribution as described herein
remaining after interest on the Group I, Group
II and Group III Class A Certificates,
respectively, is distributed, an amount (the
related "Class A Principal Distribution
Amount") equal to the sum of (i) the portion of
any Group I, Group II or Group III Class A
Carry- Forward Amount, as applicable, which
relates to a shortfall in a distribution of a
related Subordination Deficit, (ii) all
scheduled installments of principal in respect
of the Mortgage Loans in the related Loan Group
received or advanced during the related Due
Period (as defined herein), together with all
unscheduled
S-14
<PAGE>
payments of principal on such Mortgage Loans
received by the Master Servicer during the
prior calendar month, (iii) the Principal
Balance of each Mortgage Loan in the related
Loan Group that was repurchased by either the
Seller or by the Company, (iv) any amounts
delivered by the Company on the Master Servicer
Remittance Date (as defined herein) in
connection with a substitution of a Mortgage
Loan in the related Loan Group, (v) the net
Liquidation Proceeds (as defined in the
Prospectus) collected by the Master Servicer of
all Mortgage Loans in the related Loan Group
during the prior calendar month (to the extent
such net Liquidation Proceeds are related to
principal), (vi) the amount of any related
Subordination Deficit for such Distribution
Date, (vii) the proceeds received by the
Trustee of any termination of the related Loan
Group (to the extent such proceeds are related
to principal), (viii) the amount of any related
Subordination Increase Amount (as defined
herein) for such Distribution Date; MINUS (ix)
the amount of any related Subordination
Reduction Amount (as defined herein) for such
Distribution Date.
In no event will any Class A Principal
Distribution Amount with respect to any
Distribution Date be less than zero or greater
than the Certificate Principal Balances of the
related Class A Certificates.
See "Description of the Certificates--Priority
of Payment" and "--Class A Principal
Distribution Amount" herein.
Credit Enhancement...............The credit enhancement provided for the benefit
of the Class A Certificateholders consists
solely of (a) the overcollateralization
mechanics which utilize the internal cash flows
of the Mortgage Loans in the related Loan Group
(and, to the extent of Cross- Collateralization
Payments, the non-related Loan Groups) and (b)
the related Certificate Insurance Policy.
OVERCOLLATERALIZATION. The
overcollateralization mechanics of the Trust
Fund result in a limited acceleration of the
Class A 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
Class A Certificates. This acceleration feature
creates overcollateralization which equals the
excess of the aggregate Principal Balances of
the Mortgage Loans in the related Loan Group
over the aggregate Certificate Principal
Balance of the related Class A Certificates.
Once the required level of
overcollateralization is reached, and subject
to the provisions described in the next
paragraph, the acceleration feature will cease,
unless necessary to maintain the required level
of overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain trigger tests, the
required percentage level of
S-15
<PAGE>
overcollateralization with respect to each Loan
Group may increase or decrease over time. An
increase would result in a temporary period of
accelerated amortization of the related Class A
Certificates to increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual
level of overcollateralization to its required
level. See "Description of the
Certificates--Overcollateralization
Provisions."
THE CERTIFICATE INSURANCE POLICIES. The Class A
Certificateholders will have the benefit of the
related Certificate Insurance Policy, as
discussed more fully below. See "Description of
the Certificates--The Certificate Guaranty
Insurance Policies" herein.
Certificate Insurer..............MBIA Insurance Corporation (the "Certificate
Insurer"). See "MBIA Insurance Corporation"
herein.
Certificate Guaranty Insurance
Policies........................The Certificate Insurer will issue the
Certificate Insurance Policies as a means of
providing additional credit enhancement to the
Class A Certificates. Under the Certificate
Insurance Policies, the Certificate Insurer
will pay the Trustee, for the benefit of the
holders of the related Class A Certificates, as
further described herein, an amount that will
insure the payment of (i) on each Distribution
Date, an amount equal to (a) the related Class
A Interest Distribution Amount minus the
related Available Funds (to the extent such
difference is not covered by
Cross-Collateralization Payments) and (b) the
related Subordination Deficit (to the extent
not covered by Cross- Collateralization
Payments) and (ii) the related unpaid
Preference Amount. The Certificate Insurance
Policies do not insure the payment of the Group
I Class A Available Funds Cap Carry-Forward
Amount or Group II Class A Available Funds Cap
Carry-Forward Amount. A payment by the
Certificate Insurer under a Certificate
Insurance Policy is referred to herein as an
"Insured Payment." See "Description of the
Certificates--The Certificate Guaranty
Insurance Policies" herein.
Cross-Collateralization..........In the event that on any Distribution Date
after giving effect to distributions pertaining
to a particular Loan Group and its related
Certificates (except for any payment to be made
from proceeds of the related Certificate
Insurance Policy), (i) the Available Funds with
respect to a Loan Group would be less than the
related Class A Interest Distribution Amount
(such difference, a "Cross-Collateralized
Interest Shortfall"), (ii) a Subordination
Deficit exists with respect to a Loan Group,
(iii) a Reimbursement Amount with respect to a
Loan Group exists or (iv) the Subordinated
Amount with respect to a Loan Group would be
less than the related Required Subordinated
Amount (such difference, a
"Cross-Collateralized Subordination
Shortfall"), the Certificate Insurer, the Group
I, Group II or Group III Class A Certificates,
as the case may be, will be
S-16
<PAGE>
entitled to receive an additional payment (a
"Cross- Collateralization Payment") in respect
of interest or principal, as applicable, to the
extent of such Cross-Collateralized Interest
Shortfall, Subordination Deficit or
Cross-Collateralized Subordination Shortfall or
as reimbursement of the Reimbursement Amount,
as the case may be, out of funds then on
deposit in the Certificate Account for the
other Loan Groups that are otherwise payable on
such Distribution Date to the Class R-II
Certificates.
If a Cross-Collateralization Payment is
required with respect to a single Loan Group,
such Loan Group will be entitled to receive
additional payments from both of the other Loan
Groups on a pro rata basis to the extent of
funds on deposit in the Certificate Account for
such other Loan Groups and available to make
Cross-Collateralization Payments. If a
Cross-Collateralization Payment is required
with respect to two Loan Groups, such Loan
Groups will be entitled to receive additional
payments from the third Loan Group on a pro
rata basis to the extent of their respective
required Cross-Collateralization Payments, to
the extent of funds on deposit in the
Certificate Account related to such third Loan
Group available to make Cross-Collateralization
Payments.
Advances.........................The Master Servicer is required to make
advances ("Advances") in respect of delinquent
payments of principal and interest on the
Mortgage Loans, subject to the limitations
described herein. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Optional Termination.............At its option, on any Distribution Date when
the aggregate Principal Balance of the Mortgage
Loans is less than 10% of the sum of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, the holder of a
majority percentage interest of the Class R-II
Certificates (or the Master Servicer (or the
Certificate Insurer, if Advanta is removed as
Master Servicer) if the Principal Balance of
the Mortgage Loans is less than 5% of such sum)
may purchase from the Trust Fund all remaining
Mortgage Loans and other assets thereof at the
price described herein, and thereby effect
early retirement of the related Certificates.
See "Pooling and Servicing Agreement--
Termination" herein and "The Pooling
Agreement--Termination; Retirement of
Certificates" in the Prospectus.
Special Prepayment
Considerations................The rate and timing of principal payments on
the Class A Certificates will depend, among
other things, on the rate and timing of
principal payments (including prepayments,
defaults, liquidations and purchases of the
Mortgage Loans 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
Class A Certificates are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans in the related Loan Group may be
prepaid at
S-17
<PAGE>
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 Group III
Class A Certificates (other than the Group III
Fixed Strip Component) 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 Group III Loans early in the life of the
Mortgage Pool. The timing of commencement of
principal distributions and the weighted
average lives of classes of 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 Group III Loans will
be allocated among the Group III Class A
Certificates (other than the Lockout
Certificates), and, during certain periods,
principal payments will not be distributed to
the Lockout Certificates. Unless the
Certificate Principal Balance of the Group III
Class A Certificates (other than the Lockout
Certificates) have been reduced to zero, the
Lockout Certificates will not be entitled to
receive distributions of principal payments
prior to the Distribution Date in October 2000.
The Lockout Certificates will generally receive
the Lockout Distribution Percentage of
principal payments on the Group III Loans. 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
(as defined herein) 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 III
Class A
S-18
<PAGE>
Certificates (other than the Lockout
Certificates) have been reduced to zero, the
Lockout Distribution Percentage will be equal
to 100%.
See "Description of the Certificates--Class A
Principal Distribution Amount" and "Certain
Yield and Prepayment Considerations" herein,
and "Maturity and Prepayment Considerations" in
the Prospectus.
Special Yield Considerations.....The yield to maturity on the Class A
Certificates will depend on, among other
things, the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of the Mortgage
Loans in the related Loan Group due to a breach
of a representation or warranty) on the
Mortgage Loans in the related Loan Group and
the allocation thereof to reduce the
Certificate Principal Balance thereof. The
yield to maturity on the Class A Certificates
will also depend on the related Pass- Through
Rate and the purchase price for such
Certificates.
If the Class A Certificates are purchased at a
premium and principal distributions thereon
occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield
to maturity will be lower than that assumed at
the time of purchase. Conversely, if the Class
A Certificates are purchased at a discount and
principal distributions thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at the
time of purchase.
The Group I Class A Certificates and Group II
Class A 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 III Class A Certificates were structured
assuming, among other things, a prepayment rate
equal to 115% of the Prepayment Assumption (as
defined herein) and corresponding weighted
average lives as described herein. The
prepayment, yield and other assumptions to be
used for pricing purposes for the Class A
Certificates may vary as determined at the time
of sale.
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 principal payments from the Group III
Loans prior to the Distribution Date occurring
in October 2000 and will receive a
disproportionately small or large portion of
principal payments thereafter (unless the
Certificate Principal Balances of the Class
A-3, Class A-4 and Class A-5 Certificates have
been reduced to zero), the weighted average
life of the Lockout
S-19
<PAGE>
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 III
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.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences...................Two real estate mortgage investment conduit
("REMIC") elections will be made with respect
to the Trust Fund for federal income tax
purposes. Upon the issuance of the Class A
Certificates, Thacher Proffitt & Wood, counsel
to the Company, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the Pooling
and Servicing Agreement, for federal income tax
purposes, REMIC I and REMIC II 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) each class
of the Certificates (other than the Residual
Certificates), will represent ownership of
"regular interests" in REMIC II and will
generally be treated as representing ownership
of debt instruments of REMIC II and (c) the
Class R-II Certificates will constitute the
sole class of "residual interests" in REMIC II.
For federal income tax reporting purposes, the
Class A 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 Class A Certificates and Group II Class
A Certificates, and 115% of the Prepayment
Assumption, with respect to the Group III Class
A Certificates. No representation is made that
the Mortgage Loans will prepay at these rates
or at any other rates.
For further information regarding the federal
income tax consequences of investing in the
Class A Certificates, see "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
S-20
<PAGE>
ERISA Considerations.............A fiduciary of any employee benefit plan or any
other plan or arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of
the Code (each, a "Plan") or any person
investing the assets of any Plan should
carefully review with its legal advisors
whether the purchase, sale or holding of the
Class A Certificates will give rise to a
prohibited transaction under ERISA or Section
4975 of the Code. The U.S. Department of Labor
("DOL") has issued individual exemptions,
Prohibited Transaction Exemption ("PTE") 90-24,
PTE 91-83 and PTE 94-14 to the underwriters
that 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-though certificates underwritten by the
Underwriters, such as the Offered Certificates,
and the servicing and operation of asset pools
such as the Trust Fund, provided that certain
conditions are satisfied. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment.................The Class A Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"). Institutions whose
investment activities are subject to legal
investment laws and regulations, regulatory
capital requirements or review by regulatory
authorities may be subject to restrictions on
investment in the Class A Certificates and
should consult with their legal advisors. See
"Legal Investment" herein and "Legal Investment
Matters" in the Prospectus.
Ratings..........................It is a condition of the issuance of the Class
A 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 "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and that the Fixed
Strip Certificates be rated "AAAr" by S&P,
"AAA" by DCR and "Aaa" by Moody's. A security
rating is not a recommendation to buy, sell or
hold securities and may be subject to revision
or withdrawal at any time by the assigning
rating organization. A security rating does not
address the frequency of prepayments of
Mortgage Loans, or the corresponding effect on
yield to investors. Also, the ratings issued by
S&P, DCR and Moody's on payment of principal
and interest do not cover the payment of the
Group I or Group II Class A Available Funds Cap
Carry- Forward Amounts. See "Certain Yield and
Prepayment Considerations" and "Ratings" herein
and "Yield Considerations" and "Rating" in the
Prospectus.
S-21
<PAGE>
RISK FACTORS
Prospective Class A Certificateholders should consider, among other
things, the items discussed under "Risk Factors" in the Prospectus and the
following factors in connection with the purchase of the Certificates.
UNDERWRITING STANDARDS
Approximately 77.69%, 85.51% and 94.59% of the Initial Group I
Loans, Group II Loans and Initial Group III Loans (each by principal balance as
of the Cut-off Date), respectively, were originated and underwritten or acquired
and reunderwritten by Southern Pacific Funding Corporation ("SPFC" or the
"Seller") or its subsidiaries. Approximately 13.37%, 12.14% and none of the
Initial Group I Loans, Group II Loans and Initial Group III Loans (each by
principal balance as of the Cut-off Date), respectively, were underwritten by
BOMAC Capital Mortgage Inc. ("BOMAC"), and approximately 8.94%, 2.35% and 5.41%
of the Initial Group I Loans, Group II Loans and Initial Group III Loans (each
by principal balance as of the Cut-off Date), respectively, were underwritten by
American Funding Group Inc., Capital Alliance Group, First Liberty Lending and
Sierra Capital Acceptance, which are affiliated with the Company (collectively,
the "Strategic Partners"). The Mortgage Loans originated by SPFC and BOMAC 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 were originated pursuant to similar guidelines, but were
not so reunderwritten (and therefore may perform differently). 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, Group II Loans and Group III 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, Group II
Loans and Group III Loans may increase and such increase may be substantial.
The mortgage loan programs of SPFC and BOMAC 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 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, Loan Group II or Loan Group III. See "Description of the Mortgage
Pool--Delinquency and Foreclosure Experience of the Seller" herein.
S-22
<PAGE>
DELINQUENCIES AND POTENTIAL DELINQUENCIES
None of the Initial Group I Loans or Initial Group III Loans were
thirty or more days delinquent in their Monthly Payments as of the Cut-off Date.
Approximately 0.20% of the Group II Loans (by aggregate principal balance as of
the Cut-off Date) were thirty days or more but less than sixty days delinquent
in their Monthly Payments as of the Cut-off Date. Prospective investors in the
Class A Certificates should be aware, however, that only approximately 38.38%,
55.44% and 56.70% of the Initial Group I Loans, Group II Loans and Initial Group
III Loans, respectively (by aggregate principal balance as of the Cut-off Date)
had a first Monthly Payment due before September 1, 1997, and therefore, the
remaining Initial Group I Loans, Group II Loans and Initial Group III Loans
could not have been thirty or more days delinquent as of the Cut-off Date.
Approximately 5.02% of the Initial Group III Loans (by aggregate
principal balance as of the Cut-off 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 III is greater than that associated with fully-amortizing loans.
Approximately 9.63% of the Initial Group III Loans were originated
in the State of Alabama, and approximately 31.53% of the Initial Group III 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, and in particular the State of Alabama, experiences
a decline in real estate values, losses on the Group III Loans may be greater
than otherwise would be the case.
SECOND LIENS
Approximately 9.62% of the Initial Group III Loans (by aggregate
outstanding principal balance as of the Cut-off Date) are secured by second
liens on the related Mortgaged Properties. The proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Group III Loans only to the extent that the claims
of the related senior mortgages have been satisfied in full, including any
related foreclosure costs. In circumstances when it is determined to be
uneconomical to foreclose on the Mortgaged Property, the Master Servicer may
write off the entire outstanding balance of such Mortgage Loan as a bad debt.
The foregoing considerations will be particularly applicable to Mortgage Loans
secured by second liens that have high combined Loan-to-Value Ratios because it
is comparatively more likely that the Master Servicer would determine
foreclosure to be uneconomical in the case of such Mortgage Loans. Any losses on
such Group III Loans, to the extent such losses are not covered by
overcollateralization, Cross-Collateralization or the related Certificate
Insurance Policy, will be borne by the Group III Class A Certificateholders. The
rate of default of second mortgage loans may be greater than that of mortgage
loans secured by first liens on comparable properties. See "The Mortgage
Pool--The Mortgage Loans" in the Prospectus.
RISK OF MORTGAGE LOAN YIELD REDUCING PASS-THROUGH RATES
ON THE CLASS A-1 CERTIFICATES AND CLASS A-2 CERTIFICATES
The Pass-Through Rates on the Class A-1 Certificates and Class A-2
Certificates are 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 and Group II Loans adjust semi-annually or annually based upon
Six-Month LIBOR and One-Year LIBOR as described under "Description of the
Mortgage Pool--Mortgage Rate Adjustment" herein. However, clause (ii) of the
definitions of the Pass-Through Rate on the Class A-1 Certificates and Class A-2
Certificates limits the Pass-Through Rate on the Class A-1 Certificates and
Class A-2 Certificates to the Group I Class A Available Funds Pass-Through Rate
and Group II Class A Available Funds Pass-Through Rate, respectively, which are
generally based upon the Mortgage Rates on the Group I Loans and Group II Loans,
respectively, which are subject to Six-Month LIBOR
S-23
<PAGE>
or One-Year LIBOR. As a result, the interest paid to the Class A-1 Certificates
or Class A-2 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 and Group II Loans adjust less frequently,
the Pass-Through Rate on the Class A-1 Certificates or Class A-2 Certificates
may be determined by the Group I Class A Available Funds Pass-Through Rate or
Group II Class A Available Funds Pass-Through Rate, respectively, for extended
periods in a rising interest rate environment. In addition, with respect to the
Class A-1 Certificates and Class A-2 Certificates, One-Month LIBOR, Six-Month
LIBOR and One-Year 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 and One-Year LIBOR are stable or are falling or that, even if One-Month
LIBOR, Six-Month LIBOR and One-Year LIBOR all rise during the same period,
One-Month LIBOR may rise much more rapidly than Six-Month LIBOR and One-Year
LIBOR.
In addition, the Mortgage Rates on the Group I Loans and Group II
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 77.07% and 0.26% of the Initial Group I Loans,
respectively, and 61.31% and none of the Group II Loans, respectively (in each
case by aggregate outstanding principal balance as of the Cut-off 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.
BOOK-ENTRY CERTIFICATES
Issuance of the Class A Certificates in book-entry form may reduce
the liquidity of such Certificates in the secondary trading market since
investors may be unwilling to purchase Certificates for which they cannot
obtain physical certificates.
Since transactions in the Book-Entry Certificates will be effected
only through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
DTC, Cedel or Euroclear systems, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
such Certificates.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Book-Entry Certificates since
such distributions will be forwarded by the Trustee to DTC, and DTC will credit
such distributions to the accounts of its Participants (as defined herein) which
will thereafter credit them to the accounts of Beneficial Owners either directly
or indirectly through indirect participants.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the Group I Loans and Group III Loans describes a sampling of
mortgage loans in Loan Group I and Loan Group III (with respect to Loan Group I
and Loan Group III, the "Initial Group I Loans" and "Initial Group III 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")
and additional mortgage loans which will be included in Loan Group III on the
Delivery Date (the "Additional Group III Loans"). The statistical information
presented in this Prospectus Supplement concerning the Group II Loans describes
all the Group II Loans expected to be delivered to the Trustee on the Delivery
Date. The Initial Group I Loans and Additional Group I Loans will constitute
approximately 88.83% and 11.17%, respectively, of the aggregate of the Principal
Balance of such mortgage loans as of the Cut-off Date. The Initial Group III
Loans and Additional Group III Loans will constitute approximately 83.64% and
16.36%, respectively, of the aggregate of the Principal Balance of such mortgage
loans as of the Cut-off Date. While the statistical
S-24
<PAGE>
distribution of the final characteristics of the Group I Loans and Group III
Loans transferred to the Trust Fund on the Delivery Date will vary from the
statistical information presented in this Prospectus Supplement, the
characteristics of such Mortgage Loans as of the Delivery Date will not vary
materially from the information presented herein with respect to the Initial
Group I Loans and Initial Group III Loans as of the Cut-off Date.
The Initial Group I Loans, Group II Loans and Initial Group III
Loans had an aggregate outstanding principal balance as of the Cut-off Date of
approximately $224,112,249, $88,233,125 and $91,552,303, respectively (each such
group of Mortgage Loans, "Loan Group I," "Loan Group II" or "Loan Group III,"
respectively, or a "Loan Group"). The Group I Loans and Group II Loans will
consist of conventional, adjustable rate, monthly payment, first lien mortgage
loans with terms to maturity of approximately 30 years from the date of
origination or modification. Approximately 99.99% of the Initial Group I Loans
have terms to maturity from the date of origination or modification of 30 years
and approximately 0.01% of the Initial Group I Loans have terms to maturity from
the date of origination or modification of 15 years. Approximately 99.76% of the
Group II Loans have terms to maturity from the date of origination or
modification of 30 years and approximately 0.24% of the Group II Loans have
terms to maturity from the date of origination or modification of 15 years. The
Initial Group III Loans will generally consist of conventional, fixed-rate,
monthly payment, first lien mortgage loans (except that approximately 9.62% of
the Initial Group III Loans are second lien mortgages). Approximately 75.06% of
the Initial Group III Loans have terms to maturity from the date of origination
or modification of 20 to 30 years and approximately 24.94% of the Initial Group
III Loans have terms to maturity from the date of origination or modification of
15 years. 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, Group II Loans and Group III 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 and the
Certificate Insurer.
Each Mortgage Loan will contain a customary "due-on-sale" clause.
See "Certain Legal Aspects of Mortgage Loans--Enforceability of Certain
Provisions" in the Prospectus.
Each Mortgage Loan will have been originated or acquired by the
Seller on or before the Delivery Date. Certain of the Mortgage Loans will have
their first Monthly Payments due on November 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
November 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 October 1997, the month prior to the month in
which the first Monthly Payment is due.
S-25
<PAGE>
The majority of the Group I Loans, Group II Loans and Group III
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 and Group
II Loan will be subject to adjustment, commencing (i) with respect to
approximately 22.67% and 38.69% of the Initial Group I Loans and Group II Loans,
respectively, approximately six months or one year after the date of
origination, (ii) with respect to approximately 77.07% and 61.31% of the Initial
Group I Loans and Group II Loans, respectively, approximately two years after
origination (each such Group I Loan, a "2/28 Loan") and (iii) with respect to
approximately 0.26% of the Initial Group I Loans, approximately three years
after origination (each such Group I Loan, a "3/27 Loan"). The Mortgage Rate on
each Group I Loan and Group II 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
related Index plus (ii) a fixed percentage (the "Gross Margin"), which is
generally subject to a maximum increase or decrease in the Mortgage Rate on any
Adjustment Date (the "Periodic Rate Cap") of 1.00% with respect to approximately
22.32% and 33.85% of the Initial Group I Loans and Group II Loans, respectively,
and 1.50% with respect to approximately 75.50% and 63.89% of the Initial Group I
Loans and Group II Loans, respectively (which percentage includes the initial
2/28 Loans and 3/27 Loans, which loans have a Periodic Rate Cap of up to 3.00%
for the first Adjustment Date and 1.50% for each Adjustment Date thereafter),
and 2.00% with respect to approximately 2.18% and 2.26% of the Initial Group I
Loans and Group II Loans, respectively, each by aggregate Principal Balance as
of the Cut-off Date and to specified maximum and minimum lifetime Mortgage Rates
("Lifetime Rate Caps" and "Lifetime Rate Floors," respectively). The Mortgage
Loans were generally originated with an initial Mortgage Rate below the sum of
the current Index and the Gross Margin. The Index applicable with respect to the
Group I Loans and Group II Loans is based either upon (a) the average of the
interbank offered rates for six-month United States dollar deposits in the
London market ("Six-Month LIBOR") or (b) the average of the interbank offered
rates for one-year United States dollar deposits in the London market ("One-Year
LIBOR"), in each case 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. The
Index for approximately 89.34% and 10.66% of the Initial Group I Loans will have
an Index of Six-Month LIBOR and One- Year LIBOR, respectively. The Index for
approximately 93.16% and 6.84% of the Group II Loans will have an Index of
Six-Month LIBOR and One-Year LIBOR, respectively. Due to the application of the
Periodic Rate Caps, Lifetime Rate Caps and Lifetime Rate Floors, the Mortgage
Rate on any Group I Loan or Group II Loan as adjusted on any related Adjustment
Date, may not equal the sum of the related Index and the Gross Margin. The
Mortgage Rate on each Group III Loan is fixed. The Due Date is generally the
first day of the month for all of the Mortgage Loans.
The majority of the Group I Loans or Group II Loans have not reached
their first Adjustment Date on or before the Cut-off Date. The initial Mortgage
Rate with respect to such Mortgage Loans is generally lower than the rate that
would have been produced if the applicable Gross Margin had been added to the
Index in effect at origination. Group I Loans and Group II Loans that have not
reached their first Adjustment Date are, therefore, more likely to be subject to
the Periodic Rate Cap on their first Adjustment Date.
S-26
<PAGE>
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 Cut-Off Date, after deducting
payments of principal due on or prior to such date, of
$224,112,249.47.
All percentages of the Initial Group I Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Cut-Off Date.
Approximately 99.99% of the Initial Group I Loans have original
terms to stated maturity of approximately 30 years and approximately 0.01% of
the Initial Group I Loans have original 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 Cut-Off Date
to the next Adjustment Date for the Initial Group I Loans is approximately 19
months.
As of the Cut-Off Date, each Initial Group I Loan will have an
unpaid principal balance of not less than $9,950 or more than $723,996 and the
average unpaid principal balance of the Initial Group I Loans will be
approximately $114,988. The latest stated maturity date of any of the Initial
Group I Loans will be
October 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.
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 Cut-Off Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
S-27
<PAGE>
INITIAL MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
INITIAL MORTGAGE NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
RATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
6.751% - 7.000% 2 $ 417,716.97 0.19%
7.001% - 7.250% 1 52,376.37 0.02
7.251% - 7.500% 2 657,977.65 0.29
7.501% - 7.750% 12 2,451,724.11 1.09
7.751% - 8.000% 10 1,823,491.02 0.81
8.001% - 8.250% 28 4,300,186.29 1.92
8.251% - 8.500% 45 7,727,100.62 3.45
8.501% - 8.750% 41 5,708,437.46 2.55
8.751% - 9.000% 76 11,834,205.73 5.28
9.001% - 9.250% 65 9,664,999.04 4.31
9.251% - 9.500% 107 16,273,820.93 7.26
9.501% - 9.750% 97 13,768,403.75 6.14
9.751% - 10.000% 125 17,850,744.39 7.97
10.001% - 10.250% 115 13,480,772.38 6.02
10.251% - 10.500% 116 16,210,435.32 7.23
10.501% - 10.750% 110 12,195,044.61 5.44
10.751% - 11.000% 169 16,608,585.48 7.41
11.001% - 11.250% 93 8,076,640.27 3.60
11.251% - 11.500% 125 12,708,779.28 5.67
11.501% - 11.750% 92 7,771,222.82 3.47
11.751% - 12.000% 99 7,822,666.87 3.49
12.001% - 12.250% 52 5,322,247.99 2.37
12.251% - 12.500% 75 7,827,589.04 3.49
12.501% - 12.750% 49 3,694,543.80 1.65
12.751% - 13.000% 42 4,361,252.60 1.95
13.001% - 13.250% 35 3,122,365.64 1.39
13.251% - 13.500% 25 1,392,598.82 0.62
13.501% - 13.750% 28 2,499,334.41 1.12
13.751% - 14.000% 24 1,558,580.71 0.70
14.001% - 14.250% 13 751,359.40 0.34
14.251% - 14.500% 13 1,092,998.78 0.49
14.501% - 14.750% 21 1,876,680.37 0.84
14.751% - 15.000% 14 1,166,863.29 0.52
15.001% - 15.250% 10 1,026,184.61 0.46
15.251% - 15.500% 6 347,745.95 0.16
15.501% - 15.750% 6 322,359.67 0.14
16.001% - 16.250% 2 80,590.54 0.04
16.251% - 16.500% 1 168,482.49 0.08
16.501% - 16.750% 1 19,740.00 0.01
17.001% - 17.250% 2 75,400.00 0.03
-------- -------------------- --------
TOTAL....................... 1,949 $224,112,249.47 100.00%
===== =============== =======
</TABLE>
The weighted average Initial Mortgage Rate of the Initial Group I
Loans will be approximately 10.571% per annum.
S-28
<PAGE>
NEXT INTEREST ADJUSTMENT DATE
PERCENTAGE OF
CUT-OFF DATE
NEXT INTEREST NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
ADJUSTMENT DATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
October 1997 6 $ 1,186,750.00 0.53%
November 1997 10 1,977,049.95 0.88
December 1997 30 2,721,126.25 1.21
January 1998 85 13,487,703.48 6.02
February 1998 106 13,618,181.43 6.08
March 1998 121 14,135,260.04 6.31
April 1998 17 1,588,845.00 0.71
May 1998 1 280,182.64 0.13
July 1998 3 788,291.23 0.35
August 1998 1 27,764.10 0.01
September 1998 5 991,900.00 0.44
March 1999 2 382,331.37 0.17
April 1999 18 1,589,404.72 0.71
May 1999 42 4,887,052.98 2.18
June 1999 144 15,914,846.02 7.10
July 1999 372 42,379,714.76 18.91
August 1999 468 49,609,936.99 22.14
September 1999 469 54,319,729.78 24.24
October 1999 45 3,638,190.00 1.62
June 2000 1 309,422.93 0.14
July 2000 1 56,653.50 0.03
August 2000 2 221,912.30 0.10
----- ------------------ ------
TOTAL.......... 1,949 $ 224,112,249.47 100.00%
===== ================== ======
The weighted average remaining months to the next interest
Adjustment Date of the Initial Group I Loans
will be approximately 19 months.
S-29
<PAGE>
GROSS MARGIN
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- ----------------- -----------------
4.001% - 4.500% 1 $ 167,391.00 0.07%
4.501% - 5.000% 13 2,189,762.77 0.98
5.001% - 5.500% 150 21,719,319.59 9.69
5.501% - 6.000% 309 41,732,926.29 18.62
6.001% - 6.500% 475 55,077,959.06 24.58
6.501% - 7.000% 462 52,279,921.61 23.33
7.001% - 7.500% 254 27,302,570.58 12.18
7.501% - 8.000% 167 13,926,324.60 6.21
8.001% - 8.500% 64 5,024,410.48 2.24
8.501% - 9.000% 29 2,324,810.85 1.04
9.001% - 9.500% 11 619,316.56 0.28
9.501% - 10.000% 10 985,712.05 0.44
10.001% - 10.500% 1 35,100.00 0.02
10.501% - 11.000% 1 500,000.00 0.22
12.501% - 13.000% 1 114,800.00 0.05
17.001% - 17.500% 1 111,924.03 0.05
-------- --------------- -------
TOTAL................ 1,949 $224,112,249.47 100.00%
======== =============== =======
The weighted average Gross Margin of the Initial Group I Loans will
be approximately 6.555% per
annum.
S-30
<PAGE>
LIFETIME RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LIFETIME RATE CAP GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ----------------- ----------------- -----------------
12.501% - 13.000% 1 $ 363,556.33 0.16%
13.501% - 14.000% 1 54,160.64 0.02
14.001% - 14.500% 4 1,242,354.02 0.55
14.501% - 15.000% 26 5,217,500.13 2.33
15.001% - 15.500% 76 11,854,442.84 5.29
15.501% - 16.000% 123 18,217,597.53 8.13
16.001% - 16.500% 181 26,640,582.49 11.89
16.501% - 17.000% 232 33,081,089.29 14.76
17.001% - 17.500% 220 28,308,944.23 12.63
17.501% - 18.000% 270 27,639,616.43 12.33
18.001% - 18.500% 217 20,827,842.38 9.29
18.501% - 19.000% 193 15,339,609.81 6.84
19.001% - 19.500% 123 12,517,367.66 5.59
19.501% - 20.000% 87 8,152,584.48 3.64
20.001% or greater 195 14,655,001.21 6.54
----- --------------- -------
TOTAL........ 1,949 $224,112,249.47 100.00%
===== =============== =======
The weighted average Lifetime Rate Cap of the Initial Group I Loans
will be approximately 17.519% per annum.
S-31
<PAGE>
LIFETIME RATE FLOOR
PERCENTAGE OF
CUT-OFF DATE
LIFETIME RATE NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
FLOOR GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ------------- ----------------- -----------------
6.5-01% - 7.000% 2 $ 417,716.97 0.19%
7.0-01% - 7.500% 3 710,354.02 0.32
7.5-01% - 8.000% 22 4,275,215.13 1.91
8.0-01% - 8.500% 73 12,027,286.91 5.37
8.5-01% - 9.000% 117 17,542,643.19 7.83
9.0-01% - 9.500% 172 25,938,819.97 11.57
9.5-01% - 10.000% 222 31,619,148.14 14.11
10.0-01% - 10.500% 230 29,404,392.49 13.12
10.5-01% - 11.000% 279 28,803,630.09 12.85
11.0-01% - 11.500% 218 20,785,419.55 9.27
11.5-01% - 12.000% 191 15,593,889.69 6.96
12.0-01% - 12.500% 128 13,436,652.24 6.00
12.5-01% - 13.000% 90 7,935,546.40 3.54
13.0-01% - 13.500% 60 4,514,964.46 2.01
13.5-01% - 14.000% 52 4,057,915.12 1.81
14.0-01% - 14.500% 26 1,844,358.18 0.82
14.5-01% - 15.000% 36 3,163,793.66 1.41
15.0-01% - 15.500% 16 1,373,930.56 0.61
15.5-01% - 16.000% 6 322,359.67 0.14
16.0-01% - 16.500% 3 249,073.03 0.11
16.5-01% - 17.000% 1 19,740.00 0.01
17.0-01% - 17.500% 2 75,400.00 0.03
------ --------------- -------
TOTAL .......... 1,949 $224,112,249.47 100.00%
====== =============== =======
The weighted average Lifetime Rate Floor of the Initial Group I
Loans will be approximately 10.575% per annum.
REMAINING MONTHS TO STATED MATURITY
NUMBER OF PERCENTAGE OF
REMAINING MONTHS INITIAL CUT-OFF DATE
TO GROUP I AGGREGATE UNPAID AGGREGATE UNPAID
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------ ----------------- -----------------
169 - 180 1 $15,050.00 0.01%
337 - 348 1 57,843.04 0.03
349 - 360 1,947 224,039,356.43 99.97
----- -------------- ------
TOTAL.............. 1,949 $224,112,249.47 100.00%
===== =============== =======
The weighted average remaining term to stated maturity of the
Initial Group I Loans will be approximately 359 months.
S-32
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
ORIGINAL NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN-TO-VALUE RATIOS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------- ----------------- -----------------
10.01% - 15.00% 1 $30,000.00 0.01%
20.01% - 25.00% 5 233,830.73 0.10
25.01% - 30.00% 8 309,816.31 0.14
30.01% - 35.00% 9 406,884.48 0.18
35.01% - 40.00% 13 873,286.12 0.39
40.01% - 45.00% 20 1,868,501.42 0.83
45.01% - 50.00% 30 3,459,249.60 1.54
50.01% - 55.00% 48 6,262,456.09 2.79
55.01% - 60.00% 139 13,306,690.91 5.94
60.01% - 65.00% 348 30,938,439.21 13.80
65.01% - 70.00% 239 28,992,887.61 12.94
70.01% - 75.00% 314 38,089,963.33 17.00
75.01% - 80.00% 291 35,078,445.55 15.65
80.01% - 85.00% 228 29,300,687.15 13.07
85.01% - 90.00% 249 33,908,160.44 15.13
90.01% - 95.00% 5 572,684.92 0.26
95.01% - 100.00% 2 480,265.60 0.21
----- --------------- -------
TOTAL............... 1,949 $224,112,249.47 100.00%
===== =============== =======
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group I Loans were approximately 13.04% and 100.00%, respectively, and
the weighted average Loan-to-Value Ratio at origination
of the Initial Group I Loans was approximately 74.38%.
S-33
<PAGE>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ------------------ -----------------
Full Documentation 1,196 $126,686,689.98 56.53%
Stated Income 430 54,886,939.87 24.49
Quick Qualifier 203 21,636,658.51 9.65
Lite Documentation 120 20,901,961.11 9.33
----- -------------- ------
TOTAL............. 1,949 $224,112,249.47 100.00%
===== =============== =======
See "--Underwriting" below and Appendix A to the Prospectus
Supplement for a description of SPFC's and BOMAC mortgage loan documentation
programs. Each Mortgage Loan underwritten by a Strategic Partner was placed into
the above categories based upon a representation by the related Strategic
Partner upon the sale thereof to SPFC.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
ORIGINAL UNPAID
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID PRINCIPAL
PRINCIPAL BALANCE GROUP I LOANS PRINCIPAL BALANCE BALANCE
- ----------------- ------------- ----------------- -------
1 - $ 20,000 26 $450,400.27 0.20%
20,001 - $ 30,000 89 2,335,861.47 1.04
30,001 - $ 40,000 160 5,681,074.07 2.53
40,001 - $ 50,000 237 10,768,367.91 4.80
50,001 - $ 60,000 264 14,603,594.94 6.52
60,001 - $ 70,000 159 10,420,015.70 4.65
70,001 - $ 80,000 128 9,546,352.95 4.26
80,001 - $ 90,000 111 9,400,400.72 4.19
90,001 - $100,000 96 9,151,414.92 4.08
100,001 - $125,000 172 19,413,517.02 8.66
125,001 - $150,000 106 14,450,186.11 6.45
150,001 - $200,000 87 14,873,940.98 6.64
200,001 - $250,000 92 21,024,553.30 9.38
250,001 - $300,000 84 23,045,549.93 10.28
300,001 - $400,000 68 23,564,903.85 10.51
400,001 - $500,000 40 18,118,335.95 8.08
500,001 - $600,000 22 12,027,532.11 5.37
600,001 or greater 8 5,236,247.27 2.34
----- --------------- -------
TOTAL............. 1,949 $224,112,249.47 100.00%
===== =============== =======
The average original principal balance of the Initial Group I Loans
will be approximately $115,030.
S-34
<PAGE>
PROPERTY TYPES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------------- ----------------- -----------------
Single Family 1,377 $166,928,953.68 74.48%
2-4 Family 154 15,754,498.37 7.03
Condominium 133 13,826,842.75 6.17
PUD 82 13,455,133.42 6.00
Manufactured Housing 89 6,254,926.83 2.79
Mobile Home 83 4,189,853.44 1.87
Mixed Use 10 1,881,823.07 0.84
Townhouse 21 1,820,217.91 0.81
----- -------------- -------
TOTAL............ 1,949 $224,112,249.47 100.00%
===== =============== =======
RISK CATEGORIES
NUMBER OF PERCENTAGE OF
INITIAL CUT-OFF DATE
GROUP I AGGREGATE UNPAID AGGREGATE UNPAID
RISK CATEGORY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------ ----------------- -----------------
A+ 8 $ 1,624,589.89 0.72%
A 210 28,829,668.92 12.86
A- 645 84,951,298.54 37.91
B 535 57,571,304.61 25.69
C 235 21,181,046.50 9.45
D 316 29,954,341.01 13.37
----- --------------- ------
TOTAL............. 1,949 $224,112,249.47 100.00%
===== =============== =======
See "--Underwriting" below and Appendix A to this Prospectus
Supplement for a description of SPFC's and BOMAC risk classifications. Each
Mortgage Loan originated by a Strategic Partner was classified by credit grade
to SPFC's guidelines.
S-35
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- -----------------
CALIFORNIA-SOUTHERN 163 $31,932,988.79 14.25%
TEXAS 161 18,995,557.90 8.48
CALIFORNIA-NORTHERN 105 18,949,446.62 8.46
FLORIDA 120 12,932,878.04 5.77
MICHIGAN 167 12,473,779.21 5.57
ILLINOIS 80 11,347,197.81 5.06
MARYLAND 73 10,452,882.64 4.66
COLORADO 78 9,639,222.88 4.30
WASHINGTON 95 9,568,312.99 4.27
OREGON 89 8,218,031.70 3.67
NEW YORK 42 7,098,608.58 3.17
OHIO 77 6,804,797.52 3.04
VIRGINIA 55 6,798,466.12 3.03
OTHER (LESS THAN 3%) 644 58,900,078.67 26.28
TOTAL............ 1,949 $224,112,249.47 100.00%
===== =============== =======
No more than approximately 0.71% 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
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ------------- ----------------- -----------------
REFINANCE (EQUITY TAKE-OUT) 882 $95,220,608.72 42.49%
REFINANCE (RATE/TERM) 384 49,260,316.85 21.98
PURCHASE 683 79,631,323.90 35.53
----- --------------- ------
TOTAL................... 1,949 $224,112,249.47 100.00%
===== =============== =======
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-36
<PAGE>
OCCUPANCY STATUS
NUMBER OF PERCENTAGE OF
INITIAL CUT-OFF DATE
GROUP I AGGREGATE UNPAID AGGREGATE UNPAID
OCCUPANCY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ----- ----------------- -----------------
PRIMARY 1,654 $200,825,676.03 89.61%
INVESTMENT 281 22,352,361.53 9.97
SECOND HOME 14 934,211.91 0.42
----- --------------- -------
TOTAL....... 1,949 $224,112,249.47 100.00%
===== =============== =======
GROUP II LOANS
THE GROUP II LOANS WILL CONSIST OF MORTGAGE LOANS WITH AN AGGREGATE
PRINCIPAL BALANCE OUTSTANDING AS OF THE CUT-OFF DATE, AFTER DEDUCTING PAYMENTS
OF PRINCIPAL DUE ON OR PRIOR TO SUCH DATE, OF APPROXIMATELY $88,233,125. ALL
PERCENTAGES OF THE GROUP II LOANS DESCRIBED HEREIN ARE APPROXIMATE PERCENTAGES
(EXCEPT AS OTHERWISE INDICATED) BY AGGREGATE PRINCIPAL BALANCE AS OF THE CUT-OFF
DATE.
APPROXIMATELY 99.76% OF THE GROUP II LOANS HAVE ORIGINAL TERMS TO
STATED MATURITY OF APPROXIMATELY 30 YEARS AND APPROXIMATELY 0.24% OF THE GROUP
II LOANS HAVE ORIGINAL TERMS TO STATED MATURITY OF APPROXIMATELY 15
YEARS.
ALL OF THE GROUP II LOANS ARE SECURED BY FIRST LIENS.
EFFECTIVE WITH THE FIRST PAYMENT DUE ON A GROUP II 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 CUT-OFF DATE
TO THE NEXT ADJUSTMENT DATE FOR THE GROUP II LOANS IS APPROXIMATELY 15 MONTHS.
AS OF THE CUT-OFF DATE, EACH GROUP II LOAN WILL HAVE AN UNPAID
PRINCIPAL BALANCE OF NOT LESS THAN $60,473 OR MORE THAN $211,302 AND THE AVERAGE
UNPAID PRINCIPAL BALANCE OF THE GROUP II LOANS WILL BE APPROXIMATELY $113,410.
THE LATEST STATED MATURITY DATE OF ANY OF THE GROUP II LOANS WILL BE
OCTOBER 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.
NO 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 CUT-OFF DATE (EXCEPT AS
OTHERWISE INDICATED). DOLLAR AMOUNTS AND PERCENTAGES MAY NOT ADD UP TO TOTALS
DUE TO ROUNDING.
S-37
<PAGE>
INITIAL MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
INITIAL MORTGAGE RATE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
6.751% - 7.000% 1 $86,801.00 0.10%
7.001% - 7.250% 1 90,929.00 0.10
7.-251% - 7.500% 7 753,742.00 0.85
7.501% - 7.750% 6 710,626.00 0.81
7.751% - 8.000% 13 1,345,025.80 1.52
8.001% - 8.250% 18 2,283,312.40 2.59
8.-251% - 8.500% 50 6,043,508.45 6.85
8.501% - 8.750% 41 5,244,042.30 5.94
8.751% - 9.000% 60 6,482,067.40 7.35
9.001% - 9.250% 53 5,952,244.80 6.75
9.251% - 9.500% 69 8,198,106.00 9.29
9.501% - 9.750% 86 9,514,109.40 10.78
9.751% - 10.000% 102 11,168,744.30 12.66
10.-001% - 10.250% 73 8,250,844.50 9.35
10.251% - 10.500% 49 5,791,394.50 6.56
10.501% - 10.750% 52 5,970,741.40 6.77
10.751% - 11.000% 16 1,581,824.00 1.79
11.-001% - 11.250% 7 722,312.00 0.82
11.251% - 11.500% 13 1,510,280.81 1.71
11.501% - 11.750% 3 217,553.00 0.25
11.751% - 12.000% 2 287,350.00 0.33
12.001% - 12.250% 7 636,655.00 0.72
12.251% - 12.500% 3 317,901.00 0.36
12.501% - 12.750% 2 151,817.00 0.17
12.751% - 13.000% 3 455,019.00 0.52
13.001% - 13.250% 7 720,701.00 0.82
13.251% - 13.500% 5 505,966.00 0.57
13.501% - 13.750% 3 379,079.00 0.43
13.751% - 14.000% 4 495,398.10 0.56
14.001% - 14.250% 7 860,216.20 0.97
14.251% - 14.500% 1 106,640.00 0.12
14.501% - 14.750% 2 254,631.00 0.29
14.751% - 15.000% 8 810,101.50 0.92
15.001% - 15.250% 2 156,000.00 0.18
15.251% - 15.500% 2 177,441.00 0.20
------- --- -------------- ------
TOTAL............. 778 $88,233,124.86 100.00%
=== ============== ======
THE WEIGHTED AVERAGE INITIAL MORTGAGE RATE OF THE GROUP II LOANS
WILL BE APPROXIMATELY 9.852% PER ANNUM.
S-38
<PAGE>
NEXT INTEREST ADJUSTMENT DATE
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
NEXT INTEREST GROUP II AGGREGATE UNPAID AGGREGATE UNPAID
ADJUSTMENT DATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- ----- ----------------- -----------------
OCTOBER 1997 3 $ 322,038.00 0.36%
NOVEMBER 1997 15 1,368,313.60 1.55
DECEMBER 1997 34 3,648,757.30 4.14
JANUARY 1998 119 13,547,238.10 15.35
FEBRUARY 1998 97 10,714,792.25 12.14
MARCH 1998 28 3,417,981.00 3.87
APRIL 1998 1 109,200.00 0.12
JUNE 1998 4 538,925.00 0.61
JULY 1998 2 230,416.00 0.26
AUGUST 1998 2 243,000.00 0.28
MARCH 1999 1 61,088.00 0.07
APRIL 1999 4 389,693.10 0.44
MAY 1999 7 859,287.50 0.97
JUNE 1999 33 4,193,346.20 4.75
JULY 1999 198 23,481,208.41 26.61
AUGUST 1999 189 20,428,144.40 23.15
SEPTEMBER 1999 41 4,679,696.00 5.30
- -------------- --- -------------- --------
TOTAL........... 778 $88,233,124.86 100.00%
=== -------------- -------
THE WEIGHTED AVERAGE REMAINING MONTHS TO THE NEXT INTEREST
ADJUSTMENT DATE OF THE GROUP II LOANS WILL BE APPROXIMATELY 15 MONTHS.
GROSS MARGIN
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
GROSS MARGINS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- ----------------- -----------------
4.001% - 4.500% 1 $ 122,146.00 0.14%
4.501% - 5.000% 13 1,615,462.10 1.83
5.00-1% - 5.500% 183 21,102,770.75 23.92
5.501% - 6.000% 239 26,880,322.80 30.47
6.001% - 6.500% 175 19,941,154.70 22.60
6.501% - 7.000% 86 9,394,603.21 10.65
7.00-1% - 7.500% 46 5,060,750.70 5.74
7.501% - 8.000% 18 2,011,888.50 2.28
8.001% - 8.500% 10 1,386,490.00 1.57
8.50-1% - 9.000% 6 646,080.10 0.73
9.00-1% - 9.500% 1 71,456.00 0.08
--- -------------- ------
TOTAL................... 778 $88,233,124.86 100.00%
=== ============== =======
THE WEIGHTED AVERAGE GROSS MARGIN OF THE GROUP II LOANS WILL BE
PPROXIMATELY 6.111% PER ANNUM.
S-39
<PAGE>
LIFETIME RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
LIFETIME RATE CAP GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- --------------- ------------------ -----------------
13.501% - 14.000% 1 $ 86,801.00 0.10%
14.001% - 14.500% 8 844,671.00 0.96
14.501% - 15.000% 28 3,036,039.40 3.44
15.001% - 15.500% 75 9,152,170.85 10.37
15.501% - 16.000% 104 12,413,820.10 14.07
16.001% - 16.500% 123 14,260,428.80 16.16
16.501% - 17.000% 177 19,178,628.70 21.74
17.001% - 17.500% 115 13,228,233.00 14.99
17.501% - 18.000% 67 7,388,692.40 8.37
18.001% - 18.500% 19 2,111,170.81 2.39
18.501% - 19.000% 5 504,903.00 0.57
19.001% - 19.500% 13 1,220,221.00 1.38
19.501% - 20.000% 7 803,812.10 0.91
20.001% or greater 36 4,003,532.70 4.54
TOTAL..... 778 $88,233,124.86 100.00%
=== ============== =======
THE WEIGHTED AVERAGE LIFETIME RATE CAP OF THE GROUP II LOANS WILL BE
APPROXIMATELY 16.793% PER ANNUM.
S-40
<PAGE>
LIFETIME RATE FLOOR
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
LIFETIME RATE FLOOR GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ------------------ ------------------
6.501% - 7.000% 1 $ 86,801.00 0.10%
7.001% - 7.500% 8 844,671.00 0.96
7.501% - 8.000% 19 2,055,651.80 2.33
8.001% - 8.500% 68 8,326,820.85 9.44
8.501% - 9.000% 101 11,726,109.70 13.29
9.001% - 9.500% 122 14,150,350.80 16.04
9.501% - 10.000% 188 20,682,853.70 23.44
10.001% - 10.500% 122 14,042,239.00 15.91
10.501% - 11.000% 68 7,552,565.40 8.56
11.001% - 11.500% 20 2,232,592.81 2.53
11.501% - 12.000% 5 504,903.00 0.57
12.001% - 12.500% 10 954,556.00 1.08
12.501% - 13.000% 5 606,836.00 0.69
13.001% - 13.500% 12 1,226,667.00 1.39
13.501% - 14.000% 7 874,477.10 0.99
14.001% - 14.500% 8 966,856.20 1.10
14.501% - 15.000% 10 1,064,732.50 1.21
15.001% - 15.500% 4 333,441.00 0.38
--- -------------- ------
TOTAL.............. 778 $88,233,124.86 100.00%
=== ============== -------
THE WEIGHTED AVERAGE LIFETIME RATE FLOOR OF THE GROUP II LOANS WILL
BE APPROXIMATELY 9.852% PER ANNUM.
REMAINING MONTHS TO STATED MATURITY
PERCENTAGE OF
REMAINING MONTHS NUMBER OF CUT-OFF DATE
TO GROUP II AGGREGATE UNPAID AGGREGATE UNPAID
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- ----- ----------------- -----------------
169 - 180 1 $208,741.00 0.24%
349 - 360 777 88,024,383.86 99.76
--- ------------- ------
TOTAL......... 778 $88,233,124.86 100.00%
=== ============== =======
THE WEIGHTED AVERAGE REMAINING TERM TO STATED MATURITY OF THE GROUP
II LOANS WILL BE APPROXIMATELY 358 MONTHS.
S-41
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
ORIGINAL NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
LOAN-TO-VALUE RATIOS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
20.01% - 25.00% 2 $ 136,927.00 0.16%
25.01% - 30.00% 2 277,011.00 0.31
30.01% - 35.00% 4 391,274.00 0.44
40.01% - 45.00% 1 92,958.00 0.11
45.01% - 50.00% 6 920,298.00 1.04
50.01% - 55.00% 10 1,106,323.00 1.25
55.01% - 60.00% 34 3,507,316.20 3.98
60.01% - 65.00% 94 10,439,923.80 11.83
65.01% - 70.00% 120 13,287,014.50 15.06
70.01% - 75.00% 145 16,652,740.00 18.87
75.01% - 80.00% 137 14,524,845.80 16.46
80.01% - 85.00% 108 12,253,682.80 13.89
85.01% - 90.00% 113 14,412,336.86 16.33
90.01% - 95.00% 1 170,000.00 0.19
95.01% - 100.00% 1 60,473.90 0.07
--- -------------- -------------
TOTAL............ 778 $88,233,124.86 100.00%
=== ============== ==============
THE MINIMUM AND MAXIMUM LOAN-TO-VALUE RATIOS AT ORIGINATION OF THE
GROUP II LOANS WERE APPROXIMATELY 20.59% AND 100.00%, RESPECTIVELY, AND THE
WEIGHTED AVERAGE LOAN-TO-VALUE RATIO AT ORIGINATION OF THE GROUP II LOANS WAS
APPROXIMATELY 75.76%.
S-42
<PAGE>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
GROUP II AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PROGRAM LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ----- ----------------- -----------------
FULL DOCUMENTATION 472 $51,695,269.46 58.59%
STATED INCOME 189 22,747,309.80 25.78
QUICK QUALIFIER 75 8,434,350.50 9.56
LITE DOCUMENTATION 41 5,165,025.10 5.85
ALTERNATIVE DOCUMENTATION 1 191,170.00 0.22
--- -------------- -------
TOTAL.................. 778 $88,233,124.86 100.00%
=== ============== =======
SEE "--UNDERWRITING" BELOW AND APPENDIX A TO THE PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF SPFC'S AND BOMAC'S MORTGAGE LOAN DOCUMENTATION
PROGRAMS. EACH MORTGAGE LOAN UNDERWRITTEN BY A STRATEGIC PARTNER WAS PLACED INTO
THE ABOVE CATEGORIES BASED UPON A REPRESENTATION BY THE RELATED STRATEGIC
PARTNER UPON THE SALE THEREOF TO SPFC.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
ORIGINAL UNPAID
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID PRINCIPAL
PRINCIPAL BALANCE GROUP II LOANS PRINCIPAL BALANCE BALANCE
------------------- -------------- ----------------- -------
$60,000 - $70,000 88 $5,755,822.60 6.52%
$70,001 - $80,000 113 8,498,589.00 9.63
$80,001 - $90,000 85 7,310,867.00 8.29
$90,001 - $100,000 69 6,566,027.45 7.44
$100,001 - $125,000 160 17,750,950.81 20.12
$125,001 - $150,000 117 16,035,775.00 18.17
$150,001 - $200,000 117 20,336,121.00 23.05
$200,001 - $250,000 29 5,978,972.00 6.78
--- --------------- ------
TOTAL................. 778 $88,233,124.86 100.00%
=== ============== =======
THE AVERAGE ORIGINAL PRINCIPAL BALANCE OF THE GROUP II LOANS WILL BE
APPROXIMATELY $113,488.
S-43
<PAGE>
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
PROPERTY TYPE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
SINGLE FAMILY 552 $63,538,207.76 72.01%
2-4 FAMILY 62 6,854,000.10 7.77
CONDOMINIUM 55 6,502,861.10 7.37
PUD 36 4,388,787.20 4.97
MANUFACTURED HOUSING 44 3,992,940.50 4.53
MIXED USE 8 1,098,415.00 1.24
TOWNHOUSE 10 1,025,029.00 1.16
MOBILE HOME 10 768,859.20 0.87
DE MINIMIS PUD 1 64,025.00 0.07
--- -------------- ----
TOTAL....... 778 $88,233,124.86 100.00%
=== ============= ======
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
RISK CATEGORY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
A+ 9 $ 1,336,663.00 1.51%
A 128 16,029,483.75 18.17
A- 385 43,778,149.01 49.62
B 176 18,556,795.80 21.03
C 25 2,503,568.00 2.84
D 55 6,028,465.30 6.83
- - --- -------------- ----
TOTAL..... 778 $88,233,124.86 100.00%
=== ============= =======
SEE "--UNDERWRITING" BELOW AND APPENDIX A TO THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF SPFC'S AND BOMAC'S RISK CLASSIFICATIONS. EACH
MORTGAGE LOAN ORIGINATED BY A STRATEGIC PARTNER WAS CLASSIFIED BY CREDIT GRADE
TO SPFC'S GUIDELINES.
S-44
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
STATE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ----------------- -----------------
CALIFORNIA-SOUTHERN 73 $9,753,868.40 11.05%
CALIFORNIA-NORTHERN 54 7,703,662.50 8.73
OREGON 55 6,642,920.60 7.53
COLORADO 59 6,224,820.00 7.05
WASHINGTON 61 6,021,785.30 6.82
ILLINOIS 50 5,723,642.80 6.49
TEXAS 43 4,820,054.70 5.46
MICHIGAN 42 4,553,118.95 5.16
FLORIDA 30 3,428,322.10 3.89
MASSACHUSETTS 25 3,406,246.00 3.86
MARYLAND 27 2,956,356.50 3.35
OHIO 26 2,810,766.00 3.19
OTHER (LESS THAN 3%) 233 24,187,561.01 27.41
--- ------------- -----
TOTAL.............. 778 $88,233,124.86 100.00%
=== ============== =======
NO MORE THAN APPROXIMATELY 1.07% OF THE GROUP II LOANS WILL BE
SECURED BY MORTGAGED PROPERTIES LOCATED IN ANY ONE ZIP CODE.
PURPOSES OF GROUP II LOANS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
GROUP II AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PURPOSE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ----- ----------------- -----------------
REFINANCE (EQUITY TAKE-OUT) 353 $39,133,812.65 44.35%
REFINANCE (RATE/TERM) 146 16,955,007.51 19.22
PURCHASE 279 32,144,304.70 36.43
- -------- --- ------------- ------
TOTAL..................... 778 $88,233,124.86 100.00%
=== ============== =======
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
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE UNPAID
OCCUPANCY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
PRIMARY 681 $77,362,159.66 87.68%
- ------- --- -------------- ------
INVESTMENT 94 10,532,601.20 11.94
SECOND HOME 3 338,364.00 0.38
--- -------------- -------
TOTAL......... 778 $88,233,124.86 100.00%
=== ============== =======
GROUP III LOANS
THE INITIAL GROUP III LOANS WILL CONSIST OF MORTGAGE LOANS WITH AN
AGGREGATE PRINCIPAL BALANCE OUTSTANDING AS OF THE CUT-OFF DATE, AFTER DEDUCTING
PAYMENTS OF PRINCIPAL DUE ON OR PRIOR TO SUCH DATE, OF APPROXIMATELY
$91,552,303. ALL PERCENTAGES OF THE INITIAL GROUP III LOANS DESCRIBED HEREIN ARE
APPROXIMATE PERCENTAGES (EXCEPT AS OTHERWISE INDICATED) BY AGGREGATE PRINCIPAL
BALANCE AS OF THE CUT-OFF DATE.
APPROXIMATELY 75.06% OF THE INITIAL GROUP III LOANS HAVE ORIGINAL
TERMS TO STATED MATURITY OF APPROXIMATELY 20 TO 30 YEARS. APPROXIMATELY 24.94%
OF THE INITIAL GROUP III LOANS HAVE ORIGINAL TERMS TO STATED MATURITY OF
APPROXIMATELY 15 YEARS OR LESS.
APPROXIMATELY 5.02% OF THE INITIAL GROUP III LOANS ARE BALLOON
PAYMENT MORTGAGE LOANS. EACH SUCH GROUP III 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
III LOAN IS SUBSTANTIALLY IN EXCESS OF THE AMOUNT OF THE SCHEDULED MONTHLY
PAYMENT ON SUCH GROUP III LOAN FOR THE PERIOD PRIOR TO THE DUE DATE OF SUCH
BALLOON PAYMENT.
AS OF THE CUT-OFF DATE, EACH INITIAL GROUP III LOAN WILL HAVE AN
UNPAID PRINCIPAL BALANCE OF NOT LESS THAN $6,435 OR MORE THAN $499,841 AND THE
AVERAGE UNPAID PRINCIPAL BALANCE OF THE INITIAL GROUP
III
LOANS WILL BE APPROXIMATELY $61,076. THE LATEST STATED MATURITY DATE OF ANY OF
THE INITIAL GROUP III LOANS WILL BE OCTOBER 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. NO INITIAL GROUP III LOAN
PROVIDES FOR NEGATIVE AMORTIZATION OR DEFERRED INTEREST.
SET FORTH BELOW IS A DESCRIPTION OF CERTAIN ADDITIONAL
CHARACTERISTICS OF THE INITIAL GROUP III LOANS AS OF THE CUT-OFF 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
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
MORTGAGE RATES GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- --------------- ----------------- -----------------
7.251% - 7.500% 1 $ 242,608.97 0.26%
7.751% - 8.000% 1 169,463.67 0.19
8.251% - 8.500% 3 436,303.07 0.48
8.751% - 9.000% 8 970,650.31 1.06
9.001% - 9.250% 4 220,496.01 0.24
9.251% - 9.500% 24 2,298,207.74 2.51
9.501% - 9.750% 40 3,219,638.90 3.52
9.751% - 10.000% 38 3,545,914.04 3.87
10.001% - 10.250% 50 4,205,679.01 4.59
10.251% - 10.500% 51 3,542,953.58 3.87
10.501% - 10.750% 84 5,704,758.81 6.23
10.751% - 11.000% 84 5,310,836.54 5.80
11.001% - 11.250% 74 4,569,397.05 4.99
11.251% - 11.500% 87 6,396,559.73 6.99
11.501% - 11.750% 112 7,346,386.28 8.02
11.751% - 12.000% 112 7,666,973.32 8.37
12.001% - 12.250% 100 4,662,462.03 5.09
12.251% - 12.500% 94 4,644,212.85 5.07
12.501% - 12.750% 81 4,774,601.83 5.22
12.751% - 13.000% 116 5,719,020.07 6.25
13.001% - 13.250% 45 2,276,463.09 2.49
13.251% - 13.500% 60 2,179,571.58 2.38
13.501% - 13.750% 37 1,978,627.50 2.16
13.751% - 14.000% 38 1,693,842.32 1.85
14.001% - 14.250% 28 1,150,234.24 1.26
14.251% - 14.500% 25 1,124,620.21 1.23
14.501% - 14.750% 20 793,569.43 0.87
14.751% - 15.000% 33 2,431,314.10 2.66
15.001% - 15.250% 10 667,027.89 0.73
15.251% - 15.500% 6 299,808.93 0.33
15.501% - 15.750% 5 300,718.62 0.33
15.751% - 16.000% 12 437,074.34 0.48
16.001% - 16.250% 3 113,323.24 0.12
16.251% - 16.500% 1 14,918.76 0.02
16.501% - 16.750% 9 356,593.82 0.39
16.751% - 17.000% 1 37,500.00 0.04
17.251% - 17.500% 2 49,970.94 0.05
---- -------------- -------
TOTAL............ 1499 $91,552,302.82 100.00%
==== ============== =======
THE WEIGHTED AVERAGE MORTGAGE RATE OF THE INITIAL GROUP III LOANS
WILL BE APPROXIMATELY 11.814% PER ANNUM.
S-47
<PAGE>
REMAINING MONTHS TO STATED MATURITY
REMAINING PERCENTAGE OF
MONTHS CUT-OFF DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
STATED MATURITY GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- --------------- ----------------- -----------------
37 - 48 1 $ 9,898.36 0.01%
145 - 156 2 56,509.44 0.06
157 - 168 2 426,180.32 0.47
169 - 180 499 21,905,204.94 23.93
229 - 240 23 789,686.09 0.86
289 - 300 7 290,693.94 0.32
337 - 348 3 569,044.12 0.62
349 - 360 951 67,071,498.80 73.26
---- -------------- ------
TOTAL.......... 1499 $91,552,302.82 100.00%
==== ============== =======
THE WEIGHTED AVERAGE REMAINING TERM TO STATED MATURITY OF THE
INITIAL GROUP III LOANS WILL BE APPROXIMATELY 312 MONTHS.
S-48
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
PERCENTAGE OF
CUT-OFF DATE
ORIGINAL NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN-TO-VALUE RATIOS GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- --------------- ---------------- -----------------
0.01% - 5.00% 3 $ 32,435.15 0.04%
5.01% - 10.00% 27 1,022,018.37 1.12
10.01% - 15.00% 39 1,107,919.28 1.21
15.01% - 20.00% 76 2,202,011.62 2.41
20.01% - 25.00% 56 1,986,156.07 2.17
25.01% - 30.00% 29 1,006,225.68 1.10
30.01% - 35.00% 31 1,340,331.22 1.46
35.01% - 40.00% 39 2,027,108.45 2.21
40.01% - 45.00% 32 1,845,651.72 2.02
45.01% - 50.00% 39 1,681,671.78 1.84
50.01% - 55.00% 52 2,410,557.88 2.63
55.01% - 60.00% 109 5,924,167.98 6.47
60.01% - 65.00% 204 12,396,481.44 13.54
65.01% - 70.00% 172 10,295,289.82 11.25
70.01% - 75.00% 181 12,557,641.91 13.72
75.01% - 80.00% 159 12,827,339.12 14.01
80.01% - 85.00% 147 11,146,607.97 12.18
85.01% - 90.00% 88 7,852,633.69 8.58
90.01% - 95.00% 2 219,136.36 0.24
95.01% - 100.00% 14 1,670,917.31 1.83
----- -------------- -------
TOTAL.......... 1,499 $91,552,302.82 100.00%
===== ============== =======
- --------------------
(1)THE LOAN-TO-VALUE RATIO OF GROUP III LOANS SECURED BY SECOND LIENS INCLUDES
THE OUTSTANDING PRINCIPAL BALANCE OF THE RELATED SENIOR LIENS. SEE "THE MORTGAGE
POOLS-THE MORTGAGE LOANS" IN THE PROSPECTUS.
THE MINIMUM AND MAXIMUM LOAN-TO-VALUE RATIOS AT ORIGINATION OF THE
INITIAL GROUP III LOANS WERE APPROXIMATELY 4.23% AND 100.00%, RESPECTIVELY, AND
THE WEIGHTED AVERAGE LOAN-TO-VALUE RATIO AT ORIGINATION OF THE INITIAL GROUP III
LOANS WAS APPROXIMATELY 67.69%.
S-49
<PAGE>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PROGRAM GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ---------------- ----------------- -----------------
FULL DOCUMENTATION 1086 $62,588,878.20 68.36%
STATED INCOME 238 17,303,051.82 18.90
QUICK QUALIFIER 126 7,886,352.57 8.61
LITE DOCUMENTATION 48 3,748,363.83 4.09
ALTERNATIVE DOCUMENTATION 1 25,656.40 0.03
---- -------------- -------
TOTAL.................. 1499 $91,552,302.82 100.00%
==== ============== =======
SEE "--UNDERWRITING" BELOW AND APPENDIX A TO THE PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF SPFC'S AND BOMAC MORTGAGE LOAN DOCUMENTATION
PROGRAMS. EACH MORTGAGE LOAN UNDERWRITTEN BY A STRATEGIC PARTNER WAS PLACED INTO
THE ABOVE CATEGORIES BASED UPON A REPRESENTATION BY THE RELATED STRATEGIC
PARTNER UPON THE SALE THEREOF TO SPFC.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
ORIGINAL UNPAID
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID PRINCIPAL
PRINCIPAL BALANCE GROUP III LOANS PRINCIPAL BALANCE BALANCE
- ------------------ --------------- ----------------- -------
$1,000 - $20,000 98 $1,604,042.60 1.75%
$20,001 - $30,000 229 5,840,310.45 6.38
$30,001 - $40,000 243 8,629,546.56 9.43
$40,001 - $50,000 250 11,328,785.00 12.37
$50,001 - $60,000 169 9,290,084.71 10.15
$60,001 - $70,000 122 7,915,426.62 8.65
$70,001 - $80,000 103 7,677,430.27 8.39
$80,001 - $90,000 61 5,196,631.04 5.68
$90,001 - $100,000 47 4,486,125.17 4.90
$100,001 - $125,000 62 6,897,641.32 7.53
$125,001 - $150,000 39 5,270,998.00 5.76
$150,001 - $200,000 33 5,645,168.95 6.17
$200,001 - $250,000 26 5,913,359.94 6.46
$250,001 - $300,000 7 1,828,016.71 2.00
$300,001 - $400,000 5 1,754,499.29 1.92
$400,001 - $500,000 5 2,274,236.19 2.48
---- -------------- --------
TOTAL............. 1499 $91,552,302.82 100.00%
==== ============== =======
THE AVERAGE ORIGINAL PRINCIPAL BALANCE OF THE INITIAL GROUP III
LOANS WILL BE $61,149.86.
S-50
<PAGE>
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
PROPERTY TYPE GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- ----------------- -----------------
SINGLE FAMILY 1050 $66,470,581.64 72.60%
2-4 FAMILY 87 6,122,350.62 6.69
MOBILE HOME 130 5,260,387.25 5.75
MANUFACTURED HOUSING 104 5,136,655.55 5.61
CONDO 62 3,494,244.52 3.82
PUD 39 2,798,395.28 3.06
MIXED USE 17 1,752,993.63 1.91
TOWNHOUSE 9 476,772.52 0.52
DEMINIMUS PUD 1 39,921.81 0.04
---- --------------- ------
TOTAL............. 1499 $91,552,302.82 100.00%
==== ============== =======
RISK CATEGORIES
NUMBER OF PERCENTAGE OF
INITIAL CUT-OFF DATE
GROUP III AGGREGATE UNPAID AGGREGATE UNPAID
RISK CATEGORY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------ ----------------- -----------------
A+ 2 $ 65,000.00 0.07%
A 249 14,949,613.59 16.33
A- 475 33,121,884.09 36.18
B+ 1 33,900.00 0.04
B 425 24,237,091.23 26.47
B- 1 311,892.33 0.34
C+ 5 103,318.45 0.11
C 156 8,329,113.55 9.10
D 185 10,400,489.58 11.36
----- ------------- ------
TOTAL............... 1,499 $91,552,302.82 100.00%
===== ============== =======
SEE "--UNDERWRITING" BELOW AND APPENDIX A TO THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF SPFC'S AND BOMAC RISK CLASSIFICATIONS. EACH
MORTGAGE LOAN ORIGINATED BY A STRATEGIC PARTNER WAS CLASSIFIED BY CREDIT GRADE
TO SPFC'S GUIDELINES.
S-51
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
STATE GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------- ----------------- -----------------
FLORIDA 220 $11,419,763.41 12.47%
CALIFORNIA-SOUTHERN 125 9,054,504.21 9.89
ALABAMA 163 8,820,489.19 9.63
NEW YORK 52 5,882,304.34 6.43
GEORGIA 91 5,715,747.08 6.24
WASHINGTON 96 5,223,157.38 5.71
OREGON 64 4,018,786.69 4.39
CALIFORNIA-NORTHERN 48 3,799,392.48 4.15
COLORADO 41 2,868,509.21 3.13
OTHER (LESS THAN 3%) 599 34,749,648.83 37.96
----- -------------- -------
TOTAL............. 1,499 $91,552,302.82 100.00%
===== ============== =======
NO MORE THAN APPROXIMATELY 0.55% OF THE INITIAL GROUP III LOANS
WILL BE SECURED BY MORTGAGED PROPERTIES LOCATED IN ANY ONE ZIP CODE.
PURPOSES OF GROUP III LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PURPOSE GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ --------------- ----------------- -----------------
REFINANCE (EQUITY TAKE-OUT) 1,012 $57,896,611.21 63.24%
REFINANCE (RATE/TERM) 258 17,369,574.98 18.97
PURCHASE 229 16,286,116.63 17.79
----- -------------- ------
TOTAL................... 1,499 $91,552,302.82 100.00%
===== ============== =======
IN GENERAL, IN HE 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-52
<PAGE>
OCCUPANCY STATUS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
OCCUPANCY GROUP III LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- --------------- ----------------- -----------------
PRIMARY 1,284 $79,714,289.63 87.07%
INVESTMENT 207 11,458,470.89 12.52
SECOND HOME 8 379,542.30 0.41
----- -------------- -------
TOTAL...... 1,499 $91,552,302.82 100.00%
===== ============== =======
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 JUNE 30, 1997 IN EXCESS OF $442 MILLION.
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 SIX MONTH PERIOD ENDING JUNE 30, 1997, SPFC ORIGINATED OR PURCHASED
8,800 LOANS, WITH A PRINCIPAL BALANCE OF APPROXIMATELY $813 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 JUNE 30,
1994 1995 1996 1997
------------------------- ---------------------- --------------------------- ----------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN SERVICING IN SERVICING IN SERVICING IN SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Serviced ................ $ 68,171 100.0% $ 270,193 100.0% $ 908,220 100.0% $1,600,646 100.0%
30-59 days delinquent ......... 321 0.5 3,072 1.1 23,486 2.6 47,580 3.0
60-89 days delinquent ......... 199 0.3 1,896 0.7 16,183 1.8 20,181 1.3
90 days or more
delinquent .................... 383 0.5 4,396 1.6 22,751 2.5 71,847 4.5
---------- ===== ========== ===== ========== ===== --------- -----
Total delinquencies
$ 903 1.3% $ 9,364 3.4% $ 62,420 6.9% $ 139,608 8.7%
========== ===== ========== ===== ============ ===== ========= =====
Delinquent loans in
foreclosure ................... $ 383 0.5% $ 4,883 1.8% $ 20,546 2.3% $ 57,862 3.6%
Total real estate owned .......
-- -- 141 -- 1,227 0.1% $ 8,092 0.5%
</TABLE>
AS OF JUNE 30, 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 $837,000
AND SUCH STATEMENTS REPORTED LOSSES OF APPROXIMATELY $457,000 FOR THE QUARTER
S-53
<PAGE>
ENDED JUNE 30, 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.
UNDERWRITING
SPFC'S STANDARD NON-CONFORMING PROGRAM AND BOMAC'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 BOMAC WERE UNDERWRITTEN IN ACCORDANCE WITH BOMAC'S
"NON-CONFORMING LOAN PROGRAM." THE MORTGAGE LOANS UNDERWRITTEN BY THE STRATEGIC
PARTNERS WERE UNDERWRITTEN IN ACCORDANCE WITH THEIR OWN UNDERWRITING PROGRAMS,
WHICH ARE SIMILAR TO THOSE OF SPFC. SPFC CREDIT GRADED EACH OF THE GROUP I
LOANS, GROUP II LOANS AND GROUP III LOANS ORIGINATED BY THE STRATEGIC PARTNERS
TO ITS OWN UNDERWRITING STANDARDS. NONE OF THESE PROGRAMS MEET THE CREDIT
UNDERWRITING STANDARDS OF FNMA OR FHLMC. THE PROGRAMS OF SPFC AND BOMAC 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 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 NONAFFILIATED APPRAISAL REVIEW FIRM, OR BY ANOTHER
REVIEW APPRAISER ACCEPTABLE TO THE RESPECTIVE ORIGINATOR BEFORE THE MORTGAGE
LOAN IS MADE.
S-54
<PAGE>
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 CUT-OFF DATE, AS ADJUSTED FOR THE SCHEDULED
PRINCIPAL PAYMENTS DUE ON OR BEFORE SUCH DATE. PRIOR TO THE ISSUANCE OF THE
CLASS A CERTIFICATES, MORTGAGE LOANS MAY BE REMOVED FROM THE MORTGAGE POOL AS A
RESULT OF INCOMPLETE DOCUMENTATION OR OTHERWISE, IF THE COMPANY OR THE
CERTIFICATE INSURER DEEMS SUCH REMOVAL NECESSARY OR APPROPRIATE. A LIMITED
NUMBER OF OTHER MORTGAGE LOANS MAY BE ADDED TO THE MORTGAGE POOL PRIOR TO THE
ISSUANCE OF THE CLASS A CERTIFICATES. THE COMPANY BELIEVES THAT THE INFORMATION
SET FORTH HEREIN WILL BE SUBSTANTIALLY REPRESENTATIVE OF THE CHARACTERISTICS OF
THE MORTGAGE POOL AS IT WILL BE CONSTITUTED AT THE TIME THE CLASS A CERTIFICATES
ARE ISSUED ALTHOUGH THE RANGE OF MORTGAGE RATES AND MATURITIES AND CERTAIN OTHER
CHARACTERISTICS OF THE MORTGAGE LOANS IN THE MORTGAGE POOL MAY VARY.
A CURRENT REPORT ON FORM 8-K WILL BE FILED ON THE DELIVERY DATE TO
REFLECT THE ADDITIONAL LOANS. A CURRENT REPORT ON FORM 8-K WILL BE AVAILABLE TO
PURCHASERS OF THE CLASS A CERTIFICATES AND WILL BE FILED, TOGETHER WITH THE
POOLING AND SERVICING AGREEMENT, WITH THE SECURITIES AND EXCHANGE COMMISSION
WITHIN FIFTEEN DAYS AFTER THE INITIAL ISSUANCE OF THE CLASS A CERTIFICATES. IN
THE EVENT MORTGAGE LOANS ARE REMOVED FROM OR ADDED TO THE MORTGAGE POOL AS SET
FORTH IN THE PRECEDING PARAGRAPH, SUCH REMOVAL OR ADDITION WILL BE NOTED IN THE
CURRENT REPORT ON FORM 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
THE SERIES 1997-3 MORTGAGE LOAN ASSET-BACKED PASS-THROUGH
CERTIFICATES (THE "CERTIFICATES") WILL INCLUDE THE FOLLOWING SEVEN SENIOR
CLASSES (THE "CLASS A CERTIFICATES"): (I) CLASS A-1 CERTIFICATES, CLASS A-2
CERTIFICATES, CLASS A-3 CERTIFICATES, CLASS A-4 CERTIFICATES AND CLASS A-5
CERTIFICATES, (II) CLASS A-6 CERTIFICATES (THE "LOCKOUT CERTIFICATES") AND (III)
CLASS A-7 CERTIFICATES (THE "FIXED STRIP CERTIFICATES"). IN ADDITION TO THE
CLASS A CERTIFICATES, THE SERIES 1997-3 MORTGAGE LOAN ASSET-BACKED PASS-THROUGH
CERTIFICATES WILL INCLUDE THE CLASS R-I CERTIFICATES AND CLASS R-II CERTIFICATES
(TOGETHER, THE "RESIDUAL CERTIFICATES"). THE FIXED STRIP CERTIFICATES WILL BE
DIVIDED INTO SEVEN COMPONENTS (EACH, A "COMPONENT"), THE CLASS A-7 COMPONENT A,
B AND C (COLLECTIVELY, THE "GROUP I FIXED STRIP COMPONENTS"), THE CLASS A-7
COMPONENT D, E AND F (COLLECTIVELY, THE "GROUP II FIXED STRIP COMPONENTS") AND
THE CLASS A-7 COMPONENT G (THE "GROUP III 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 CERTIFICATES AND THE GROUP
II FIXED STRIP COMPONENTS ARE ALSO REFERRED TO HEREIN AS THE "GROUP II CLASS A
CERTIFICATES." THE CLASS A-3, CLASS A-4, CLASS A-5 AND CLASS A-6 CERTIFICATES
AND THE GROUP III FIXED STRIP COMPONENT ARE ALSO REFERRED TO HEREIN AS THE
"GROUP III CLASS A CERTIFICATES." ONLY THE CLASS A CERTIFICATES ARE OFFERED
HEREBY.
THE CERTIFICATES WILL EVIDENCE THE ENTIRE BENEFICIAL OWNERSHIP
INTEREST IN THE TRUST FUND. THE TRUST FUND WILL CONSIST OF: (I) THE MORTGAGE
LOANS; (II) SUCH ASSETS AS FROM TIME TO TIME ARE IDENTIFIED AS DEPOSITED IN
RESPECT OF THE MORTGAGE LOANS IN THE CERTIFICATE ACCOUNTS; (III) PROPERTY
ACQUIRED BY FORECLOSURE OF SUCH MORTGAGE LOANS OR DEED IN LIEU OF FORECLOSURE;
(IV) THE TRUSTEE'S RIGHTS WITH RESPECT TO THE MORTGAGE LOANS UNDER ALL INSURANCE
POLICIES (INCLUDING THE CERTIFICATE INSURANCE POLICIES) REQUIRED TO BE
MAINTAINED PURSUANT TO THE POOLING AND SERVICING AGREEMENT AND ANY PROCEEDS
THEREOF; (V) LIQUIDATION PROCEEDS; AND (VI) RELEASED MORTGAGED PROPERTY
PROCEEDS.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES WILL BE MADE ON THE 25TH
DAY OF EACH MONTH OR, IF SUCH DAY IS NOT A BUSINESS DAY, THEN ON THE NEXT
SUCCEEDING BUSINESS DAY (EACH, A "DISTRIBUTION DATE"), COMMENCING IN OCTOBER
1997, TO CERTIFICATEHOLDERS OF RECORD ON THE IMMEDIATELY PRECEDING RECORD
DATE.
S-55
<PAGE>
THE RECORD DATE (THE "RECORD DATE") FOR EACH DISTRIBUTION DATE WILL BE THE CLOSE
OF BUSINESS ON THE LAST DAY OF THE MONTH IMMEDIATELY PRECEDING THE RELATED
DISTRIBUTION DATE.
THE CLASS A CERTIFICATES WILL BE ISSUED, MAINTAINED AND TRANSFERRED
ON THE BOOK-ENTRY RECORDS OF THE DEPOSITORY TRUST COMPANY ("DTC") AND ITS
PARTICIPANTS (AS DEFINED IN THE PROSPECTUS). THE CLASS A CERTIFICATES (OTHER
THAN THE FIXED STRIP 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 CLASS A CERTIFICATES WILL BE REPRESENTED BY ONE OR MORE
CERTIFICATES REGISTERED IN THE NAME OF THE NOMINEE OF DTC (CLASS A CERTIFICATES
SO REGISTERED, "BOOK-ENTRY CERTIFICATES"). THE COMPANY HAS BEEN INFORMED BY DTC
THAT DTC'S NOMINEE WILL BE CEDE & CO. ("CEDE"). NO PERSON ACQUIRING AN INTEREST
IN THE CLASS A CERTIFICATES (A "BENEFICIAL OWNER") WILL BE ENTITLED TO RECEIVE A
CERTIFICATE REPRESENTING SUCH PERSON'S INTEREST (A "DEFINITIVE CERTIFICATE"),
EXCEPT AS SET FORTH BELOW UNDER "--BOOK-ENTRY REGISTRATION OF THE CLASS A
CERTIFICATES--DEFINITIVE CERTIFICATES." UNLESS AND UNTIL DEFINITIVE CERTIFICATES
ARE ISSUED FOR THE CLASS A CERTIFICATES UNDER THE LIMITED CIRCUMSTANCES
DESCRIBED HEREIN, ALL REFERENCES TO ACTIONS BY CERTIFICATEHOLDERS WITH RESPECT
TO THE CLASS A CERTIFICATES SHALL REFER TO ACTIONS TAKEN BY DTC UPON
INSTRUCTIONS FROM ITS PARTICIPANTS, AND ALL REFERENCES HEREIN TO DISTRIBUTIONS,
NOTICES, REPORTS AND STATEMENTS TO CERTIFICATEHOLDERS WITH RESPECT TO THE CLASS
A CERTIFICATES SHALL REFER TO DISTRIBUTIONS, NOTICES, REPORTS AND STATEMENTS TO
DTC OR CEDE, AS THE REGISTERED HOLDER OF THE CLASS A CERTIFICATES, FOR
DISTRIBUTION TO BENEFICIAL OWNERS BY DTC IN ACCORDANCE WITH DTC PROCEDURES.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
GENERAL. BENEFICIAL OWNERS THAT ARE NOT PARTICIPANTS OR
INTERMEDIARIES (AS DEFINED IN THE PROSPECTUS) BUT DESIRE TO PURCHASE, SELL OR
OTHERWISE TRANSFER OWNERSHIP OF, OR OTHER INTERESTS IN, THE RELATED CLASS A
CERTIFICATES MAY DO SO ONLY THROUGH PARTICIPANTS AND INTERMEDIARIES. IN
ADDITION, BENEFICIAL OWNERS WILL RECEIVE ALL DISTRIBUTIONS OF PRINCIPAL OF AND
INTEREST ON THE RELATED CLASS A CERTIFICATES FROM THE PAYING AGENT (AS DEFINED
IN THE PROSPECTUS) THROUGH DTC AND PARTICIPANTS. ACCORDINGLY, BENEFICIAL OWNERS
MAY EXPERIENCE DELAYS IN THEIR RECEIPT OF PAYMENTS. UNLESS AND UNTIL DEFINITIVE
CERTIFICATES ARE ISSUED FOR THE RELATED CLASS A CERTIFICATES, IT IS ANTICIPATED
THAT THE ONLY REGISTERED CERTIFICATEHOLDER OF SUCH CLASS A CERTIFICATES WILL BE
CEDE, AS NOMINEE OF DTC. BENEFICIAL OWNERS WILL NOT BE RECOGNIZED BY THE TRUSTEE
OR THE MASTER SERVICER AS CERTIFICATEHOLDERS, AS SUCH TERM IS USED IN THE
POOLING AND SERVICING AGREEMENT, AND BENEFICIAL OWNERS WILL BE PERMITTED TO
RECEIVE INFORMATION FURNISHED TO CERTIFICATEHOLDERS AND TO EXERCISE THE RIGHTS
OF CERTIFICATEHOLDERS ONLY INDIRECTLY THROUGH DTC, ITS PARTICIPANTS AND
INTERMEDIARIES.
UNDER THE RULES, REGULATIONS AND PROCEDURES CREATING AND AFFECTING
DTC AND ITS OPERATIONS (THE "RULES"), DTC IS REQUIRED TO MAKE BOOK-ENTRY
TRANSFERS OF CLASS A CERTIFICATES AMONG PARTICIPANTS AND TO RECEIVE AND TRANSMIT
DISTRIBUTIONS OF PRINCIPAL OF, AND INTEREST ON, SUCH CLASS A CERTIFICATES.
PARTICIPANTS AND INTERMEDIARIES WITH WHICH BENEFICIAL OWNERS HAVE ACCOUNTS WITH
RESPECT TO SUCH CLASS A CERTIFICATES SIMILARLY ARE REQUIRED TO MAKE BOOK-ENTRY
TRANSFERS AND RECEIVE AND TRANSMIT SUCH DISTRIBUTIONS ON BEHALF OF THEIR
RESPECTIVE BENEFICIAL OWNERS. ACCORDINGLY, ALTHOUGH BENEFICIAL OWNERS WILL NOT
POSSESS PHYSICAL CERTIFICATES EVIDENCING THEIR INTERESTS IN THE CLASS A
CERTIFICATES, THE RULES PROVIDE A MECHANISM BY WHICH BENEFICIAL OWNERS, THROUGH
THEIR PARTICIPANTS AND INTERMEDIARIES, WILL RECEIVE DISTRIBUTIONS AND WILL BE
ABLE TO TRANSFER THEIR INTERESTS IN THE CLASS A CERTIFICATES.
NONE OF THE COMPANY, THE MASTER SERVICER OR THE TRUSTEE WILL HAVE
ANY LIABILITY FOR ANY ACTIONS TAKEN BY DTC OR ITS NOMINEE OR CEDEL OR EUROCLEAR,
INCLUDING, WITHOUT LIMITATION, ACTIONS FOR ANY ASPECT OF THE RECORDS RELATING TO
OR PAYMENTS MADE ON ACCOUNT OF BENEFICIAL OWNERSHIP INTERESTS IN THE CLASS A
CERTIFICATES HELD BY CEDE, AS NOMINEE FOR DTC, OR FOR MAINTAINING, SUPERVISING
OR REVIEWING ANY RECORDS RELATING TO SUCH BENEFICIAL OWNERSHIP INTERESTS.
S-56
<PAGE>
DEFINITIVE CERTIFICATES. DEFINITIVE CERTIFICATES WILL BE ISSUED TO
BENEFICIAL OWNERS OR THEIR NOMINEES, RESPECTIVELY, RATHER THAN TO DTC OR ITS
NOMINEE, ONLY UNDER THE LIMITED CONDITIONS SET FORTH IN THE PROSPECTUS UNDER
"DESCRIPTION OF THE CERTIFICATES--FORM OF CERTIFICATES."
UPON THE OCCURRENCE OF AN EVENT DESCRIBED IN THE PROSPECTUS IN THE
THIRD PARAGRAPH UNDER "DESCRIPTION OF THE CERTIFICATES--FORM OF CERTIFICATES,"
THE TRUSTEE IS REQUIRED TO NOTIFY, THROUGH DTC, PARTICIPANTS WHO HAVE OWNERSHIP
OF CLASS A CERTIFICATES AS INDICATED ON THE RECORDS OF DTC OF THE AVAILABILITY
OF DEFINITIVE CERTIFICATES FOR THEIR CLASS A CERTIFICATES. UPON SURRENDER BY DTC
OF THE DEFINITIVE CERTIFICATES REPRESENTING THE CLASS A CERTIFICATES AND UPON
RECEIPT OF INSTRUCTIONS FROM DTC FOR RE-REGISTRATION, THE TRUSTEE WILL REISSUE
THE CLASS A CERTIFICATES AS DEFINITIVE CERTIFICATES ISSUED IN THE RESPECTIVE
PRINCIPAL AMOUNTS OWNED BY INDIVIDUAL BENEFICIAL OWNERS, AND THEREAFTER THE
TRUSTEE AND THE MASTER SERVICER WILL RECOGNIZE THE HOLDERS OF SUCH DEFINITIVE
CERTIFICATES AS CERTIFICATEHOLDERS UNDER THE POOLING AND SERVICING AGREEMENT.
FOR ADDITIONAL INFORMATION REGARDING DTC AND THE CLASS A
CERTIFICATES, SEE "DESCRIPTION OF THE CERTIFICATES--FORM OF CERTIFICATES" IN THE
PROSPECTUS.
BOOK-ENTRY FACILITIES. BENEFICIAL OWNERS MAY ELECT TO HOLD THEIR
INTERESTS IN THE BOOK-ENTRY CERTIFICATES THROUGH DTC IN THE UNITED STATES OR
THROUGH CEDEL OR EUROCLEAR IN EUROPE, IF THEY ARE PARTICIPANTS OF SUCH SYSTEMS,
OR INDIRECTLY THROUGH ORGANIZATIONS WHICH ARE PARTICIPANTS IN SUCH SYSTEMS. THE
BOOK-ENTRY CERTIFICATES OF EACH CLASS WILL BE ISSUED IN ONE OR MORE CERTIFICATES
WHICH EQUAL THE 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 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
S-57
<PAGE>
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 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
S-58
<PAGE>
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 CLASS A CERTIFICATES TO
PERSONS OR ENTITIES THAT DO NOT PARTICIPATE IN THE DTC, CEDEL OR EUROCLEAR
SYSTEMS, OR OTHERWISE TO TAKE ACTIONS IN RESPECT OF SUCH CERTIFICATES, MAY BE
LIMITED DUE TO LACK OF A PHYSICAL CERTIFICATE REPRESENTING SUCH CERTIFICATES. IN
ADDITION, ISSUANCE OF THE BOOK-ENTRY CERTIFICATES IN BOOK-ENTRY FORM MAY REDUCE
THE LIQUIDITY OF SUCH CERTIFICATES IN THE SECONDARY MARKET SINCE CERTAIN
POTENTIAL INVESTORS MAY BE UNWILLING TO PURCHASE CERTIFICATES FOR WHICH THEY
CANNOT OBTAIN PHYSICAL CERTIFICATES.
DTC HAS ADVISED THE COMPANY AND THE TRUSTEE THAT, UNLESS AND UNTIL
DEFINITIVE CERTIFICATES ARE ISSUED, DTC WILL TAKE ANY ACTION PERMITTED TO BE
TAKEN BY THE HOLDERS OF THE BOOK-ENTRY CERTIFICATES UNDER THE AGREEMENT ONLY AT
THE DIRECTION OF ONE OR MORE PARTICIPANTS TO WHOSE DTC ACCOUNTS THE BOOK-ENTRY
CERTIFICATES ARE CREDITED, TO THE EXTENT THAT SUCH ACTIONS ARE TAKEN ON BEHALF
OF INTERMEDIARIES WHOSE HOLDINGS INCLUDE SUCH BOOK-ENTRY CERTIFICATES. CEDEL OR
THE EUROCLEAR OPERATOR, AS THE CASE MAY BE, WILL TAKE ANY OTHER ACTION PERMITTED
TO BE TAKEN BY A CERTIFICATEHOLDER UNDER THE AGREEMENT ON BEHALF OF A CEDEL
PARTICIPANT OR EUROCLEAR PARTICIPANT ONLY IN ACCORDANCE WITH ITS RELEVANT RULES
AND PROCEDURES AND SUBJECT TO THE ABILITY OF THE RELEVANT DEPOSITARY TO EFFECT
SUCH ACTIONS ON ITS BEHALF THROUGH DTC. DTC MAY TAKE ACTIONS, AT THE DIRECTION
OF THE RELATED PARTICIPANTS, WITH RESPECT TO SOME CERTIFICATES WHICH CONFLICT
WITH ACTIONS TAKEN WITH RESPECT TO OTHER CERTIFICATES.
ALTHOUGH DTC, CEDEL AND EUROCLEAR HAVE AGREED TO THE FOREGOING
PROCEDURES IN ORDER TO FACILITATE TRANSFERS OF CERTIFICATES AMONG PARTICIPANTS
OF DTC, CEDEL AND EUROCLEAR, THEY ARE UNDER NO OBLIGATION TO PERFORM OR CONTINUE
TO PERFORM SUCH PROCEDURES AND SUCH PROCEDURES MAY BE DISCONTINUED AT ANY TIME.
MULTIPLE LOAN GROUP STRUCTURE
THE MORTGAGE LOANS IN THE TRUST FUND CONSIST OF THE GROUP I LOANS, GROUP
II LOANS AND GROUP III LOANS, AS DESCRIBED ABOVE UNDER "DESCRIPTION OF THE
MORTGAGE POOL." ALL DISTRIBUTIONS (OTHER THAN CROSS- COLLATERALIZATION PAYMENTS)
WITH RESPECT TO THE GROUP I LOANS WILL BE ALLOCATED SOLELY AMONG THE GROUP I
CLASS A CERTIFICATES AND THE CLASS R-II CERTIFICATES. ALL DISTRIBUTIONS (OTHER
THAN CROSS-COLLATERALIZATION PAYMENTS) WITH RESPECT TO THE GROUP II LOANS WILL
BE ALLOCATED SOLELY AMONG THE GROUP II CLASS A CERTIFICATES AND THE CLASS R-II
CERTIFICATES. ALL DISTRIBUTIONS (OTHER THAN CROSS-COLLATERALIZATION PAYMENTS)
WITH RESPECT TO THE GROUP III LOANS WILL BE ALLOCATED SOLELY AMONG THE GROUP III
CLASS A CERTIFICATES AND THE CLASS R-II CERTIFICATES.
S-59
<PAGE>
OVERCOLLATERALIZATION PROVISIONS AND SUPPORT FEATURES
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. THE
POOLING AND SERVICING AGREEMENT REQUIRES THAT, ON EACH DISTRIBUTION DATE, THE
NET MONTHLY EXCESS CASHFLOW WITH RESPECT TO EACH LOAN GROUP, IF ANY, BE APPLIED
ON SUCH DISTRIBUTION DATE AS AN ACCELERATED PAYMENT OF PRINCIPAL ON THE RELATED
CLASS A CERTIFICATES, BUT ONLY IN THE MANNER AND TO THE EXTENT HEREAFTER
DESCRIBED. THE "NET MONTHLY EXCESS CASHFLOW" WITH RESPECT TO EACH LOAN GROUP FOR
ANY DISTRIBUTION DATE IS EQUAL TO (X) THE AMOUNT ON DEPOSIT IN THE CERTIFICATE
ACCOUNT ON SUCH DISTRIBUTION DATE WITH RESPECT TO THE MORTGAGE LOANS IN THE
RELATED LOAN GROUP, OTHER THAN THE RELATED INSURED PAYMENTS AND THE TRUSTEE'S
FEE AND PREMIUM AMOUNT PAYABLE ON SUCH DISTRIBUTION DATE (SUCH AMOUNT, THE
RELATED "AVAILABLE FUNDS" FOR SUCH DISTRIBUTION DATE) MINUS (Y) THE SUM OF (I)
THE SUM OF THE RELATED CLASS A INTEREST DISTRIBUTION AMOUNT AND THE RELATED
CLASS A PRINCIPAL DISTRIBUTION AMOUNT (CALCULATED FOR THIS PURPOSE WITHOUT
REGARD TO ANY SUBORDINATION INCREASE AMOUNT, SUBORDINATION REDUCTION AMOUNT OR
PORTION THEREOF INCLUDED THEREIN) AND (II) ANY RELATED REIMBURSEMENT AMOUNT (AS
DEFINED HEREIN) OWED TO THE CERTIFICATE INSURER. THIS APPLICATION HAS THE EFFECT
OF ACCELERATING THE AMORTIZATION OF THE RELATED CLASS A CERTIFICATES RELATIVE TO
THE AMORTIZATION OF THE MORTGAGE LOANS IN THE RELATED LOAN GROUP.
WITH RESPECT TO ANY DISTRIBUTION DATE, THE EXCESS, IF ANY, OF (X)
THE SUM OF THE AGGREGATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS IN THE RELATED
LOAN GROUP AS OF THE CLOSE OF BUSINESS ON THE LAST DAY OF THE RELATED DUE PERIOD
(AS DEFINED HEREIN) OVER (Y) THE CERTIFICATE PRINCIPAL BALANCE OF THE RELATED
CLASS A CERTIFICATES AS OF SUCH DISTRIBUTION DATE (AND FOLLOWING THE MAKING OF
ALL DISTRIBUTIONS ON SUCH DISTRIBUTION DATE) IS THE "SUBORDINATED AMOUNT" AS OF
SUCH DISTRIBUTION DATE. THE POOLING AND SERVICING AGREEMENT REQUIRES THAT THE
NET MONTHLY EXCESS CASHFLOWS WILL BE APPLIED AS AN ACCELERATED PAYMENT OF
PRINCIPAL ON THE RELATED CLASS A CERTIFICATES UNTIL THE RELATED SUBORDINATED
AMOUNT HAS INCREASED TO THE LEVEL EQUAL TO THE RELATED REQUIRED SUBORDINATED
AMOUNT FOR SUCH DISTRIBUTION DATE AND, ONCE THE REQUIRED SUBORDINATED AMOUNT HAS
BEEN REACHED WITH RESPECT TO SUCH LOAN GROUP, TO BE USED AS DESCRIBED BELOW
UNDER "--CROSS-COLLATERALIZATION PAYMENTS" AS AN ACCELERATED PAYMENT OF
PRINCIPAL ON THE NON-RELATED CLASS A CERTIFICATES UNTIL THE SUBORDINATED AMOUNTS
FOR THE NON-RELATED LOAN GROUPS HAVE REACHED THEIR REQUIRED SUBORDINATED
AMOUNTS. ANY AMOUNT OF NET MONTHLY EXCESS CASHFLOW ACTUALLY APPLIED AS AN
ACCELERATED PAYMENT OF PRINCIPAL IS A "SUBORDINATION INCREASE AMOUNT." THE
REQUIRED LEVEL OF THE SUBORDINATED AMOUNT WITH RESPECT TO A DISTRIBUTION DATE IS
THE "REQUIRED SUBORDINATED AMOUNT" WITH RESPECT TO SUCH DISTRIBUTION DATE.
INITIALLY, THE REQUIRED SUBORDINATED AMOUNT WILL BE SET AT AN AMOUNT EQUAL TO A
PERCENTAGE, SPECIFIED IN THE POOLING AND SERVICING AGREEMENT, OF THE AGGREGATE
PRINCIPAL BALANCES OF THE RELATED MORTGAGE LOANS IN THE RELATED LOAN GROUP AS OF
THE CUT-OFF DATE. THE POOLING AND SERVICING AGREEMENT GENERALLY PROVIDES THAT
THE REQUIRED SUBORDINATED AMOUNTS MAY, OVER TIME, DECREASE, OR INCREASE, SUBJECT
TO CERTAIN FLOORS, CAPS AND TRIGGERS. UNDER CERTAIN DELINQUENCY SCENARIOS, THE
REQUIRED SUBORDINATED AMOUNTS MAY INCREASE CONTINUALLY THROUGHOUT THE LIFE OF
THE TRANSACTION, AND THEREFORE THE WEIGHTED AVERAGE LIVES OF THE CLASS A
CERTIFICATES WOULD BE REDUCED.
IN THE EVENT THAT THE REQUIRED SUBORDINATED AMOUNT WITH RESPECT TO
ANY 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
CLASS A CERTIFICATES ON SUCH DISTRIBUTION DATE SHALL BE USED FOR
CROSS-COLLATERALIZATION PAYMENTS (AS DEFINED BELOW), APPLIED TO THE PAYMENT OF
ANY RELATED GROUP I OR GROUP II CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD
AMOUNT, IF APPLICABLE, OR DISTRIBUTED TO THE HOLDERS OF THE CLASS R-II
CERTIFICATES ON SUCH DISTRIBUTION DATE. THESE PAYMENTS WILL HAVE THE EFFECT OF
DECELERATING THE AMORTIZATION OF THE CLASS A CERTIFICATES RELATIVE TO THE
AMORTIZATION OF THE MORTGAGE LOANS IN THE RELATED LOAN GROUP, AND OF REDUCING
THE RELATED SUBORDINATED AMOUNT. WITH RESPECT TO ANY DISTRIBUTION DATE, THE
DIFFERENCE, IF ANY, BETWEEN (A) THE RELATED SUBORDINATED AMOUNT THAT WOULD APPLY
ON SUCH DISTRIBUTION DATE AFTER TAKING INTO ACCOUNT ALL DISTRIBUTIONS TO BE MADE
ON SUCH DISTRIBUTION DATE (EXCLUSIVE OF ANY REDUCTIONS THERETO ATTRIBUTABLE TO
SUBORDINATION REDUCTION AMOUNTS (AS DESCRIBED BELOW) ON SUCH DISTRIBUTION DATE)
AND (B) THE RELATED REQUIRED SUBORDINATED AMOUNT FOR SUCH DISTRIBUTION DATE IS
THE RELATED "EXCESS SUBORDINATED AMOUNT" WITH RESPECT TO SUCH DISTRIBUTION DATE.
WITH RESPECT TO ANY DISTRIBUTION DATE, AN AMOUNT EQUAL TO THE LESSER
S-60
<PAGE>
OF (A) THE RELATED EXCESS SUBORDINATED AMOUNT AND (B) THE PRINCIPAL COLLECTIONS
RECEIVED BY THE MASTER SERVICER WITH RESPECT TO THE PRIOR DUE PERIOD IS THE
RELATED "SUBORDINATION REDUCTION AMOUNT."
IF ANY MORTGAGE LOAN BECAME A LIQUIDATED MORTGAGE LOAN (AS DEFINED
BELOW) DURING RELATED 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. THE POOLING AND SERVICING AGREEMENT DOES NOT CONTAIN ANY RULE WHICH
REQUIRES THAT THE AMOUNT OF ANY LIQUIDATED LOAN LOSS BE DISTRIBUTED TO THE
HOLDERS OF THE RELATED CLASS A CERTIFICATES ON THE DISTRIBUTION DATE WHICH
IMMEDIATELY FOLLOWS THE EVENT OF LOSS; I.E., THE POOLING AND SERVICING AGREEMENT
DOES NOT REQUIRE THE CURRENT RECOVERY OF LOSSES. HOWEVER, THE OCCURRENCE OF A
LIQUIDATED LOAN LOSS WILL REDUCE THE SUBORDINATED AMOUNT, WHICH, TO THE EXTENT
THAT SUCH REDUCTION CAUSES THE SUBORDINATED AMOUNT TO BE LESS THAN THE RELATED
REQUIRED SUBORDINATED AMOUNT APPLICABLE TO THE RELATED DISTRIBUTION DATE, WILL
REQUIRE THE PAYMENT OF A SUBORDINATION INCREASE AMOUNT ON SUCH DISTRIBUTION DATE
(OR, IF INSUFFICIENT FUNDS ARE AVAILABLE ON SUCH DISTRIBUTION DATE, ON
SUBSEQUENT DISTRIBUTION DATES, UNTIL THE SUBORDINATED AMOUNT EQUALS THE RELATED
REQUIRED SUBORDINATED AMOUNT). THE EFFECT OF THE FOREGOING IS TO ALLOCATE LOSSES
TO THE HOLDERS OF THE CLASS R-II CERTIFICATES BY REDUCING, OR ELIMINATING
ENTIRELY, PAYMENTS OF NET MONTHLY EXCESS CASHFLOW AND OF SUBORDINATION REDUCTION
AMOUNTS WHICH SUCH HOLDERS WOULD OTHERWISE RECEIVE. INVESTORS IN THE CLASS A
CERTIFICATES SHOULD REALIZE THAT, UNDER EXTREME LOSS OR DELINQUENCY SCENARIOS,
THEY MAY TEMPORARILY RECEIVE NO DISTRIBUTIONS OF PRINCIPAL.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICIES. THE
POOLING AND SERVICING AGREEMENT DEFINES A "SUBORDINATION DEFICIT" WITH RESPECT
TO A DISTRIBUTION DATE TO BE THE AMOUNT, IF ANY, BY WHICH (X) THE AGGREGATE
CERTIFICATE PRINCIPAL BALANCE OF THE RELATED CLASS A CERTIFICATES AS OF SUCH
DISTRIBUTION DATE, AND FOLLOWING THE MAKING OF ALL DISTRIBUTIONS TO BE MADE ON
SUCH DISTRIBUTION DATE (EXCEPT FOR ANY PAYMENT TO BE MADE AS TO PRINCIPAL FROM
PROCEEDS OF THE RELATED CERTIFICATE INSURANCE POLICY), EXCEEDS (Y) THE AGGREGATE
PRINCIPAL BALANCES OF THE MORTGAGE LOANS IN THE RELATED LOAN GROUP AS OF THE
CLOSE OF BUSINESS ON THE PRECEDING DUE DATE. THE POOLING AND SERVICING AGREEMENT
REQUIRES THE TRUSTEE TO MAKE A CLAIM FOR AN INSURED PAYMENT UNDER THE RELATED
CERTIFICATE INSURANCE POLICY NOT LATER THAN THE SECOND BUSINESS DAY PRIOR TO ANY
DISTRIBUTION DATE AS TO WHICH THE TRUSTEE HAS DETERMINED THAT A SUBORDINATION
DEFICIT WILL OCCUR WITH RESPECT TO A LOAN GROUP FOR THE PURPOSE OF APPLYING THE
PROCEEDS OF SUCH INSURED PAYMENT AS A PAYMENT OF PRINCIPAL TO THE HOLDERS OF THE
RELATED CLASS A CERTIFICATES ON SUCH DISTRIBUTION DATE.
CROSS-COLLATERALIZATION
IN THE EVENT THAT ON ANY DISTRIBUTION DATE AFTER GIVING EFFECT TO
DISTRIBUTIONS PERTAINING TO A PARTICULAR LOAN GROUP AND ITS RELATED CERTIFICATES
(EXCEPT FOR ANY PAYMENT TO BE MADE AS PRINCIPAL FROM PROCEEDS OF THE RELATED
CERTIFICATE INSURANCE POLICY), (I) THE AVAILABLE FUNDS WITH RESPECT TO A LOAN
GROUP WOULD BE LESS THAN THE RELATED CLASS A INTEREST DISTRIBUTION AMOUNT (SUCH
DIFFERENCE, A "CROSS- COLLATERALIZED INTEREST SHORTFALL"), (II) A SUBORDINATION
DEFICIT EXISTS WITH RESPECT TO A LOAN GROUP, (III) A REIMBURSEMENT AMOUNT WITH
RESPECT TO A LOAN GROUP EXISTS OR (IV) THE SUBORDINATED AMOUNT WITH RESPECT TO A
LOAN GROUP WOULD BE LESS THAN THE RELATED REQUIRED SUBORDINATED AMOUNT (SUCH
DIFFERENCE, A "CROSS- COLLATERALIZED SUBORDINATION SHORTFALL"), THE CERTIFICATE
INSURER, THE GROUP I, GROUP II OR GROUP III CLASS A CERTIFICATES, AS THE CASE
MAY BE, WILL BE ENTITLED TO RECEIVE AN ADDITIONAL PAYMENT (A "CROSS-
COLLATERALIZATION PAYMENT") IN RESPECT OF INTEREST OR PRINCIPAL, AS APPLICABLE,
TO THE EXTENT OF SUCH CROSS- COLLATERALIZED INTEREST SHORTFALL, SUBORDINATION
DEFICIT OR CROSS-COLLATERALIZED SUBORDINATION SHORTFALL OR AS REIMBURSEMENT OF
THE REIMBURSEMENT AMOUNT, AS THE CASE MAY BE, OUT OF FUNDS THEN ON DEPOSIT IN
THE CERTIFICATE ACCOUNT FOR THE OTHER LOAN GROUP OR LOAN GROUPS THAT ARE
OTHERWISE PAYABLE ON SUCH DISTRIBUTION DATE TO THE CLASS R-II CERTIFICATES.
S-61
<PAGE>
IF A CROSS-COLLATERALIZATION PAYMENT IS REQUIRED WITH RESPECT TO A
SINGLE LOAN GROUP, SUCH LOAN GROUP WILL BE ENTITLED TO RECEIVE ADDITIONAL
PAYMENTS FROM BOTH OF THE OTHER LOAN GROUPS ON A PRO RATA BASIS TO THE EXTENT OF
FUNDS ON DEPOSIT IN THE CERTIFICATE ACCOUNT FOR SUCH OTHER LOAN GROUPS AND
AVAILABLE TO MAKE CROSS-COLLATERALIZATION PAYMENTS. IF A CROSS-COLLATERALIZATION
PAYMENT IS REQUIRED WITH RESPECT TO TWO LOAN GROUPS, SUCH LOAN GROUPS WILL BE
ENTITLED TO RECEIVE ADDITIONAL PAYMENTS FROM THE THIRD LOAN GROUP ON A PRO RATA
BASIS TO THE EXTENT OF THEIR RESPECTIVE REQUIRED CROSS-COLLATERALIZATION
PAYMENTS, TO THE EXTENT OF FUNDS ON DEPOSIT IN THE CERTIFICATE ACCOUNT RELATED
TO SUCH THIRD LOAN GROUP AVAILABLE TO MAKE CROSS-COLLATERALIZATION PAYMENTS.
PRIORITY OF PAYMENT
ON EACH DISTRIBUTION DATE, THE TRUSTEE SHALL MAKE THE FOLLOWING
DISTRIBUTIONS, TO THE EXTENT OF FUNDS ON DEPOSIT IN THE RELATED CERTIFICATE
ACCOUNT WITH RESPECT TO EACH LOAN GROUP AND THE AMOUNT OF INSURED PAYMENTS AND
CROSS-COLLATERALIZATION PAYMENTS (IF APPLICABLE) TO BE MADE ON SUCH DISTRIBUTION
DATE, AS DISTRIBUTED SEPARATELY WITH RESPECT TO THE GROUP I CERTIFICATE ACCOUNT,
GROUP II CERTIFICATE ACCOUNT AND GROUP III CERTIFICATE ACCOUNT:
(A) TO THE CERTIFICATE INSURER, THE PREMIUM AMOUNT
(AS DEFINED HEREIN) WITH RESPECT TO SUCH LOAN
GROUP;
(B) TO THE TRUSTEE, AN AMOUNT EQUAL TO THE
TRUSTEE'S FEES THEN DUE TO IT WITH RESPECT TO
SUCH LOAN GROUP;
(C) TO THE CERTIFICATE INSURER THE LESSER OF (X) AN
AMOUNT EQUAL TO (I) THE AMOUNT THEN ON DEPOSIT
IN THE RELATED CERTIFICATE ACCOUNT REMAINING
AFTER THE FOREGOING DISTRIBUTIONS MINUS (II)
THE INSURED DISTRIBUTION AMOUNT FOR SUCH
DISTRIBUTION DATE AND (Y) THE AMOUNT OF ALL
INSURED PAYMENTS AND OTHER PAYMENTS MADE BY THE
CERTIFICATE INSURER PURSUANT TO THE RELATED
CERTIFICATE INSURANCE POLICY (TOGETHER WITH
INTEREST THEREON) WHICH HAVE NOT BEEN
PREVIOUSLY REPAID (THE "REIMBURSEMENT AMOUNT")
AS OF SUCH DISTRIBUTION DATE;
(D) FROM AMOUNTS THEN ON DEPOSIT IN THE RELATED
CERTIFICATE ACCOUNT (INCLUDING ANY INSURED
PAYMENTS), TO THE RELATED CLASS A
CERTIFICATEHOLDERS AN AMOUNT EQUAL TO THE
RELATED CLASS A INTEREST DISTRIBUTION AMOUNT
(AS DESCRIBED BELOW), DISTRIBUTED TO THE
RELATED CLASS A CERTIFICATEHOLDERS AS DESCRIBED
BELOW;
(E) FROM AMOUNTS THEN ON DEPOSIT IN THE RELATED
CERTIFICATE ACCOUNT (INCLUDING ANY RELATED
INSURED PAYMENTS), TO THE RELATED CLASS A
CERTIFICATEHOLDERS AN AMOUNT EQUAL TO THE
RELATED CLASS A PRINCIPAL DISTRIBUTION AMOUNT
(AS DESCRIBED BELOW), DISTRIBUTED TO THE
RELATED CLASS A CERTIFICATEHOLDERS AS DESCRIBED
BELOW;
(F) FROM AMOUNTS THEN ON DEPOSIT IN THE RELATED
CERTIFICATE ACCOUNT, AN AMOUNT EQUAL TO THE
CROSS-COLLATERALIZATION PAYMENTS REQUIRED TO BE
MADE ON SUCH DISTRIBUTION DATE IN RESPECT OF
CROSS-COLLATERALIZED INTEREST SHORTFALLS TO
NON-RELATED CLASS A CERTIFICATES AS DESCRIBED
IN "--CROSS-COLLATERALIZATION" ABOVE;
(G) FROM AMOUNTS THEN ON DEPOSIT IN THE RELATED
CERTIFICATE ACCOUNT, AN AMOUNT EQUAL TO THE
CROSS-COLLATERALIZATION PAYMENTS IN RESPECT OF
SUBORDINATION DEFICITS REQUIRED TO BE MADE ON
SUCH CERTIFICATES ON SUCH DISTRIBUTION DATE,
DISTRIBUTED TO THE NON-RELATED CLASS A
CERTIFICATES AS DESCRIBED IN
"--CROSS-COLLATERALIZATION" ABOVE AND ALLOCATED
TO SUCH NON-RELATED CLASS A CERTIFICATES AS
DESCRIBED BELOW;
S-62
<PAGE>
(H) FROM AMOUNTS THEN ON DEPOSIT IN THE RELATED
CERTIFICATE ACCOUNT, TO THE CERTIFICATE
INSURER, AN AMOUNT EQUAL TO THE
CROSS-COLLATERALIZATION PAYMENTS IN RESPECT OF
REIMBURSEMENT AMOUNTS REQUIRED TO BE MADE TO
THE CERTIFICATE INSURER FROM SUCH CERTIFICATE
ACCOUNT ON SUCH DISTRIBUTION DATE AS DESCRIBED
IN "--CROSS- COLLATERALIZATION" ABOVE, TO THE
EXTENT THE CERTIFICATE INSURER HAS NOT BEEN
REIMBURSED PURSUANT TO CLAUSE (C) ABOVE;
(I) FROM AMOUNTS THEN ON DEPOSIT IN THE RELATED
CERTIFICATE ACCOUNT, AN AMOUNT EQUAL TO THE
CROSS-COLLATERALIZATION PAYMENTS REQUIRED TO BE
MADE ON SUCH DISTRIBUTION DATE IN RESPECT OF
CROSS-COLLATERALIZED SUBORDINATION SHORTFALLS,
DISTRIBUTED TO THE NON- RELATED CLASS A
CERTIFICATES AS DESCRIBED IN
"--CROSS-COLLATERALIZATION" ABOVE, AND
ALLOCATED TO SUCH NON-RELATED CLASS A
CERTIFICATEHOLDERS AS DESCRIBED BELOW;
(J) TO THE CLASS A-1 CERTIFICATES AND CLASS A-2
CERTIFICATES, AN AMOUNT EQUAL TO THE LESSER OF
(I) ANY AMOUNT THEN REMAINING IN THE RELATED
CERTIFICATE ACCOUNT AFTER THE APPLICATIONS
DESCRIBED IN CLAUSES (A) THROUGH (I) ABOVE AND
(II) THE AGGREGATE GROUP I CLASS A AVAILABLE
FUNDS CAP CARRY-FORWARD AMOUNT OR GROUP II
CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD
AMOUNT, RESPECTIVELY, FOR SUCH DISTRIBUTION
DATE SHALL BE PAID TO THE CLASS A-1
CERTIFICATEHOLDERS AND CLASS A-2
CERTIFICATEHOLDERS, RESPECTIVELY, ON ACCOUNT OF
THE GROUP I CLASS A AVAILABLE FUNDS CAP
CARRY-FORWARD AMOUNT AND GROUP II CLASS A
AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT,
RESPECTIVELY, IF ANY; AND
(K) FROM AMOUNTS THEN ON DEPOSIT IN THE CERTIFICATE
ACCOUNT, TO THE HOLDERS OF THE CLASS R-II
CERTIFICATES, THE AMOUNT REMAINING ON SUCH
DISTRIBUTION DATE, IF ANY.
CLASS A INTEREST DISTRIBUTION AMOUNTS
ON EACH DISTRIBUTION DATE, HOLDERS OF EACH CLASS OF CLASS A
CERTIFICATES WILL BE ENTITLED TO RECEIVE INTEREST DISTRIBUTIONS IN AN AMOUNT
(SUCH AMOUNT THE "ACCRUED CERTIFICATE INTEREST" FOR SUCH CLASS) EQUAL TO THE SUM
OF (A) 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 (TO THE EXTENT OF THE AMOUNTS REMAINING FOR DISTRIBUTIONS
AFTER PAYMENTS UNDER CLAUSES (A) THROUGH (C) UNDER "--PRIORITY OF PAYMENT"
ABOVE), AS REDUCED BY SHORTFALLS CAUSED BY THE RELIEF ACT (AS DEFINED IN THE
PROSPECTUS) OR THE FAILURE OF THE MASTER SERVICER TO COVER PREPAYMENT INTEREST
SHORTFALLS TO THE EXTENT DESCRIBED HEREIN, WITH ALL SUCH REDUCTIONS ALLOCATED
AMONG THE RELATED CLASS A CERTIFICATES IN PROPORTION TO THEIR RESPECTIVE AMOUNTS
OF RELATED CLASS A INTEREST DISTRIBUTION AMOUNT (AS DEFINED BELOW) WHICH WOULD
HAVE RESULTED ABSENT SUCH REDUCTIONS AND (B) THE GROUP I, GROUP II OR GROUP III
CLASS A CARRY-FORWARD AMOUNT, AS APPLICABLE, ALLOCABLE TO INTEREST. THE
AGGREGATE AMOUNT OF INTEREST ALLOCABLE TO EACH CLASS OF THE GROUP I, GROUP II
AND GROUP III CLASS A CERTIFICATES AS DETERMINED SEPARATELY (THE RELATED "CLASS
A INTEREST DISTRIBUTION AMOUNT") WILL BE ALLOCABLE FIRST TO THE RELATED
COMPONENTS OF THE FIXED STRIP CERTIFICATES, AND THEN TO THE RELATED CLASS A
CERTIFICATES (OTHER THAN THE FIXED STRIP CERTIFICATES) ON A PRO RATA BASIS. THE
CLASS A INTEREST DISTRIBUTION AMOUNT WITH RESPECT TO THE CLASS A-1 CERTIFICATES
AND CLASS A-2 CERTIFICATES IS CALCULATED ON THE BASIS OF A 360-DAY YEAR AND THE
ACTUAL NUMBER OF DAYS ELAPSED; PROVIDED THAT, FOR ANY DISTRIBUTION DATE FOR
WHICH CLAUSE (II) OF THE DEFINITION OF PASS-THROUGH RATE ON THE CLASS A-1
CERTIFICATES OR CLASS A-2 CERTIFICATES IS APPLICABLE, THE RELATED CLASS A
INTEREST DISTRIBUTION AMOUNT WILL BE CALCULATED ON THE BASIS OF A 360-DAY YEAR
AND A 30-DAY MONTH. THE CLASS A INTEREST DISTRIBUTION AMOUNT WITH RESPECT TO THE
GROUP I FIXED STRIP COMPONENTS, GROUP II FIXED STRIP COMPONENTS AND THE GROUP
III CLASS A CERTIFICATES IS CALCULATED ON THE BASIS OF A 360-DAY YEAR AND A 30-
DAY MONTH.
S-63
<PAGE>
WITH RESPECT TO ANY DISTRIBUTION DATE AND THE GROUP I, GROUP II AND
GROUP III CLASS A CERTIFICATES, THE SUM OF THE RELATED CLASS A INTEREST
DISTRIBUTION AMOUNT AND THE AMOUNT OF THE RELATED SUBORDINATION DEFICIT, IF ANY,
WITH RESPECT TO SUCH DISTRIBUTION DATE IS THE RELATED "INSURED DISTRIBUTION
AMOUNT" FOR SUCH DISTRIBUTION DATE.
FOR EACH DISTRIBUTION DATE, (I) WITH RESPECT TO THE CLASS A-1
CERTIFICATES AND CLASS A-2 CERTIFICATES, THE "ACCRUAL PERIOD" IS THE PERIOD
COMMENCING ON THE DISTRIBUTION DATE IMMEDIATELY PRECEDING THE MONTH ON WHICH
SUCH DISTRIBUTION DATE OCCURS AND ENDING ON THE CALENDAR DAY IMMEDIATELY
PRECEDING SUCH DISTRIBUTION DATE, EXCEPT WITH RESPECT TO THE FIRST DISTRIBUTION
DATE, WHICH HAS AN ACCRUAL PERIOD FROM SEPTEMBER 26, 1997 TO OCTOBER 24, 1997
AND (II) WITH RESPECT TO THE GROUP I FIXED STRIP COMPONENTS, GROUP II FIXED
STRIP COMPONENTS AND THE GROUP III CLASS A CERTIFICATES, THE "ACCRUAL PERIOD" IS
THE PREVIOUS CALENDAR MONTH.
WITH RESPECT TO THE GROUP I CLASS A CERTIFICATES, THE "GROUP I CLASS
A CARRY-FORWARD AMOUNT" AS OF ANY DISTRIBUTION DATE EQUALS THE SUM OF (A) THE
AMOUNT, IF ANY, BY WHICH (I) THE RELATED INSURED DISTRIBUTION AMOUNT FOR THE
IMMEDIATELY PRECEDING DISTRIBUTION DATE EXCEEDED (II) THE AMOUNT ACTUALLY
DISTRIBUTED TO THE HOLDERS OF THE GROUP I CLASS A CERTIFICATES IN RESPECT
THEREOF (INCLUDING, WITHOUT LIMITATION, AMOUNTS PAID UNDER A CERTIFICATE
INSURANCE POLICY) AND (B) 30 DAYS' INTEREST ON SUCH AMOUNT AT A RATE EQUAL TO
THE SUM OF (I) THE CLASS A-1 FORMULA PASS-THROUGH RATE APPLICABLE TO THE CLASS
A-1 CERTIFICATES FOR SUCH DISTRIBUTION DATE 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 CERTIFICATE PRINCIPAL BALANCE OF THE
CLASS A-1 CERTIFICATES, IN EACH CASE AS DETERMINED IMMEDIATELY PRIOR TO SUCH
DISTRIBUTION DATE. THE GROUP I CLASS A CARRY-FORWARD AMOUNT DOES NOT INCLUDE ANY
GROUP I CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT.
THE "CLASS A-1 FORMULA PASS-THROUGH RATE" FOR A DISTRIBUTION DATE IS
THE LESSER OF (X) THE RATE DETERMINED BY CLAUSE (I) OF THE DEFINITION OF
PASS-THROUGH RATE FOR THE CLASS A-1 CERTIFICATES FOR 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 RATES PER ANNUM AT WHICH
THE TRUSTEE'S FEE AND THE PREMIUM AMOUNT ACCRUE 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 CERTIFICATE PRINCIPAL BALANCE OF THE
CLASS A-1 CERTIFICATES, IN EACH CASE AS DETERMINED IMMEDIATELY PRIOR TO SUCH
DISTRIBUTION DATE.
THE POOLING AND SERVICING AGREEMENT PROVIDES THAT IF THE
PASS-THROUGH RATE ON THE CLASS A-1 CERTIFICATES IS LESS THAN THE CLASS A-1
FORMULA PASS-THROUGH RATE AND ANY RESULTING SHORTFALL IN INTEREST IS NOT PAID ON
SUCH DISTRIBUTION DATE FROM ANY AVAILABLE NET MONTHLY EXCESS CASHFLOW, AS
DESCRIBED BELOW, THEN THE AMOUNT OF ANY SUCH SHORTFALL WILL BE CARRIED FORWARD
AND BE PAID TO THE EXTENT OF AVAILABLE FUNDS, AS DESCRIBED HEREIN, TO THE
HOLDERS OF THE CLASS A-1 CERTIFICATES ON FUTURE DISTRIBUTION DATES AND SHALL
ACCRUE INTEREST AT THE APPLICABLE CLASS A-1 FORMULA PASS-THROUGH RATE, UNTIL
PAID (SUCH SHORTFALL, TOGETHER WITH SUCH ACCRUED INTEREST, THE "GROUP I CLASS A
AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT"). THE CERTIFICATE INSURANCE POLICY
DOES NOT COVER THE GROUP I CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT, NOR
DO THE RATINGS ASSIGNED TO THE CLASS A-1 CERTIFICATES ADDRESS THE PAYMENT OF THE
GROUP I CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT.
WITH RESPECT TO THE GROUP II CLASS A CERTIFICATES, THE "GROUP II
CLASS A CARRY-FORWARD AMOUNT" AS OF ANY DISTRIBUTION DATE EQUALS THE SUM OF (A)
THE AMOUNT, IF ANY, BY WHICH (I) THE RELATED INSURED DISTRIBUTION AMOUNT FOR THE
IMMEDIATELY PRECEDING DISTRIBUTION DATE EXCEEDED (II) THE AMOUNT ACTUALLY
DISTRIBUTED TO THE HOLDERS OF THE GROUP II CLASS A CERTIFICATES ON SUCH
DISTRIBUTION DATE IN RESPECT THEREOF (INCLUDING, WITHOUT LIMITATION, AMOUNTS
PAID UNDER A CERTIFICATE INSURANCE POLICY) AND (B) 30 DAYS' INTEREST ON SUCH
AMOUNT AT A RATE EQUAL TO THE SUM OF (I) THE CLASS A-2 FORMULA PASS-THROUGH RATE
APPLICABLE TO THE CLASS A-2 CERTIFICATES FOR SUCH DISTRIBUTION DATE AND (II) THE
GROUP II FIXED STRIP EFFECTIVE RATE TIMES A FRACTION EQUAL TO (X) THE NOTIONAL
AMOUNT OF THE GROUP II FIXED STRIP COMPONENTS DIVIDED BY (Y) THE
S-64
<PAGE>
CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES, IN EACH CASE AS
DETERMINED IMMEDIATELY PRIOR TO SUCH DISTRIBUTION DATE. THE GROUP II CLASS A
CARRY-FORWARD AMOUNT DOES NOT INCLUDE ANY GROUP II
CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT.
THE "CLASS A-2 FORMULA PASS-THROUGH RATE" FOR A DISTRIBUTION DATE IS
THE LESSER OF (X) THE RATE DETERMINED BY CLAUSE (I) OF THE DEFINITION OF
PASS-THROUGH RATE FOR THE CLASS A-2 CERTIFICATES FOR SUCH DISTRIBUTION DATE AND
(Y) THE WEIGHTED AVERAGE OF THE NET LIFETIME RATE CAPS OF THE GROUP II LOANS.
THE NET LIFETIME RATE CAP ON EACH GROUP II LOAN IS EQUAL TO THE RELATED LIFETIME
RATE CAP MINUS THE SUM OF (I) THE SERVICING FEE RATE AND THE RATES PER ANNUM AT
WHICH THE TRUSTEE'S FEE AND THE PREMIUM AMOUNT ACCRUE AND (II) THE GROUP II
FIXED STRIP EFFECTIVE RATE TIMES A FRACTION EQUAL TO (X) THE NOTIONAL AMOUNT OF
THE GROUP II FIXED STRIP COMPONENTS DIVIDED BY (Y) THE CERTIFICATE PRINCIPAL
BALANCE OF THE CLASS A-2 CERTIFICATES, IN EACH CASE AS DETERMINED IMMEDIATELY
PRIOR TO SUCH DISTRIBUTION DATE.
THE POOLING AND SERVICING AGREEMENT PROVIDES THAT IF THE
PASS-THROUGH RATE ON THE CLASS A-2 CERTIFICATES IS LESS THAN THE CLASS A-2
FORMULA PASS-THROUGH RATE AND ANY RESULTING SHORTFALL IN INTEREST IS NOT PAID ON
SUCH DISTRIBUTION DATE FROM ANY AVAILABLE NET MONTHLY EXCESS CASHFLOW, AS
DESCRIBED BELOW, THEN THE AMOUNT OF ANY SUCH SHORTFALL WILL BE CARRIED FORWARD
AND BE PAID TO THE EXTENT OF AVAILABLE FUNDS, AS DESCRIBED HEREIN, TO THE
HOLDERS OF THE CLASS A-2 CERTIFICATES ON FUTURE DISTRIBUTION DATES AND SHALL
ACCRUE INTEREST AT THE APPLICABLE CLASS A-2 FORMULA PASS-THROUGH RATE, UNTIL
PAID (SUCH SHORTFALL, TOGETHER WITH SUCH ACCRUED INTEREST, THE "GROUP II CLASS A
AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT"). THE CERTIFICATE INSURANCE POLICY
DOES NOT COVER THE GROUP II CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT,
NOR DO THE RATINGS ASSIGNED TO THE CLASS A-2 CERTIFICATES ADDRESS THE PAYMENT OF
THE GROUP II CLASS A AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT.
WITH RESPECT TO THE GROUP III CLASS A CERTIFICATES, THE "GROUP III
CLASS A CARRY-FORWARD AMOUNT" AS OF ANY DISTRIBUTION DATE EQUALS THE SUM OF (A)
THE AMOUNT, IF ANY, BY WHICH (I) THE RELATED INSURED DISTRIBUTION AMOUNT FOR THE
IMMEDIATELY PRECEDING DISTRIBUTION DATE EXCEEDED (II) THE AMOUNT ACTUALLY
DISTRIBUTED TO THE HOLDERS OF THE GROUP III CLASS A CERTIFICATES ON SUCH
DISTRIBUTION DATE IN RESPECT THEREOF (INCLUDING, WITHOUT LIMITATION, AMOUNTS
PAID UNDER A CERTIFICATE INSURANCE POLICY) AND (B) 30 DAYS' INTEREST ON SUCH
AMOUNT AT A RATE EQUAL TO THE SUM OF (I) THE WEIGHTED AVERAGE OF THE
PASS-THROUGH RATES APPLICABLE TO THE GROUP III CLASS A CERTIFICATES (OTHER THAN
THE GROUP III FIXED STRIP COMPONENT) AND (II) THE PASS- THROUGH RATE ON THE
GROUP III FIXED STRIP COMPONENT FOR SUCH DISTRIBUTION DATE TIMES A FRACTION
EQUAL TO (X) THE NOTIONAL AMOUNT OF THE GROUP III FIXED STRIP COMPONENT DIVIDED
BY (Y) THE AGGREGATE CERTIFICATE PRINCIPAL BALANCE OF THE GROUP III CLASS A
CERTIFICATES IMMEDIATELY PRIOR TO SUCH DISTRIBUTION DATE.
THE "PREPAYMENT INTEREST SHORTFALL" FOR ANY DISTRIBUTION DATE IS
EQUAL TO THE AGGREGATE SHORTFALL, IF ANY, IN COLLECTIONS OF INTEREST (MINUS THE
RELATED SERVICING FEE) RESULTING FROM MORTGAGOR PREPAYMENTS ON THE MORTGAGE
LOANS DURING THE PRECEDING CALENDAR MONTH. SUCH SHORTFALLS WILL RESULT BECAUSE
INTEREST ON PREPAYMENTS IN FULL IS DISTRIBUTED ONLY TO THE DATE OF PREPAYMENT,
AND BECAUSE NO INTEREST IS DISTRIBUTED ON PREPAYMENTS IN PART, AS SUCH
PREPAYMENTS IN PART ARE APPLIED TO REDUCE THE OUTSTANDING PRINCIPAL BALANCE OF
THE RELATED MORTGAGE LOANS AS OF THE DUE DATE IN THE MONTH OF PREPAYMENT.
HOWEVER, WITH RESPECT TO ANY DISTRIBUTION DATE, ANY PREPAYMENT INTEREST
SHORTFALLS RESULTING FROM FULL OR PARTIAL PREPAYMENTS DURING THE PRECEDING
CALENDAR MONTH WILL BE OFFSET BY THE MASTER SERVICER, BUT ONLY TO THE EXTENT
SUCH PREPAYMENT INTEREST SHORTFALLS DO NOT EXCEED AN AMOUNT EQUAL TO THE
SERVICING FEE PAYABLE TO THE MASTER SERVICER IN RESPECT OF ITS SERVICING
ACTIVITIES WITH RESPECT TO SUCH DISTRIBUTION DATE. SEE "POOLING AND SERVICING
AGREEMENT--SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES" HEREIN. AN
AMOUNT EQUAL TO THE CLASS A CERTIFICATES' PRO RATA SHARE, BASED ON THE AMOUNT OF
INTEREST PAYABLE ON EACH SUCH CLASS, OF ANY PREPAYMENT INTEREST SHORTFALLS IN
EXCESS OF THE SERVICING FEE WILL BE MADE AVAILABLE BY THE CERTIFICATE INSURER
FOR DISTRIBUTION TO THE CLASS A CERTIFICATEHOLDERS.
THE PASS-THROUGH RATE ON THE CLASS A-1 CERTIFICATES IS ADJUSTABLE
AND IS CALCULATED AS FOLLOWS: BEGINNING ON THE DISTRIBUTION DATE IN OCTOBER
1997, AND ON EACH DISTRIBUTION DATE THEREAFTER, THE PASS- THROUGH RATE ON THE
CLASS A-1 CERTIFICATES WILL BE ADJUSTED TO EQUAL THE LESSER OF (I) (A) WITH
RESPECT TO ANY
S-65
<PAGE>
DISTRIBUTION DATE WHICH OCCURS ON OR PRIOR TO THE DATE ON WHICH THE AGGREGATE
PRINCIPAL BALANCE OF THE MORTGAGE LOANS IS LESS THAN 10% OF THE AGGREGATE
PRINCIPAL BALANCE OF THE MORTGAGE LOANS AS OF THE CUTOFF DATE, ONE-MONTH LIBOR
(AS DEFINED IN "DESCRIPTION OF THE CERTIFICATES--CALCULATION OF ONE-MONTH LIBOR"
BELOW) PLUS 0.21% OR (B) WITH RESPECT TO ANY DISTRIBUTION DATE THEREAFTER,
ONE-MONTH LIBOR PLUS 0.42% AND (II) THE GROUP I CLASS A AVAILABLE FUNDS
PASS-THROUGH RATE.
THE "GROUP I CLASS A AVAILABLE FUNDS PASS-THROUGH RATE," AS OF ANY
DISTRIBUTION DATE, IS EQUAL TO (I) THE WEIGHTED AVERAGE OF THE MORTGAGE RATES OF
THE GROUP I LOANS, MINUS (II) THE SUM OF THE SERVICING FEE RATE AND THE RATES
PER ANNUM AT WHICH THE TRUSTEE'S FEE AND PREMIUM AMOUNT ACCRUE AND MINUS (III)
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
CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-1 CERTIFICATES, IN EACH CASE AS
DETERMINED IMMEDIATELY PRIOR TO SUCH DISTRIBUTION DATE FOR THE RELATED DUE
PERIOD AND MINUS (IV) COMMENCING ON THE SEVENTH DISTRIBUTION DATE, 0.50% PER
ANNUM. 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 24TH THROUGH 30TH DISTRIBUTION DATES, AND 0.00% THEREAFTER.
THE PASS-THROUGH RATE ON THE CLASS A-2 CERTIFICATES IS ADJUSTABLE
AND IS CALCULATED AS FOLLOWS: BEGINNING ON THE DISTRIBUTION DATE IN OCTOBER
1997, AND ON EACH DISTRIBUTION DATE THEREAFTER, THE PASS- THROUGH RATE ON THE
CLASS A-2 CERTIFICATES WILL BE ADJUSTED TO EQUAL THE LESSER OF (I) (A) WITH
RESPECT TO ANY DISTRIBUTION DATE WHICH OCCURS ON OR PRIOR TO THE DATE ON WHICH
THE AGGREGATE PRINCIPAL BALANCE OF THE MORTGAGE LOANS IS LESS THAN 10% OF THE
AGGREGATE PRINCIPAL BALANCE OF THE MORTGAGE LOANS AS OF THE CUTOFF DATE,
ONE-MONTH LIBOR (AS DEFINED IN "DESCRIPTION OF THE CERTIFICATES--CALCULATION OF
ONE-MONTH LIBOR" BELOW) PLUS 0.20% OR (B) WITH RESPECT TO ANY DISTRIBUTION DATE
THEREAFTER, ONE-MONTH LIBOR PLUS 0.40% AND (II) THE GROUP II CLASS A AVAILABLE
FUNDS PASS-THROUGH RATE.
THE "GROUP II CLASS A AVAILABLE FUNDS PASS-THROUGH RATE," AS OF ANY
DISTRIBUTION DATE, IS EQUAL TO (I) THE WEIGHTED AVERAGE OF THE MORTGAGE RATES OF
THE GROUP II LOANS, MINUS (II) THE SUM OF THE SERVICING FEE RATE AND THE RATES
PER ANNUM AT WHICH THE TRUSTEE'S FEE AND PREMIUM AMOUNT ACCRUE AND MINUS (III)
THE GROUP II FIXED STRIP EFFECTIVE RATE TIMES A FRACTION EQUAL TO (X) THE
NOTIONAL AMOUNT OF THE GROUP II FIXED STRIP COMPONENTS DIVIDED BY (Y) THE
CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES, IN EACH CASE AS
DETERMINED IMMEDIATELY PRIOR TO SUCH DISTRIBUTION DATE AND MINUS (IV) COMMENCING
ON THE SEVENTH DISTRIBUTION DATE, 0.50% PER ANNUM. THE "GROUP II 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, AND 2.50% FOR THE 24TH THROUGH
30TH DISTRIBUTION DATES, AND 0.00% THEREAFTER.
THE PASS-THROUGH RATE WITH RESPECT TO THE CLASS A-3 AND CLASS A-4
CERTIFICATES IS EQUAL TO THE FIXED RATE SET FORTH ON THE COVER HEREOF.
ON THE FIRST 36 DISTRIBUTION DATES, THE PASS-THROUGH RATE ON THE
CLASS A-5 CERTIFICATES IS EQUAL TO: (I) WITH RESPECT TO ANY DISTRIBUTION DATE
WHICH OCCURS ON OR PRIOR TO THE DATE ON WHICH THE AGGREGATE PRINCIPAL BALANCE OF
THE MORTGAGE LOANS IS LESS THAN 10% OF THE SUM OF THE AGGREGATE PRINCIPAL
BALANCE OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE, 7.19% PER ANNUM AND (II)
WITH RESPECT TO ANY DISTRIBUTION DATE THEREAFTER, 7.94% PER ANNUM. ON EACH
DISTRIBUTION DATE FOLLOWING THE FIRST 36 DISTRIBUTION DATES, THE PASS-THROUGH
RATE ON THE CLASS A-5 CERTIFICATES IS EQUAL TO THE LESSER OF: (I)(A) WITH
RESPECT TO ANY DISTRIBUTION DATE WHICH OCCURS ON OR PRIOR TO THE DATE ON WHICH
THE AGGREGATE PRINCIPAL BALANCE OF THE MORTGAGE LOANS IS LESS THAN 10% OF THE
SUM OF THE AGGREGATE PRINCIPAL BALANCE OF THE MORTGAGE LOANS AS OF THE CUT-OFF
DATE, 7.19% PER ANNUM AND (B) WITH RESPECT TO ANY DISTRIBUTION DATE THEREAFTER,
7.94% PER ANNUM AND (II) THE GROUP III WEIGHTED AVERAGE PASS-THROUGH CAP. THE
"GROUP III WEIGHTED AVERAGE PASS-THROUGH CAP" IS EQUAL TO (I) THE WEIGHTED
AVERAGE OF THE MORTGAGE RATES ON THE GROUP III LOANS, MINUS (II) THE SUM OF THE
SERVICING FEE RATE AND THE RATES PER ANNUM AT WHICH THE TRUSTEE'S FEE AND
PREMIUM AMOUNT ACCRUE.
S-66
<PAGE>
THE PASS-THROUGH RATE ON THE CLASS A-6 CERTIFICATES IS EQUAL TO: (I)
ON THE FIRST 36 DISTRIBUTION DATES, 6.87% PER ANNUM, AND (II) ON ANY
DISTRIBUTION DATE THEREAFTER, THE LESSER OF (A) 6.87% PER ANNUM
AND (B) THE GROUP III WEIGHTED AVERAGE PASS-THROUGH CAP.
THE PASS-THROUGH RATE FOR THE CLASS A-7 COMPONENT A AND D WILL BE
EQUAL TO 2.50% FOR THE FIRST 30 DISTRIBUTION DATES, AND 0.00% THEREAFTER. THE
PASS-THROUGH RATE FOR THE CLASS A-7 COMPONENT B AND E WILL BE EQUAL TO 1.50% FOR
THE FIRST 24 DISTRIBUTION DATES, AND 0.00% THEREAFTER. THE PASS-THROUGH RATE FOR
THE CLASS A-7 COMPONENT C AND F WILL BE EQUAL TO 1.50% FOR THE FIRST 12
DISTRIBUTION DATES, AND 0.00% THEREAFTER. THE PASS-THROUGH RATE FOR THE GROUP
III FIXED COMPONENT OF THE FIXED STRIP CERTIFICATES WILL BE EQUAL TO 6.50% FOR
THE FIRST 36 DISTRIBUTION DATES, AND 0.00% THEREAFTER. EACH COMPONENT OF THE
FIXED STRIP CERTIFICATES HAS NO CERTIFICATE PRINCIPAL BALANCE AND WILL ACCRUE
INTEREST AT THE RELATED PASS-THROUGH RATE ON THE RELATED NOTIONAL AMOUNT (AS
DEFINED HEREIN). ANY AMOUNT DISTRIBUTED IN RESPECT OF THE COMPONENTS OF THE
FIXED STRIP CERTIFICATES SHALL BE DISTRIBUTED TO THE HOLDERS OF THE FIXED STRIP
CERTIFICATES.
AS DESCRIBED HEREIN, THE CLASS A INTEREST DISTRIBUTION AMOUNTS
ALLOCABLE TO THE CLASS A 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 A CERTIFICATE AS OF ANY DATE OF DETERMINATION IS EQUAL TO
THE INITIAL CERTIFICATE PRINCIPAL BALANCE THEREOF, REDUCED AS DESCRIBED HEREIN
WITH RESPECT TO SUCH CERTIFICATE. THE NOTIONAL AMOUNT OF EACH GROUP I FIXED
STRIP COMPONENT AS OF ANY DISTRIBUTION DATE IS EQUAL TO THE LESSER OF (I)
$25,231,000 AND (II) THE CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES IMMEDIATELY PRIOR TO SUCH DATE. THE NOTIONAL AMOUNT OF EACH GROUP
II FIXED STRIP COMPONENT AS OF ANY DISTRIBUTION DATE IS EQUAL TO THE LESSER OF
(I) $8,823,000 AND (II) THE CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-2
CERTIFICATES IMMEDIATELY PRIOR TO SUCH DATE. THE NOTIONAL AMOUNT OF THE GROUP
III FIXED STRIP COMPONENT AS OF ANY DISTRIBUTION DATE IS EQUAL TO THE
CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-6 CERTIFICATES IMMEDIATELY PRIOR TO
SUCH DATE.
ON ANY DISTRIBUTION DATE, THE AMOUNT OF THE PREMIUM (THE "PREMIUM
AMOUNT") PAYABLE TO THE CERTIFICATE INSURER IS EQUAL TO ONE-TWELFTH OF THE
PRODUCT OF A PERCENTAGE SPECIFIED IN AN EXHIBIT TO THE POOLING AND SERVICING
AGREEMENT AND THE CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A CERTIFICATES.
CALCULATION OF ONE-MONTH LIBOR
WITH RESPECT TO THE FIRST DISTRIBUTION DATE, ON THE DELIVERY DATE,
AND, WITH RESPECT TO EACH DISTRIBUTION DATE THEREAFTER, ON THE SECOND LIBOR
BUSINESS DAY PRECEDING SUCH DISTRIBUTION DATE (EACH SUCH DATE, AN "INTEREST
DETERMINATION DATE"), ONE-MONTH LIBOR SHALL BE ESTABLISHED BY THE TRUSTEE AND AS
TO ANY ACCRUAL PERIOD, ONE-MONTH LIBOR WITH RESPECT TO THE CLASS A-1
CERTIFICATES AND CLASS A-2 CERTIFICATES WILL EQUAL THE RATE FOR UNITED STATES
DOLLAR DEPOSITS FOR ONE MONTH WHICH APPEARS ON THE TELERATE SCREEN PAGE 3750 AS
OF 11:00 A.M., LONDON TIME, ON SUCH INTEREST DETERMINATION DATE. "TELERATE
SCREEN PAGE 3750" MEANS THE DISPLAY DESIGNATED AS PAGE 3750 ON THE TELERATE
SERVICE (OR SUCH OTHER PAGE AS MAY REPLACE PAGE 3750 ON THAT SERVICE FOR THE
PURPOSE OF DISPLAYING LONDON INTERBANK OFFERED RATES OF MAJOR BANKS). IF SUCH
RATE DOES NOT APPEAR ON SUCH PAGE (OR SUCH OTHER PAGE AS MAY REPLACE THAT PAGE
ON THAT SERVICE, OR IF SUCH SERVICE IS NO LONGER OFFERED, SUCH OTHER SERVICE FOR
DISPLAYING ONE-MONTH LIBOR OR COMPARABLE RATES AS MAY BE SELECTED BY THE
TRUSTEE), THE RATE WILL BE THE REFERENCE BANK RATE. THE "REFERENCE BANK RATE"
WILL BE DETERMINED ON THE BASIS OF THE RATES AT WHICH DEPOSITS IN U.S. DOLLARS
ARE OFFERED BY THE REFERENCE BANKS (WHICH SHALL BE THREE MAJOR BANKS THAT ARE
ENGAGED IN TRANSACTIONS IN THE LONDON INTERBANK MARKET, SELECTED BY THE TRUSTEE)
AS OF 11:00 A.M., LONDON TIME, ON THE INTEREST DETERMINATION DATE, TO PRIME
BANKS IN THE LONDON INTERBANK MARKET FOR A PERIOD OF ONE MONTH IN AMOUNTS
APPROXIMATELY EQUAL TO THE AGGREGATE CERTIFICATE PRINCIPAL BALANCE OF THE CLASS
A-1 CERTIFICATES AND CLASS A-2 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
S-67
<PAGE>
BE THE ARITHMETIC MEAN OF THE RATES QUOTED BY ONE OR MORE MAJOR BANKS IN NEW
YORK CITY, SELECTED BY THE TRUSTEE, AS OF 11:00 A.M., NEW YORK CITY TIME, ON THE
INTEREST DETERMINATION DATE, FOR LOANS IN U.S. DOLLARS TO LEADING EUROPEAN BANKS
FOR A PERIOD OF ONE MONTH IN AMOUNTS APPROXIMATELY EQUAL TO THE AGGREGATE
CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-1 CERTIFICATES AND CLASS A-2
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 ONE-MONTH 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 CLASS A-1 CERTIFICATES AND CLASS A-2 CERTIFICATES FOR THE
RELATED ACCRUAL PERIOD SHALL (IN THE ABSENCE OF MANIFEST ERROR) BE FINAL AND
BINDING.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
HOLDERS OF THE CLASS A CERTIFICATES WILL BE ENTITLED TO RECEIVE ON
EACH DISTRIBUTION DATE, TO THE EXTENT OF THE PORTION OF THE AMOUNT REMAINING FOR
DISTRIBUTION AFTER PAYMENT OF THE RELATED CLASS A INTEREST DISTRIBUTION AMOUNT,
AN AMOUNT (AS DETERMINED SEPARATELY FOR THE GROUP I, GROUP II AND GROUP III
CLASS A CERTIFICATES (OTHER THAN THE FIXED STRIP CERTIFICATES, WHICH ARE NOT
ENTITLED TO DISTRIBUTIONS WITH RESPECT TO PRINCIPAL), THE RELATED "CLASS A
PRINCIPAL DISTRIBUTION AMOUNT"), IN REDUCTION OF THE CERTIFICATE PRINCIPAL
BALANCE THEREOF AS DESCRIBED BELOW, WHICH EQUALS THE SUM OF (I) THE PORTION OF
ANY GROUP I, GROUP II OR GROUP III CLASS A CARRY-FORWARD AMOUNT, AS APPLICABLE,
WHICH RELATES TO A SHORTFALL IN A DISTRIBUTION OF A RELATED SUBORDINATION
DEFICIT, (II) ALL SCHEDULED INSTALLMENTS OF PRINCIPAL IN RESPECT OF THE MORTGAGE
LOANS IN THE RELATED LOAN GROUP RECEIVED OR ADVANCED DURING THE 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"), TOGETHER WITH ALL
UNSCHEDULED PAYMENTS OF PRINCIPAL ON SUCH MORTGAGE LOANS RECEIVED BY THE MASTER
SERVICER DURING THE PRIOR CALENDAR MONTH, (III) THE PRINCIPAL BALANCE OF EACH
MORTGAGE LOAN IN THE RELATED LOAN GROUP THAT WAS REPURCHASED BY EITHER THE
SELLER OR BY THE COMPANY, (IV) ANY AMOUNTS DELIVERED BY THE COMPANY ON THE
MASTER SERVICER REMITTANCE DATE (AS DEFINED HEREIN) IN CONNECTION WITH A
SUBSTITUTION OF A MORTGAGE LOAN IN THE RELATED LOAN GROUP, (V) THE NET
LIQUIDATION PROCEEDS (AS DEFINED IN THE PROSPECTUS) COLLECTED BY THE MASTER
SERVICER OF ALL MORTGAGE LOANS IN THE RELATED LOAN GROUP DURING THE PRIOR
CALENDAR MONTH (TO THE EXTENT SUCH NET LIQUIDATION PROCEEDS ARE RELATED TO
PRINCIPAL), (VI) THE AMOUNT OF ANY RELATED SUBORDINATION DEFICIT FOR SUCH
DISTRIBUTION DATE, (VII) THE PROCEEDS RECEIVED BY THE TRUSTEE OF ANY TERMINATION
OF THE RELATED LOAN GROUP (TO THE EXTENT SUCH PROCEEDS ARE RELATED TO
PRINCIPAL), AND (VIII) THE AMOUNT OF ANY RELATED SUBORDINATION INCREASE AMOUNT
(AS DEFINED HEREIN) FOR SUCH DISTRIBUTION DATE; MINUS (ix) the amount of any
related Subordination Reduction Amount (as defined herein) for such Distribution
Date.
In no event will the Class A Principal Distribution Amount with
respect to any Distribution Date be (x) less than zero or (y) greater than the
then outstanding aggregate Certificate Principal Balance of the
related Class A Certificates.
Distributions of the Class A Principal Distribution Amount and
Cross-Collateralization Payments with respect to Subordination Deficits and
Cross-Collateralized Subordination Shortfalls with respect to the Class A-1
Certificates will be allocated to the Class A-1 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal Balance
has been reduced to zero.
S-68
<PAGE>
Distributions of the Class A Principal Distribution Amount and
Cross-Collateralization Payments with respect to Subordination Deficits and
Cross-Collateralized Subordination Shortfalls with respect to the Class A-2
Certificates will be allocated to the Class A-2 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal Balance
has been reduced to zero.
Distributions of the Class A Principal Distribution Amount and
Cross-Collateralization Payments with respect to Subordination Deficits and
Cross-Collateralized Subordination Shortfalls with respect to the Group III
Class A Certificates (other than the Group III 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-3 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-4 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-5 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 a Certificate Insurer
Default exists and a Subordination Deficit exists with respect to the Group III
Loans, the related Class A Principal Distribution Amount payable to the Group
III Class A Certificates will be allocated to the Group III 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 sum of the
aggregate Certificate Principal Balances of the Group III Class A Certificates.
The "Lockout Distribution Percentage" for any Distribution Date occurring prior
to the Distribution Date in October
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 III 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
S-69
<PAGE>
balance is specified for such Due Date in the amortization schedule, (before any
adjustment to such amortization schedule by reason of any bankruptcy (other than
Deficient Valuations (as defined in the Prospectus)) or similar proceeding or
any moratorium or similar waiver or grace period) after giving effect to
prepayments received prior to such Due Date, Deficient Valuations incurred prior
to such Due Date, and to the payment of principal due on such Due Date and
irrespective of any delinquency in payment by the related Mortgagor. The
Principal Balance of a Mortgage Loan which becomes a Liquidated Mortgage Loan
(as defined herein) on or prior to such Due Date shall be zero.
See "Summary--Special Prepayment Considerations" and "--Special
Yield Considerations" and "Certain Yield and Prepayment Considerations" herein.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to
make Advances with respect to any payments of principal and interest (net of the
related servicing fees) which were due on the Mortgage Loans on the immediately
preceding Due Date and have not been received as of the business day immediately
preceding the related Master Servicer Remittance Date. With respect to a
delinquent Balloon Payment, the Master Servicer is not required to make an
Advance of such delinquent Balloon Payment. The Master Servicer will, however,
make monthly Advances with respect to balloon Mortgage Loans with delinquent
Balloon Payments, in each case in an amount equal to the assumed monthly
principal and interest payment (net of the related servicing fees) that would
have been due on the related Due Date based on the original principal
amortization schedule for such balloon Mortgage Loan.
Such Advances are required to be made by the Master Servicer only to
the extent they are deemed by the Master Servicer to be recoverable from related
late collections, insurance proceeds or liquidation proceeds. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, to maintain a specified level of overcollateralization and
to pay the premium due the Certificate Insurer and to pay the Trustee, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to application of the Relief Act. Any
failure by the Master Servicer to make an Advance as required under the Pooling
and Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor servicer, will be obligated to make any such
Advance, in accordance with the terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer making the
Advance subject to certain conditions and restrictions from late collections,
insurance proceeds and liquidation proceeds from the Mortgage Loan as to which
such unreimbursed Advance was made 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 Certificate
Account.
CERTIFICATE GUARANTY INSURANCE POLICIES
The following information regarding the Certificate Insurance
Policies has been supplied by the Certificate Insurer for inclusion in this
Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the
premium and subject to the terms of the Certificate Insurance Policies, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment (as defined below)
will be received by the Trustee, or its successor as Trustee for the Owners, on
behalf of the Owners from the Certificate Insurer, for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Certificate Insurance
Policies with
S-70
<PAGE>
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Payments shall be
made only at the time set forth in the Certificate Insurance Policies, and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Certificates, unless such acceleration is at the sole option of the
Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust Fund, either REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the Business Day following receipt on
a Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for such Owner in any
legal proceeding related to such preference payment, such instruments being in a
form satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policies no later than 12:00 noon, New York City time, on
the later of the Distribution Date on which the related Insured Payment is due
or the Business Day following receipt in New York, New York on a Business Day by
State Street Bank and Trust Company, N.A., as the Certificate Insurer's Fiscal
Agent or any successor fiscal agent appointed by the Certificate Insurer (the
"Certificate Insurer's Fiscal Agent") of a Notice (as described below); provided
that if such Notice is received after 12:00 noon, New York City time, on such
Business Day, it will be deemed to be received on the following Business Day. If
any such Notice received by the Certificate Insurer's Fiscal Agent is not in
proper form or is otherwise insufficient for the purpose of making a claim under
any Certificate Insurance Policy it shall be deemed not to have been received by
the Certificate Insurer's Fiscal Agent for purposes of this paragraph, and the
Certificate Insurer or the Certificate Insurer's Fiscal Agent, as the case may
be, shall promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under the Certificate Insurance Policies,
unless otherwise stated therein, will be disbursed by the Certificate Insurer's
Fiscal Agent to the Trustee on behalf of the Owners by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Trustee for the payment of such Insured Payment and legally available
therefor.
The Certificate Insurer's Fiscal Agent is the agent of the
Certificate Insurer only and the Certificate Insurer's Fiscal Agent shall in no
event be liable to Owners for any acts of the Certificate Insurer's Fiscal Agent
or any failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policies.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
S-71
<PAGE>
"Business Day" means any day other than a Saturday, a
Sunday or a day on which the Certificate Insurer or banking
institutions in New York City or in the city in which the corporate
trust office of the Trustee under the Pooling and Servicing
Agreement is located are authorized or
obligated by law or executive order to close.
"Insured Payment" means (i) as of any Distribution Date,
an amount equal to the sum of (a) the related Class A Interest
Distribution Amount minus the related Available Funds (to the extent
such difference is not covered by Cross-Collateralization Payments)
and (b) the related Subordination Deficit (to the extent not covered
by Cross-Collateralization Payments) and (ii) the related unpaid
Preference Amount.
"Notice" means the telephonic or telegraphic notice,
promptly confirmed in writing by telecopy substantially in the form
of Exhibit A attached to each Certificate Insurance Policy, the
original of which is ly delivered by registered or certified mail,
from the Trustee specifying the Insured Payment which shall be due
and owing on the applicable Distribution Date.
"Owner" means each related Class A Certificateholder (as
defined in the Pooling and Servicing Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the
applicable Class A Certificate to payment thereunder.
"Pooling and Servicing Agreement" means the Pooling and
Servicing Agreement dated as of September 1, 1997, by and among
Southern Pacific Secured Assets Corp., as Company, Advanta Mortgage
Corp. USA, as Master Servicer, and Norwest Bank Minnesota, N.A., as
Trustee, without regard to any amendment or supplement thereto,
unless such amendment or supplement has been approved in writing by
the Certificate Insurer.
"Preference Amount" means any amount previously
distributed to an Owner on the related Class A Certificates that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code
(11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
"Prospectus Supplement" means the final form of the
Prospectus Supplement dated September 24, 1997.
Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined in the Certificate Insurance Policies shall have the
respective meanings set forth in the Pooling and Servicing Agreement as of the
date of execution of the Certificate Insurance Policies, without giving effect
to any subsequent amendment or modification to the Pooling and Servicing
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of
process on the Certificate Insurer's Fiscal Agent may be made at the address
listed below for the Certificate Insurer's Fiscal Agent or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Certificate Insurer's Fiscal Agent is 15th
Floor, 61 Broadway, New York, New York 10006, Attention: Municipal Registrar and
Paying Agency, or such other address as the Certificate Insurer's Fiscal Agent
shall specify to the Trustee in writing.
The Certificate Insurance Policies are being issued under and
pursuant to, and shall be construed under, the laws of the State of New York,
without giving effect to the conflict of laws principles
thereof.
S-72
<PAGE>
The insurance provided by the Certificate Insurance Policies is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any
reason. The premium on each of the Certificate Insurance Policies is not
refundable for any reason including payment, or provision being made
for payment, prior to maturity of the Class A Certificates.
MBIA INSURANCE CORPORATION
The following information has been supplied by the Certificate
Insurer for inclusion in this Prospectus Supplement.
The Certificate Insurer is the principal operating subsidiary of
MBIA Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated
to pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1996 and December 31, 1995 and for each of the three years in the period ended
December 31, 1996, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1996 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries for the six months ended June 30, 1997
and for the periods ending June 30, 1997 and June 30, 1996 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended June 30, 1997,
are hereby incorporated by reference into this Prospectus Supplement and shall
be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA, Inc. pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities
("SAP") and generally accepted accounting principles ("GAAP"):
S-73
<PAGE>
<TABLE>
<CAPTION>
SAP
--------------------------------------------------------------------------
DECEMBER 31, 1996 JUNE 30, 1997
----------------------------- ------------------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets............ $4,476 $4,824
Liabilities................ 3,009 3,259
Capital and Surplus........ 1,467 1,565
</TABLE>
<TABLE>
<CAPTION>
GAAP
--------------------------------------------------------------------------
DECEMBER 31, 1996 JUNE 30, 1997
----------------------------- ------------------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets..................... $5,066 $5,408
Liabilities................ 2,262 2,412
Shareholder's Equity....... 2,804 2,996
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1996
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policies and the
Certificate Insurer set forth under the heading "Description of the
Certificates--Certificate Guaranty Insurance Policies" and "MBIA Insurance
Corporation." Additionally, the Certificate Insurer makes no representation
regarding the Class A Certificates or the advisability of investing in the Class
A Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of
the Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The Certificate Insurer does not guaranty the market price of
the Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be revised or withdrawn.
S-74
<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on
the Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans in the related Loan Group. Such yield may be
adversely affected by a higher or lower than anticipated rate of principal
payments on the Mortgage Loans in the related Loan Group. The rate of principal
payments on such Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans, the rate and timing of principal prepayments
thereon by the mortgagors, liquidations of defaulted Mortgage Loans and
purchases of Mortgage Loans in the related Loan Group due to certain breaches of
representations or warranties. The timing of changes in the rate of prepayments,
liquidations and purchases of the Mortgage Loans in the related Loan Group may,
and the timing of losses on the Mortgage Loans in the related Loan Group will,
significantly affect the yield on the related Class A Certificates to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans in the related Loan Group will depend
on future events and on a variety of factors (as described herein and in the
Prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations"), no assurance can be given as to such rate or the timing of
principal payments on the related Class A Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time;
however, a majority of the Mortgage Loans in each Loan Group are subject to a
prepayment charge for prepayments. See "Description of the Mortgage Pool"
herein. In addition, the Mortgage Loans contain a provision that may result in
the acceleration of the payment of the Mortgage Loan in the event of the
transfer or sale of the related Mortgaged Property. As described under
"Description of the Certificates--Class A Principal Distribution Amount" herein,
during certain periods all or a disproportionately large or small percentage of
Mortgagor prepayments on the Mortgage Loans will be allocated among the Group
III Class A Certificates (other than the Lockout Certificates), and during
certain periods no Mortgagor prepayments or, relative to the Lockout Certificate
Percentage, a disproportionately small portion of Mortgagor prepayments on the
Mortgage Loans will be distributed on the Lockout Certificates. Prepayments,
liquidations and purchases of the Mortgage Loans in the related Loan Group will
result in distributions to holders of the related Class A Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Mortgage Loans in the related Loan Group. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates, solicitations and servicing decisions. In
addition, if prevailing mortgage rates fell significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayments (including refinancings) on
the Mortgage Loans (in particular, the Group III 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
Because the Mortgage Rates on the Group III Loans and the
Pass-Through Rates on the Group III Class A Certificates are fixed, such rates
will not change in response to changes in market interest rates. Accordingly, if
market interest rates or market yields for securities similar to the Group III
Class A Certificates were to rise, the market value of the Group III
Certificates may decline.
The effective yield to maturity to each holder of a Group III Class
A 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 III 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 Mortgage Loans in the Trust Fund which are balloon payment
Mortgage Loans will not be fully amortizing over their terms to maturity, and
will require substantial principal payments at their stated maturity. Mortgage
loans of this type involve a greater degree of risk than self-amortizing loans
because
S-75
<PAGE>
the ability of a borrower to make a balloon payment typically will depend upon
its ability either to fully refinance the loan or to sell the related Mortgaged
Property at a price sufficient to permit the borrower to make the balloon
payment. The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the value of the related Mortgaged
Property, the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the related Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for loans
secured by residential property. Because the ability of a borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property, there is a risk that the
Mortgage Loans that require balloon payments may default at maturity. Any
defaulted balloon payment that extends the maturity of a Mortgage Loan may delay
distributions of principal on the related Class A Certificates and thereby
extend the weighted average life of the related Class A Certificates and, if the
related Class A Certificates were purchased at a discount, reduce the yield
thereon.
In addition, the yield to maturity on the Class A Certificates will
depend on, among other things, the price paid by the holders of the Class A
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of a Class A Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a class of Class A Certificates is purchased at a premium (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 Class A Certificates is purchased at a discount and
principal distributions thereon occur at a rate slower than that assumed at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. The rate and timing of principal payments
on the Certificates may be affected by any changes in the related 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 October 2000 and thereafter will receive a
disproportionately small or large portion of principal payments (unless the
Certificate Principal Balance of the Class A-3, Class A-4 and Class A-5
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 III Class A Certificates entitled to such
distributions.
The following discussion assumes the characteristics set forth in
the tables below. The Final Scheduled Maturity Date for the Class A Certificates
(other than the Class A-7 Certificates) is as follows: Class A-1, Class A-2 and
Class A-5 Certificates, September 25, 2027; Class A-3 Certificates, October 25,
2014; Class A-4 Certificates, June 25, 2024; Class A-6 Certificates, July 25,
2027. Such Final Scheduled Maturity Dates were calculated assuming (i) 0% CPR
with respect to the Group I Loans and Group II Loans, (ii) 0% of the Prepayment
Assumption with respect to the Group III Loans and (iii) no Net Monthly Excess
Cashflows are used to make accelerated payments of principal on such classes of
Class A
S-76
<PAGE>
Certificates. The Class A-7 Certificates were assigned a Final Scheduled
Maturity Date of September 25, 2027; however, no payments will be made with
respect to such Certificates following the 30th Distribution Date. The weighted
average lives of the Class A 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 the Class
A Certificates could occur significantly earlier than the Final Scheduled
Maturity Date because (i) prepayments (including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the like) on Mortgage
Loans are likely to occur, and (ii) the holder of a majority interest in the
Class R-II Certificates or the Master Servicer may cause a liquidation of the
Mortgage Loans when the aggregate outstanding principal amount of the Mortgage
Loans is less than 10% (5% with respect to the Master Servicer (or the
Certificate Insurer, if Advanta is removed as Master Servicer)) of the sum of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
"Weighted average life" refers to the average amount of time that
will elapse from the date of issuance of a security until each dollar of
principal of such security is scheduled to be repaid to an investor (assuming no
losses). The weighted average life of the Class A Certificates will be
influenced by the rate at which principal of the Mortgage Loans 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 Class A Certificates and Group II Class A 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 III Class A
Certificates is a prepayment assumption (the "Prepayment Assumption"), which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption assumes a constant prepayment rate
of 3.0% per annum of the outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional approximate
1.5454% (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,
Loan Group II and Loan Group III are comprised of Mortgage Loans having the
following characteristics (dollar amounts are
approximate):
LOAN GROUP I
(i) the 1st through 19th hypothetical Mortgage Loans set forth
below comprise the Group I Loans included in Loan Group I:
S-77
<PAGE>
<TABLE>
<CAPTION>
Remaining Original
Term to Term to Gross Initial Subsequent Months to Rate
Principal Mortgage Net Maturity Maturity Gross Lifetime Adjustment Adjustment Next Rate Reset
Balance Rate Coupon (In Months) (In Months) Margin Cap Cap Cap Adjustment Frequency
------- ---- ------ ----------- ----------- ------ --- --- --- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 36,953.39 9.5000 8.9925 355 360 7.2500 16.5000 1.0000 1.0000 1 6
114,397.37 9.8500 9.3425 176 180 6.0000 15.8500 1.0000 1.0000 2 6
176,832.30 9.1540 8.6465 357 360 6.1050 16.1540 1.2050 1.2050 3 6
751,500.68 11.3060 10.7985 358 360 7.5000 18.0490 1.0660 1.0660 4 6
2,171,261.72 10.2040 9.6965 359 360 6.4280 17.1500 1.0720 1.0720 5 6
7,641,861.24 10.1050 9.5975 360 360 6.1380 17.0610 1.0750 1.0750 6 6
21,601,535.39 9.8510 9.3435 360 360 6.1160 16.7610 1.5810 1.5810 18 6
12,635,762.56 9.5930 9.0855 360 360 6.0500 16.5800 1.5060 1.5060 25 6
2,165,709.24 9.9150 9.4075 360 360 5.6200 16.8800 2.7410 2.7410 21 8
1,155,186.11 9.6890 9.1815 360 360 6.0850 16.6890 3.0000 3.0000 25 6
89,594.50 8.0000 7.4925 350 360 4.9000 15.0000 1.0000 1.0000 2 6
1,896,844.37 11.0000 10.4925 357 360 6.4830 17.7910 1.0200 1.0200 3 6
2,943,783.61 9.7817 9.2742 358 360 6.2270 16.5190 1.0100 1.0100 4 6
2,856,240.39 10.2547 9.7472 358 360 6.4180 17.2320 1.0400 1.0400 5 6
18,840,737.99 9.9378 9.4303 360 360 6.2230 16.8790 1.0720 1.0720 6 6
98,744,071.32 10.9158 10.4083 360 360 6.6090 17.8370 1.6900 1.6900 21 6
57,643,897.76 10.9605 10.4530 360 360 6.4900 17.9430 1.5270 1.5270 25 6
12,397,278.74 10.5240 10.0165 360 360 5.9690 17.5240 2.8560 2.8560 22 7
8,442,551.33 10.3871 9.8796 360 360 6.4180 17.3870 2.9380 2.9380 25 6
</TABLE>
LOAN GROUP II
(ii) the 1st through 10th hypothetical Mortgage Loans set forth
=below comprise the Group II Loans included in Loan Group II:
<TABLE>
<CAPTION>
Remaining Original
Term to Term to Gross Initial Subsequent Months to Rate
Principal Mortgage Net Maturity Maturity Gross Lifetime Adjustment Adjustment Next Rate Reset
Balance Rate Coupon (In Months) (In Months) Margin Cap Cap Cap Adjustment Frequency
------- ---- ------ ----------- ----------- ------ --- --- --- ---------- ---------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 67,294.18 9.5000 8.9925 355 360 7.2500 16.5000 1.0000 1.0000 1 6
208,324.06 9.8500 9.3425 176 180 6.0000 15.8500 1.0000 1.0000 2 6
322,021.58 9.1540 8.6465 357 360 6.1050 16.1540 1.2050 1.2050 3 6
1,368,525.07 11.3060 10.7985 358 360 7.5000 18.0490 1.0660 1.0660 4 6
3,953,989.90 10.2040 9.6965 359 360 6.4280 17.1500 1.0720 1.0720 5 6
13,916,259.74 10.1050 9.5975 360 360 6.1380 17.0610 1.0750 1.0750 6 6
39,337,612.66 9.8510 9.3435 360 360 6.1160 16.7610 1.5810 1.5810 18 6
23,010,435.33 9.5930 9.0855 360 360 6.0500 16.5800 1.5060 1.5060 25 6
3,943,878.51 9.9150 9.4075 360 360 5.6200 16.8800 2.7410 2.7410 21 8
2,103,658.97 9.6890 9.1815 360 360 6.0850 16.6890 3.0000 3.0000 25 6
</TABLE>
LOAN GROUP III
(i) the 1st through 8th hypothetical Mortgage Loans set forth below
comprise the Group III Loans included in Loan Group III:
S-78
<PAGE>
Original
Amortization Remaining Remaining
Principal Mortgage Net Term (in Term Amortizing Term
Balance Rate Coupon Months) (In Months) (In Months)
------- ---- ------ ------- ----------- -----------
$ 2,956,129.54 12.0026% 11.4951% 359 179 358
9,715.58 13.5000 12.9925 59 38 38
701,249.70 11.4338 10.9263 119 119 119
20,714,544.29 11.7336 11.2261 167 166 166
9,370,532.19 11.9005 11.3930 208 208 208
958,420.41 12.3529 11.8454 300 300 300
71,856,035.37 11.8067 11.2992 360 359 359
2,895,372.92 11.6724 11.1649 360 360 360
In addition, the following tables have been prepared assuming that the Mortgage
Loans in each Loan Group have the following characteristics: (i) all
calculations for the Mortgage Loans are done on the basis of a 360-day year
consisting of twelve 30-day months; (ii) with respect to the Class A
Certificates, all weighted average lives are calculated on the basis of a
360-day year and a 30-day month; (iii) Due Dates on each Mortgage Loan are the
first day of the month; (iv) all scheduled monthly payments on the Mortgage
Loans are made in a timely fashion on the first day of each month, commencing in
October 1997, and prepayments are assumed to be received on the last day of each
month, commencing in September 1997; (v) the Mortgage Rate for the Group I Loans
and Group II 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; (vi) there are no Prepayment Interest Shortfalls;
(vii) distributions on the Class A Certificates are made on the 25th day of each
month, commencing in October 1997; (viii) the Delivery Date is September 26,
1997; (ix) the Index for the Group I Loans is Six-Month LIBOR, except for the
9th, 10th, 18th and 19th hypothetical Group I Loans and the 9th and 10th
hypothetical Group II Loans, for which the Index is One- Year LIBOR; (x)
One-Month LIBOR remains constant at 5.65625% per annum, Six-Month LIBOR remains
constant at 5.84375% per annum, and One-Year LIBOR remains constant at 6.04297%
per annum; (xi) the Required Subordinated Amounts will be set as provided in the
Pooling and Servicing Agreement; (xii) the Mortgage Loans will prepay at the
indicated assumed percentages of CPR or the Prepayment Assumption in the
corresponding order set forth below; and (xiii) and with regard to the weighted
average lives neither the holder of a majority percentage interest of the Class
R-II Certificates or the Master Servicer (or the Certificate Insurer, if Advanta
is removed as Master Servicer) exercises its option to terminate the Trust Fund
when the aggregate principal balance of the Mortgage Loans is reduced to less
than 10% (or 5% in the case of the Master Servicer or the Certificate Insurer)
of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
(except as noted in footnote (2) set forth on pages S-81 through S-86) ((i)
through (xiii) collectively, the "Structuring Assumptions").
Based upon the foregoing assumptions, certain of which may not
reflect actual experience, the following tables indicate the projected weighted
average life of each class of Class A Certificates and the percentages of the
initial Certificate Principal Balance of each such class that would be
outstanding after each of the dates shown at various percentages of CPR and the
Prepayment Assumption which will occur simultaneously for all three Loan Groups.
Investors in the Class A Certificates should note that, irrespective of the
assumptions above, including the assumption of no losses on the Mortgage Loans,
the following tables show both CPR with respect to Loan Group I and Loan Group
II and the Prepayment Assumption with respect to Loan Group III because
Cross-Collateralization Payments will occur with respect to distributions.
S-79
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
CLASS A-1 CERTIFICATES
---------------------------------------------------------------------------------------
GROUP I AND GROUP II (CPR) 0% 18% 20% 25% 30% 35% 40%
----- ----- ----- ----- ----- ----- ----
GROUP III (PPA) 0% 75% 100% 115% 125% 150% 200%
----- ----- ---- ---- ---- ---- ----
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................. 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1998..................... 96 78 76 71 66 62 57
SEPTEMBER 1999..................... 95 63 59 52 44 38 32
SEPTEMBER 2000..................... 95 50 46 38 31 25 19
SEPTEMBER 2001..................... 94 41 37 28 22 16 12
SEPTEMBER 2002..................... 93 33 29 21 15 10 7
SEPTEMBER 2003..................... 93 27 23 16 10 7 4
SEPTEMBER 2004..................... 92 22 19 12 7 4 2
SEPTEMBER 2005..................... 91 18 15 9 5 3 1
SEPTEMBER 2006..................... 90 15 12 7 3 1 0
SEPTEMBER 2007..................... 89 12 9 5 2 1 0
SEPTEMBER 2008..................... 88 10 7 3 1 0 0
SEPTEMBER 2009..................... 87 8 6 2 1 0 0
SEPTEMBER 2010..................... 85 6 4 2 0 0 0
SEPTEMBER 2011..................... 84 5 3 1 0 0 0
SEPTEMBER 2012..................... 82 4 3 1 0 0 0
SEPTEMBER 2013 .................... 80 3 2 0 0 0 0
SEPTEMBER 2014..................... 77 2 1 0 0 0 0
SEPTEMBER 2015..................... 75 2 1 0 0 0 0
SEPTEMBER 2016..................... 72 1 1 0 0 0 0
SEPTEMBER 2017..................... 68 1 0 0 0 0 0
SEPTEMBER 2018..................... 64 1 0 0 0 0 0
SEPTEMBER 2019..................... 60 0 0 0 0 0 0
SEPTEMBER 2020..................... 55 0 0 0 0 0 0
SEPTEMBER 2021..................... 49 0 0 0 0 0 0
SEPTEMBER 2022..................... 43 0 0 0 0 0 0
SEPTEMBER 2023..................... 36 0 0 0 0 0 0
SEPTEMBER 2024..................... 29 0 0 0 0 0 0
SEPTEMBER 2025..................... 20 0 0 0 0 0 0
SEPTEMBER 2026..................... 11 0 0 0 0 0 0
SEPTEMBER 2027..................... 0 0 0 0 0 0 0
WEIGHTED AVERAGE
LIVES IN YEARS(1) 21.5 4.5 4.1 3.2 2.6 2.2 1.8
WEIGHTED AVERAGE
LIVES IN YEARS(2).............. 21.4 4.2 3.7 2.9 2.4 2.0 1.7
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assuming exercise by the holder of a majority interest of the Class R-ii
Certificates to cause an optional termination of the Trust Fund when the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of the Hypothetical Mortgage Loans
as set forth in the Structuring Assumptions for pages S-81 through S-86.
S-80
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
CLASS A-2 CERTIFICATES
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROUP I AND GROUP II (CPR) 0% 18% 20% 25% 30% 35% 40%
----- ----- ----- ---- ---- ---- ----
GROUP III (PPA) 0% 75% 100% 115% 125% 150% 200%
----- ----- ---- ---- ---- ---- ----
DISTRIBUTION DATE
- -----------------
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1998.................... 96 79 77 72 67 62 57
SEPTEMBER 1999.................... 95 62 59 52 44 38 32
SEPTEMBER 2000.................... 94 50 46 38 31 25 19
SEPTEMBER 2001.................... 94 41 37 28 22 16 12
SEPTEMBER 2002.................... 93 33 29 21 15 10 7
SEPTEMBER 2003.................... 93 27 23 16 10 7 4
SEPTEMBER 2004.................... 92 22 18 12 7 4 2
SEPTEMBER 2005.................... 91 18 15 9 5 3 1
SEPTEMBER 2006.................... 90 14 12 6 3 1 0
SEPTEMBER 2007.................... 89 12 9 5 2 1 0
SEPTEMBER 2008.................... 88 9 7 3 1 0 0
SEPTEMBER 2009.................... 86 8 6 2 1 0 0
SEPTEMBER 2010.................... 85 6 4 2 0 0 0
SEPTEMBER 2011.................... 83 5 3 1 0 0 0
SEPTEMBER 2012.................... 81 4 2 1 0 0 0
SEPTEMBER 2013.................... 79 3 2 0 0 0 0
SEPTEMBER 2014.................... 76 2 1 0 0 0 0
SEPTEMBER 2015.................... 74 2 1 0 0 0 0
SEPTEMBER 2016.................... 71 1 1 0 0 0 0
SEPTEMBER 2017.................... 67 1 0 0 0 0 0
SEPTEMBER 2018.................... 63 1 0 0 0 0 0
SEPTEMBER 2019.................... 59 0 0 0 0 0 0
SEPTEMBER 2020.................... 54 0 0 0 0 0 0
SEPTEMBER 2021.................... 48 0 0 0 0 0 0
SEPTEMBER 2022.................... 42 0 0 0 0 0 0
SEPTEMBER 2023.................... 36 0 0 0 0 0 0
SEPTEMBER 2024.................... 28 0 0 0 0 0 0
SEPTEMBER 2025.................... 20 0 0 0 0 0 0
SEPTEMBER 2026.................... 10 0 0 0 0 0 0
SEPTEMBER 2027.................... 0 0 0 0 0 0 0
WEIGHTED AVERAGE
LIVES IN YEARS(1)............. 21.3 4.5 4.1 3.2 2.6 2.2 1.8
WEIGHTED AVERAGE
LIVES IN YEARS(2)............. 21.3 4.2 3.7 2.9 2.4 2.0 1.7
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assuming exercise by the holder of a majority interest of the Class R-ii
Certificates to cause an optional termination of the Trust Fund when the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of the Hypothetical Mortgage Loans
as set forth in the Structuring Assumptions for pages S-81 through S-86.
S-81
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
CLASS A-3 CERTIFICATES
-------------------------------------------------------------------------------------
GROUP I AND GROUP II (CPR) 0% 18% 20% 25% 30% 35% 40%
----- ----- ----- ---- ---- ---- ----
GROUP III (PPA) 0% 75% 100% 115% 125% 150% 200%
----- ----- ---- ---- ---- ---- ----
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1998.................... 89 63 54 49 45 36 18
SEPTEMBER 1999.................... 86 23 4 0 0 0 0
SEPTEMBER 2000.................... 82 0 0 0 0 0 0
SEPTEMBER 2001.................... 78 0 0 0 0 0 0
SEPTEMBER 2002.................... 74 0 0 0 0 0 0
SEPTEMBER 2003.................... 69 0 0 0 0 0 0
SEPTEMBER 2004.................... 64 0 0 0 0 0 0
SEPTEMBER 2005.................... 59 0 0 0 0 0 0
SEPTEMBER 2006.................... 54 0 0 0 0 0 0
SEPTEMBER 2007.................... 48 0 0 0 0 0 0
SEPTEMBER 2008.................... 41 0 0 0 0 0 0
SEPTEMBER 2009.................... 34 0 0 0 0 0 0
SEPTEMBER 2010.................... 25 0 0 0 0 0 0
SEPTEMBER 2011.................... 15 0 0 0 0 0 0
SEPTEMBER 2012.................... 5 0 0 0 0 0 0
SEPTEMBER 2013.................... 0 0 0 0 0 0 0
SEPTEMBER 2014.................... 0 0 0 0 0 0 0
SEPTEMBER 2015.................... 0 0 0 0 0 0 0
SEPTEMBER 2016.................... 0 0 0 0 0 0 0
SEPTEMBER 2017.................... 0 0 0 0 0 0 0
SEPTEMBER 2018.................... 0 0 0 0 0 0 0
SEPTEMBER 2019.................... 0 0 0 0 0 0 0
SEPTEMBER 2020.................... 0 0 0 0 0 0 0
SEPTEMBER 2021.................... 0 0 0 0 0 0 0
SEPTEMBER 2022.................... 0 0 0 0 0 0 0
SEPTEMBER 2023.................... 0 0 0 0 0 0 0
SEPTEMBER 2024.................... 0 0 0 0 0 0 0
SEPTEMBER 2025.................... 0 0 0 0 0 0 0
SEPTEMBER 2026.................... 0 0 0 0 0 0 0
SEPTEMBER 2027.................... 0 0 0 0 0 0 0
WEIGHTED AVERAGE
LIVES IN YEARS(1)............. 8.8 1.4 1.1 1.0 1.0 0.9 0.7
WEIGHTED AVERAGE
LIVES IN YEARS(2)............. 8.8 1.4 1.1 1.0 1.0 0.9 0.7
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assuming exercise by the holder of a majority interest of the Class R-ii
Certificates to cause an optional termination of the Trust Fund when the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of the Hypothetical Mortgage Loans
as set forth in the Structuring Assumptions for pages S-81 through S-86.
S-82
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
CLASS A-4 CERTIFICATES
-------------------------------------------------------------------------------------
GROUP I AND GROUP II (CPR) 0% 18% 20% 25% 30% 35% 40%
----- ----- ----- ---- ---- ---- ----
GROUP III (PPA) 0% 75% 100% 115% 125% 150% 200%
----- ----- ---- ---- ---- ---- ----
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1998.................... 100 100 100 100 100 100 100
SEPTEMBER 1999.................... 100 100 100 92 84 64 26
SEPTEMBER 2000.................... 100 89 59 43 34 12 0
SEPTEMBER 2001.................... 100 59 28 12 2 0 0
SEPTEMBER 2002.................... 100 34 4 0 0 0 0
SEPTEMBER 2003.................... 100 16 0 0 0 0 0
SEPTEMBER 2004.................... 100 1 0 0 0 0 0
SEPTEMBER 2005.................... 100 0 0 0 0 0 0
SEPTEMBER 2006.................... 100 0 0 0 0 0 0
SEPTEMBER 2007.................... 100 0 0 0 0 0 0
SEPTEMBER 2008.................... 100 0 0 0 0 0 0
SEPTEMBER 2009.................... 100 0 0 0 0 0 0
SEPTEMBER 2010.................... 100 0 0 0 0 0 0
SEPTEMBER 2011.................... 100 0 0 0 0 0 0
SEPTEMBER 2012.................... 100 0 0 0 0 0 0
SEPTEMBER 2013.................... 99 0 0 0 0 0 0
SEPTEMBER 2014.................... 91 0 0 0 0 0 0
SEPTEMBER 2015.................... 85 0 0 0 0 0 0
SEPTEMBER 2016.................... 78 0 0 0 0 0 0
SEPTEMBER 2017.................... 71 0 0 0 0 0 0
SEPTEMBER 2018.................... 64 0 0 0 0 0 0
SEPTEMBER 2019.................... 55 0 0 0 0 0 0
SEPTEMBER 2020.................... 45 0 0 0 0 0 0
SEPTEMBER 2021.................... 34 0 0 0 0 0 0
SEPTEMBER 2022.................... 21 0 0 0 0 0 0
SEPTEMBER 2023.................... 7 0 0 0 0 0 0
SEPTEMBER 2024.................... 0 0 0 0 0 0 0
SEPTEMBER 2025.................... 0 0 0 0 0 0 0
SEPTEMBER 2026.................... 0 0 0 0 0 0 0
SEPTEMBER 2027.................... 0 0 0 0 0 0 0
WEIGHTED AVERAGE
LIVES IN YEARS(1)............. 22.0 4.5 3.4 3.0 2.8 2.3 1.8
WEIGHTED AVERAGE
LIVES IN YEARS(2)............ 22.0 4.5 3.4 3.0 2.8 2.3 1.8
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assuming exercise by the holder of a majority interest of the Class R-ii
Certificates to cause an optional termination of the Trust Fund when the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of the Hypothetical Mortgage Loans
as set forth in the Structuring Assumptions for pages S-81 through S-86.
S-83
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
CLASS A-5 CERTIFICATES
-------------------------------------------------------------------------------------
GROUP I AND GROUP II (CPR) 0% 18% 20% 25% 30% 35% 40%
----- ----- ----- ---- ---- ---- ----
GROUP III (PPA) 0% 75% 100% 115% 125% 150% 200%
----- ----- ---- ---- ---- ---- ----
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1998.................... 100 100 100 100 100 100 100
SEPTEMBER 1999.................... 100 100 100 100 100 100 100
SEPTEMBER 2000.................... 100 100 100 100 100 100 64
SEPTEMBER 2001.................... 100 100 100 100 100 73 28
SEPTEMBER 2002.................... 100 100 100 84 71 44 10
SEPTEMBER 2003.................... 100 100 81 61 50 29 3
SEPTEMBER 2004.................... 100 100 63 46 37 20 2
SEPTEMBER 2005.................... 100 92 57 42 34 19 2
SEPTEMBER 2006.................... 100 80 47 34 27 14 2
SEPTEMBER 2007.................... 100 68 38 26 20 9 0
SEPTEMBER 2008.................... 100 57 30 19 14 6 0
SEPTEMBER 2009.................... 100 46 23 14 10 3 0
SEPTEMBER 2010.................... 100 38 17 9 6 1 0
SEPTEMBER 2011.................... 100 30 12 6 4 0 0
SEPTEMBER 2012.................... 100 23 8 4 2 0 0
SEPTEMBER 2013.................... 100 19 6 2 1 0 0
SEPTEMBER 2014.................... 100 15 4 1 0 0 0
SEPTEMBER 2015.................... 100 12 2 0 0 0 0
SEPTEMBER 2016.................... 100 9 1 0 0 0 0
SEPTEMBER 2017.................... 100 7 1 0 0 0 0
SEPTEMBER 2018.................... 100 5 0 0 0 0 0
SEPTEMBER 2019.................... 100 4 0 0 0 0 0
SEPTEMBER 2020.................... 100 2 0 0 0 0 0
SEPTEMBER 2021.................... 100 1 0 0 0 0 0
SEPTEMBER 2022.................... 100 0 0 0 0 0 0
SEPTEMBER 2023.................... 100 0 0 0 0 0 0
SEPTEMBER 2024.................... 87 0 0 0 0 0 0
SEPTEMBER 2025.................... 60 0 0 0 0 0 0
SEPTEMBER 2026.................... 30 0 0 0 0 0 0
SEPTEMBER 2027.................... 0 0 0 0 0 0 0
WEIGHTED AVERAGE
LIVES IN YEARS(1)............. 28.3 12.6 9.5 8.1 7.3 5.7 3.7
WEIGHTED AVERAGE
LIVES IN YEARS(2)............. 28.2 10.5 8.2 6.7 5.9 4.8 3.5
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assuming exercise by the holder of a majority interest of the Class R-ii
Certificates to cause an optional termination of the Trust Fund when the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of the Hypothetical Mortgage Loans
as set forth in the Structuring Assumptions for pages S-81 through S-86.
S-84
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
<TABLE>
<CAPTION>
CLASS A-6 CERTIFICATES
-------------------------------------------------------------------------------------
GROUP I AND GROUP II (CPR) 0% 18% 20% 25% 30% 35% 40%
----- ----- ----- ---- ---- ---- ----
GROUP III (PPA) 0% 75% 100% 115% 125% 150% 200%
----- ----- ---- ---- ---- ---- ----
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1998.................... 100 100 100 100 100 100 100
SEPTEMBER 1999.................... 100 100 100 100 100 100 100
SEPTEMBER 2000.................... 100 100 100 100 100 100 100
SEPTEMBER 2001.................... 99 92 90 88 87 85 79
SEPTEMBER 2002.................... 98 85 80 78 76 72 63
SEPTEMBER 2003.................... 97 73 66 62 60 53 40
SEPTEMBER 2004.................... 94 61 52 47 44 36 22
SEPTEMBER 2005.................... 87 34 24 19 17 11 9
SEPTEMBER 2006.................... 79 19 11 8 6 3 1
SEPTEMBER 2007.................... 70 10 5 3 2 1 0
SEPTEMBER 2008.................... 62 6 2 1 1 0 0
SEPTEMBER 2009.................... 53 3 1 0 0 0 0
SEPTEMBER 2010.................... 44 1 0 0 0 0 0
SEPTEMBER 2011.................... 36 1 0 0 0 0 0
SEPTEMBER 2012.................... 29 0 0 0 0 0 0
SEPTEMBER 2013.................... 25 0 0 0 0 0 0
SEPTEMBER 2014.................... 22 0 0 0 0 0 0
SEPTEMBER 2015.................... 19 0 0 0 0 0 0
SEPTEMBER 2016.................... 16 0 0 0 0 0 0
SEPTEMBER 2017.................... 14 0 0 0 0 0 0
SEPTEMBER 2018.................... 12 0 0 0 0 0 0
SEPTEMBER 2019.................... 9 0 0 0 0 0 0
SEPTEMBER 2020.................... 7 0 0 0 0 0 0
SEPTEMBER 2021.................... 5 0 0 0 0 0 0
SEPTEMBER 2022.................... 4 0 0 0 0 0 0
SEPTEMBER 2023.................... 2 0 0 0 0 0 0
SEPTEMBER 2024.................... 1 0 0 0 0 0 0
SEPTEMBER 2025.................... 0 0 0 0 0 0 0
SEPTEMBER 2026.................... 0 0 0 0 0 0 0
SEPTEMBER 2027.................... 0 0 0 0 0 0 0
WEIGHTED AVERAGE
LIVES IN YEARS(1)............. 13.4 7.4 6.8 6.6 6.4 6.1 5.6
WEIGHTED AVERAGE
LIVES IN YEARS(2)............. 13.4 7.3 6.8 6.4 5.9 5.1 4.3
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assuming exercise by the holder of a majority interest of the Class R-ii
Certificates to cause an optional termination of the Trust Fund when the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the
sum of the aggregate principal balance of the Hypothetical Mortgage Loans
as set forth in the Structuring Assumptions for pages S-81 through S-86.
S-85
<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 OCTOBER 2000. In
addition, if the aggregate Stated Principal Balance of the Mortgage Loans of any
Loan Group has been reduced to 10% of the initial aggregate Stated Principal
Balance of the Mortgage Loans of such Loan Group prior to such date, the yield
to investors on the Fixed Strip Certificates, to the extent of the Components or
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,
Certificate Insurer or holder a majority interest in the Class R-II Certificates
effects an optional termination of the Trust Fund, the Fixed Strip Certificates
will receive no further distributions. 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 September 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 ("Advanta Parent"), a
publicly-traded company based in Horsham, Pennsylvania with assets as of June
30, 1997 of approximately $6.5 billion. Advanta Parent, through its subsidiaries
(including the Master Servicer), had managed assets (including mortgage loans)
in excess of $20.6 billion as of June 30, 1997.
S-86
<PAGE>
As of June 30, 1997, the Master Servicer and its subsidiaries were
servicing approximately 61,000 mortgage loans in the Owned and Managed Servicing
Portfolio (as defined below) representing an aggregate outstanding principal
balance of approximately $3.7 billion, and approximately 110,000 mortgage loans
in the Third-Party Servicing Portfolio (as defined below) representing an
aggregate outstanding principal balance of approximately $7.5 billion.
On March 17, 1997, Advanta Parent issued a press release (the "Press
Release"), announcing that it expected to report 1997 results well below
previous expectations. The Press Release stated that for the first quarter,
Advanta Parent expected to report a loss of approximately $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. On July 16, 1997, Advanta
Parent reported net income of $5.4 million for the second quarter of 1997,
compared to net income of $45.1 million for the second quarter of 1996. Advanta
Parent has retained BT Wolfensohn, a division of the Bankers Trust New York
Corporation, to explore all strategic alternatives that build upon the historic
strength and success of the company as a whole and of its business units,
including the Master Servicer, with the aim of maximizing the company's value
for its shareholders and other constituents. The strategic alternatives which
might be considered include, but are not limited to, a strategic alliance with
another company, an alliance or initial public offering involving one or more of
Advanta Parent's operating units or a merger or sale involving Advanta Parent as
a whole. 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.
In addition to the rights of the Trustee with respect to the Master
Servicer as described in the Prospectus under "The Pooling Agreement," the
Certificate Insurer will have certain rights, described in the Pooling and
Servicing Agreement, with respect to the removal or resignation of the Master
Servicer and the ability of the Master Servicer to assign any of its obligations
under the Pooling and Servicing
Agreement.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER
OWNED AND MANAGED SERVICING PORTFOLIO. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Master Servicer for its Owned and Managed Servicing Portfolio for June 30,
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 June 30, 1997, approximately 110,000 mortgage loans with an
aggregate principal balance as of such date of approximately $7.5 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.
S-87
<PAGE>
<TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
<CAPTION>
Year Ending December 31,
Six Months Ending-------------------------------------------------------------------------------------
June 30, 1997 1996 1995 1994 1993
-------------------- --------------------------------------------------------------------------------
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) loans (000) loans (000) loans (000) loans (000)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 61,010 $3,688,283 43,303 $2,595,981 32,592 $1,797,582 26,446 $1,346,100 25,460 $1,149,864
Delinquency Percentage(1)
30-59 days
60-89 days 2.84% 2.69% 3.07% 2.90% 2.67% 2.44% 2.01% 1.57% 2.43% 2.22%
90 days or more 0.82 0.88 0.85 0.90 0.72 0.71 0.57 0.45 0.77 0.63
Total 1.33 1.73 1.45 1.26 1.69 1.23 1.85 1.51 2.19 2.12
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
4.99% 5.30% 5.37% 5.06% 5.08% 4.38% 4.43% 3.53% 5.39% 4.97%
Foreclosure Rate(2) 1.33% 1.51% 1.62% 1.92% 1.29% 1.53% 1.35% 1.38% 1.32% 1.62%
REO Properties(3) 0.28% -- 0.42% -- 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.
S-88
<PAGE>
<TABLE>
LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS*
<CAPTION>
Year Ending December 31,
Six Months Ending-------------------------------------------------------------------------------------
June 30, 1997 1996 1995 1994 1993
-------------------- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $3,078,712 $2,102,643 $1,540,238 $1,225,529 $1,049,447
Gross losses(2) $ 7,954 $ 15,184 $ 13,978 $ 20,886 $ 14,115
Recoveries(3) $ 21 $ 117 $ 148 $ 179 $ 123
Net losses(4) $ 7,933 $ 15,067 $ 13,830 $ 20,707 $ 13,992
Net losses as a percentage of
average amount outstanding 0.52%(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) June 30, 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-89
<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, Group II Loans and Group III 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,
Group II Loans and Group III 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, Group II Loans and Group
III 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, Group II Loans and Group III 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,
Group II Loans and Group III Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the Group I Loans, Group II Loans
and Group III Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees will accrue at a
rate per annum (the "Servicing Fee Rate") on the outstanding principal balance
of each Mortgage Loan equal to 0.50% per annum. The Servicing Fees consist of
servicing compensation payable to the Master Servicer in respect of its master
servicing and direct servicing activities. In addition, the Master Servicer
shall be entitled to receive, as additional servicing compensation, to the
extent permitted by applicable law and the related Mortgage Notes, any late
payment charges, assumption fees or similar items. The Master Servicer shall pay
all expenses incurred by it in connection with its servicing activities under
the Pooling and Servicing Agreement and shall not be entitled to reimbursement
therefor except as specifically provided in the Pooling and Servicing Agreement.
THE TRUSTEE
Norwest Bank Minnesota, N.A. (the "Trustee"), a national banking
association, will act as trustee for the Certificates pursuant to the Pooling
and Servicing Agreement. The Trustee will be entitled to a fee, payable monthly,
of 0.0075% per annum of the Principal Balance (as defined herein) of each
Mortgage Loan (the "Trustee's Fee"). See "The Pooling Agreement" in the
Prospectus.
- --------
* MANAGED PORTFOLIO STATISTICS RESTATED TO EXCLUDE INTEREST ADVANCES ON
SERVICED PORTFOLIO TO BE CONSISTENT WITH PRESENTATION OF OWNED PORTFOLIO.
S-90
<PAGE>
EVENTS OF DEFAULT
In addition to the Events of Default listed in the Prospectus under
"The Pooling Agreement--Events of Default," the Master Servicer may be removed
if the delinquency or loss experience of the Mortgage Loans exceeds certain
levels specified in the Pooling and Servicing Agreement.
TERMINATION
The Pooling and Servicing Agreement will terminate upon notice to
the Trustee of either: (a) the later of the distribution to Certificateholders
of the final payment or collection with respect to the last Mortgage Loan (or
Advances of same by the Master Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the Master
Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust Fund established by the
Pooling and Servicing Agreement terminate later than twenty-one years after the
death of the last surviving lineal descendant of the person named in the Pooling
and Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement, the
holder of a majority percentage interest of the Class R-II Certificates or the
Master Servicer (or the Certificate Insurer, if Advanta is removed as Master
Servicer) may, at its option and at its sole cost and expense, on any
Distribution Date when the aggregate Principal Balance of the Mortgage Loans is
less than 10% (5% with respect to the exercise of this option by the Master
Servicer or the Certificate Insurer) of the sum of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, purchase from the Trust
Fund all of the outstanding Mortgage Loans at a price equal to the sum of (a)
100% of the Principal Balance of each outstanding Mortgage Loan, (b) the
aggregate amount of accrued and unpaid interest on the Mortgage Loans through
the related Due Period and 30 days' accrued interest thereon at a rate equal to
the Mortgage Rate (net of the Servicing Fee Rate in the case of such a purchase
by the Master Servicer), (c) any unreimbursed amounts due to the Certificate
Insurer under the Pooling and Servicing Agreement or the Insurance Agreement (as
defined in the Pooling and Servicing Agreement), (d) any excess of the actual
stated principal balance of each such Mortgage Loan over the Principal Balance
thereof, the aggregate amount of accrued and unpaid interest on such excess
through the related due period and 30 days' interest on such excess at a rate
equal to the related Mortgage Interest Rate with respect to each related
Mortgage Loan and (e) any other unpaid or unreimbursed amounts owed to the
Master Servicer and not included in clauses (a) through (d) above. Any such
purchase shall be accomplished by deposit into the related Certificate Account
of the purchase price specified above. From the amount so deposited, the Trustee
shall reimburse the Master Servicer for the amount of any unpaid Servicing Fees,
unreimbursed Advances and unreimbursed servicing advances. No such termination
is permitted without the prior written consent of the Certificate Insurer if it
would result in a draw on the related Certificate Insurance Policy. See "The
Pooling Agreement--Termination; Retirement of Certificates" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt &
Wood, counsel to the Company, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, REMIC I and REMIC II will each
qualify as a REMIC under the Code.
For federal income tax purposes, (a) the Class R-I Certificates will
constitute the sole class of "residual interests" in REMIC I, (b) each class of
Certificates (other than the Residual Certificates) will represent ownership of
"regular interests" in REMIC II and will generally be treated as debt
instruments
S-91
<PAGE>
of REMIC II and (c) the Class R-II Certificates will constitute the sole class
of "residual certificates" in REMIC II. See "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates
(other than the Class A-7 Certificates) will not, and the Class A-7 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, Group II
and Group III Class A 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, with
respect to Loan Group I and Loan Group II, and a 115% Prepayment Assumption,
with respect to Loan Group III. No representation is made that the Mortgage
Loans will prepay at this rate or at any other rate. See "Certain Federal Income
Tax Consequences--General--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Class A Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate, such as the
Class A-1 Certificates and the Class A-2 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 Class A Certificates are issued with original issue discount or should be
governed by the rules applicable to debt instruments having contingent payments
or by some other method not yet set forth in regulations. Prospective purchasers
of the Class A Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
A reasonable application of the principles of the OID Regulations to
the Class A-1 Certificates and the Class A-2 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-7 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-7 Certificates will be reported to the IRS and the Class A-7
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-7 Certificateholder, 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
S-92
<PAGE>
to such Certificates. Although the matter is not free from doubt, a Class A-7
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.
Subject to the discussion below, the Class A Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code and "real
estate assets" under Section 856(c)(4)(A) of the Code generally in the same
proportion that the assets of the Trust Fund would be so treated. In addition,
interest on the Class A Certificates will be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code
generally to the extent that such Class A Certificates are treated as "real
estate assets" under Section 856(c)(4)(A) of the Code. To the extent the
manufactured housing loans meet the requirements of Section 25(e)(10) of the
Code, the Class A Certificates will be treated as assets described in the
foregoing sections of the Code. Moreover, the Class A Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code. See
"The Pooling and Servicing Agreement--Termination" herein and "Certain Federal
Income Tax Consequences--REMICs-- Characterization of Investments in REMIC
Certificates" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated September 26, 1997 (the "Underwriting Agreement"), among Morgan
Stanley & Co. Incorporated ("Morgan Stanley"), Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Lehman Brothers Inc. ("Lehman"; Morgan
Stanley, DLJ and Lehman collectively, the "Underwriters"), the Company and the
Seller, the Underwriters have agreed to purchase and the Company has agreed to
sell to the Underwriters the Class A Certificates. It is expected that delivery
of the Class A Certificates will be made only in book-entry form through the
Same Day Funds Settlement System of DTC, on or about September 26, 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 Class A Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Class A Certificates by the Underwriters may
be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of
sale.
S-93
<PAGE>
Proceeds to the Company from the sale of the Class A Certificates, before
deducting expenses payable by the Company, will be approximately 101.14% of the
aggregate initial Certificate Principal Balance of the Class A Certificates plus
accrued interest on the Class A Certificates (other than the Class A-1
Certificates and Class A-2 Certificates). The Underwriters may effect such
transactions by selling the Class A Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Class A Certificates, the Underwriters may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters and
any profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company and the Seller
will jointly and severally indemnify the Underwriters, and that under limited
circumstances the Underwriters will indemnify the Company, against certain civil
liabilities under the Securities Act of 1933, or contribute to payments
required to be made in respect thereof.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Class A
Certificates. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Class A Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed
upon for the Company by Thacher Proffitt & Wood, New York, New York, for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York, and for the
Certificate Insurer by Kutak Rock, Omaha, Nebraska.
RATINGS
It is a condition of the issuance of the Class A Certificates that
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 "Aaa" by Moody's Investors Service, Inc. ("Moody's") and that
the Fixed Strip Certificates be rated "AAAr" by S&P, "AAA" by DCR and "Aaa" by
Moody's.
S&P's ratings on mortgage loan asset-backed pass-through
certificates address the likelihood of the receipt by Certificateholders of
payments required under the Pooling and Servicing Agreement. S&P's ratings take
into consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. S&P's rating on the Certificates does not, however, constitute a
statement regarding frequency of prepayments on the mortgages. See "Certain
Yield and Prepayment Considerations" herein. The "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
S-94
<PAGE>
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 Moody's to mortgage loan asset-backed
pass-through certificates also address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
mortgage loans. The ratings assigned to mortgage loan asset-backed pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The ratings assigned by DCR to mortgage loan asset-backed
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which they are entitled under the
transaction structure. DCR's ratings reflect its analysis of the riskiness of
the mortgage loans and its analysis of the structure of the transaction as set
forth in the operative documents. In addition, DCR considers the claims paying
ability of the Certificate Insurer to be comparable to that of other companies
for which DCR assigns a "AAA" claims paying ability. DCR's ratings do not
address the effect on the certificates' yield attributable to prepayments or
recoveries on the underlying mortgages.
The Company has not requested a rating on the Class A Certificates
by any rating agency other than S&P, Moody's and DCR. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the
ratings assigned to the Class A Certificates by S&P, Moody's and DCR.
The ratings assigned to the Class A-1 Certificates do not cover the
payment of any Group I Class A Available Funds Cap Carry-Forward Amount. The
ratings assigned to the Class A-2 Certificates do not cover the payment of any
Group II Class A Available Funds Cap Carry-Forward Amount.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to the Class A Certificates.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("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 Class A Certificates constitutes a legal investment or is
subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
S-95
<PAGE>
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 Morgan Stanley
an administrative exemption (Prohibited Transaction Exemption 90-24; Exemption
Application D-8019; 55 Fed. Reg. 20,548 (1990)) (the "Morgan Stanley
Exemption"); to DLJ an administrative exemption (Prohibited Transaction
Exemption 91-14, as amended; Exemption Application D-7958; 56 Fed. Reg. 7414
(1991)) (the "DLJ Exemption"); and to Lehman an administrative exemption
(Prohibited Transaction Exemption 91-14, as amended; Exemption Application No.
D-7958; 56 Fed. Reg. 7414 (1991)) (the "Lehman Exemption"; the DLJ Exemption,
the Morgan Stanley Exemption and the Lehman 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."
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
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.
S-96
<PAGE>
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation
and Subsidiaries as of December 31, 1996 and December 31, 1995 and for each of
the three years in the period ended December 31, 1996, incorporated by reference
into this Prospectus Supplement, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report thereon incorporated by
reference herein in reliance upon the authority of such firm as experts in
accounting and auditing.
S-97
<PAGE>
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 Non-Conforming Program. The Standard Non-Conforming Program is the
"Non-Conforming Credit Program" applicable to residential loans which, for
credit reasons, do not conform to FNMA or FHLMC underwriting guidelines.
THE STANDARD NON-CONFORMING PROGRAM
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten in accordance with the underwriting criteria of SPFC.
SPFC began underwriting mortgage loans in accordance with such standards in
July, 1993.
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
A-1
<PAGE>
obtained. Verification of the source of funds (if any) required to be deposited
by the applicant into escrow is generally required under all documentation
programs in the form of a standard verification of deposit or two months'
consecutive bank statements or other acceptable documentation. Twelve months'
mortgage payment or rental history must be verified by lender or landlord. If
appropriate compensating factors exist, 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
A-2
<PAGE>
loans originated under the Non-Conforming Stated Income Program) for mortgage
loans on a single-family non-owner-occupied properties or second homes.
"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, totaling
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 NonConforming Stated Income Program) is permitted for a mortgage loan on a
non-owner occupied property or a second home. The debt service-to-income ratio
generally is 50% or less based on the Qualifying Rate. The maximum loan amount
is $600,000 for a single-family owner-occupied property, under the NonConforming
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 NonConforming 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 NonConforming 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
A-3
<PAGE>
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. 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-to-income 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.
BOMAC CAPITAL MORTGAGE, INC.
The Mortgage Loans originated by BOMAC Capital Mortgage, Inc. ("BOMAC")
were originated under BOMAC'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 BOMAC. BOMAC
began underwriting mortgage loans in accordance with such standards in November,
1996.
BOMAC'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 BOMAC'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, BOMAC 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 NonConforming Loan Program were underwritten pursuant to the "Full
Documentation," "Limited Documentation," or the stated income from the
application (the "Stated 1003") residential loan programs. Under each of the
these programs, BOMAC reviews the loan applicant's source or sources 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 BOMAC's standards. BOMAC's underwriting
standards are applied in a standardized procedure which complies with applicable
federal and state laws and regulations.
A-4
<PAGE>
BOMAC'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 Documentation program, which
is the most thorough approach to income verification, borrowers are generally
required to submit written verification of income signed by the employer
covering the most recent two-year period and a current paystub or a current
paystub and two years' W-2 forms covering the time period for the credit grade.
However, for loans with a Loan-to-Value ("LTV") ratio less than 10% only one
year of income verification is required. BOMAC also performs a verbal
verification of employment prior to funding the mortgage loan. Under the Limited
Documentation (or "Lite-Doc") program, which was primarily developed for
self-employed borrowers, a standard form of verification of income is not
required on certain loans. However, there must be verification that the borrower
has been self-employed for a minimum of one year. The following documentation
must also be provided: (1) the most recent 12 months, bank statements from the
borrowers bank account, and (2) One paystub with year to date earnings listed
for a salaried employee and for commissioned or self-employed borrowers a form
W-2 from the prior year or a Form 1099 from the prior year. 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 is in existence for self-employed borrowers,
and (2) verification of employment if not self-employed. 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 BOMAC may be no more than 30 days old) at the time of the
funding of the related loan. Additionally, if the appraisal is more than 120
days old it must be recertified, but in no event can it be more than 180 days
old. If an appraisal is more than 180 days old BOMAC will require a new full
appraisal.
BOMAC 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 consumer debt according to its terms with a
maximum number of four 30-day late payments within the last 12 months and within
the prior 24 month period a maximum of three 30-day late payments is permitted
on an existing mortgage loan. Any collection accounts or unpaid charge-offs or
judgments under $500 are permissible. Larger amounts paid over 1 year prior to
the application are also permitted. Non-creditor judgments, delinquent taxes,
medical accounts, past due child support and alimony are permitted, but must be
paid at the closing or brought current unless waived by senior underwriter
approval. 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 85% for a mortgage loan originated
under the Lite Documentation program and 80% 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%, but will be
increased to 50% for an accepted .38% point increase in the mortgage loan rate
and gross margin rate. The maximum loan amount is $650,000 for an owner-occupied
property for a mortgage loan originated under the Full Documentation, Lite
Documentation or Stated Income Documentation programs. However, on a case by
case basis BOMAC will increase the maximum loan amount to $750,000, depending on
the pricing structure of the loan, the loan-to-value ratio and other
compensating factors. All loans greater than $500,000 require written approval
from the executive loan committee of BOMAC. The maximum loan amount is $400,000
for a non-owner occupied property or second home under the Full Documentation
program, Lite Documentation program or Stated Income
A-5
<PAGE>
Documentation Program. 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 $100,000 for a non-owner occupied residence or second
home.
"A-" RISK. Under the "A-" risk category, the prospective mortgagor must
have repaid installment or revolving consumer debt according to its terms with a
maximum number of five 30-day late payments or two 60 day late payments within
the last 12 months and within the prior 12 month period a maximum of two 30-day
late payments is permitted on an existing mortgage loan. Any collection accounts
or unpaid charge-offs or judgments under which occurred within the last 18
months cannot exceed $1,000 individually. Any account which encumbers the
subject property must be paid off. The prospective mortgagor can, however, leave
open any unpaid accounts for an accepted increase in the mortgage loan rate.
Non-creditor judgments, delinquent taxes, 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 or the date the foreclosure was filed. On a case by case
basis, however, borrowers may be bought out of a Chapter 13 Bankruptcy. 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%, however, this can be increased
to 50% for an accepted .38% point increase in the mortgage loan rate and gross
margin rate and increased to 55% if the LTV on the mortgage loan is also less
than or equal to 70% and increased to 60% if the LTV on the mortgage loan is
also less than or equal to 65%. The maximum loan amount is $650,000 for an
owner-occupied property for a mortgage loan originated under the Full
Documentation, Lite Documentation or Stated Income Documentation programs.
However, on a case by case basis BOMAC will increase the maximum loan amount to
$750,000, depending on the pricing structure of the loan, the loan-to-value
ratio and other compensating factors. The maximum loan amount is $400,000 for a
nonowner occupied property or second home under the Full Documentation program,
Lite Documentation program or Stated Income Documentation Program. 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
$100,000 for a non-owner occupied residence or second home.
"B" RISK. Under the "B" risk category, the prospective mortgagor must
have repaid installment or revolving consumer debt according to its terms with a
maximum number of four 60-day late payments or two 90-day late payments within
the last 12 months and within the same prior 12 month period a maximum of four
30-day late payments or three 30-day late payments and one 60-day late payment
is permitted on an existing mortgage loan. Any collection accounts or unpaid
charge-offs or judgments which occurred within the last 18 months cannot exceed
$2,000 individually. Any account which encumbers the subject property must be
paid off. The prospective mortgagor can, however, leave open any unpaid accounts
for an accepted increase in the mortgage loan rate. Non-creditor judgments,
delinquent taxes, 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 eighteen months commencing from the date of
discharge or the date the foreclosure was filed. On a case by case basis,
however, borrowers may be bought out of a Chapter 13 Bankruptcy. A maximum
Loan-to-Value Ratio of 85% for mortgage loans 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%
A-6
<PAGE>
for a mortgage loan originated under the Full Documentation (or 70% for a
mortgage loan originated under the Lite Documentation program and 65% 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 50%, however, this can be increased to 55% for an accepted .38% point
increase in the mortgage loan rate and gross margin rate and increased to 60% if
the LTV on the mortgage loan is also less than or equal to 65%. The maximum loan
amount is $650,000 for an owner-occupied property for a mortgage loan originated
under the Full Documentation, Lite Documentation or Stated Income Documentation
programs. However, on a case by case basis BOMAC will increase the maximum loan
amount to $750,000, depending on the pricing structure of the loan, the
loan-to-value ratio and other compensating factors. The maximum loan amount is
$350,000 for a non-owner occupied property or second home under the Full
Documentation program, Lite Documentation program or Stated Income Documentation
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 $75,000 for a non-owner occupied residence or second
home.
"C" RISK. Under the "C" risk category, the prospective mortgagor must
have repaid installment or revolving consumer debt according to its terms with a
maximum number of four 90-day late payments within the last 12 months and within
the same prior 12 month period a maximum of six 30-day late payments, two 60-day
late payments and one 90-day late payment is permitted on an existing mortgage
loan. Any collection accounts or unpaid charge-offs or judgments under which
occurred within the last 18 months cannot exceed $4,000 individually (up to
$6,000 if isolated to 1 or 2 accounts only). Any account which encumbers the
subject property must be paid off. The prospective mortgagor can, however, leave
open any unpaid accounts not against the subject title for an accepted increase
in mortgage loan rate. Non-creditor judgments, delinquent taxes, 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
twelve months commencing from the date of discharge or the date the foreclosure
was filed. On a case by case basis, however, borrowers may be bought out of a
Chapter 13 Bankruptcy. A maximum Loan-to-Value Ratio of 75% for mortgage loans
originated under the Full Documentation program, (or 70% 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 70% for a mortgage
loan originated under the Full Documentation (or 65% for a mortgage loan
originated under the Lite Documentation program and 60% 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 55%, however,
this can be increased to 60% for an accepted .38% point increase in the mortgage
loan rate and gross margin rate. The maximum loan amount is $500,000 for an
owner-occupied property for a mortgage loan originated under the Full
Documentation, Lite Documentation or Stated Income Documentation programs. The
maximum loan amount is $300,000 for a non-owner occupied property or second home
under the Full Documentation program, Lite Documentation program or Stated
Income Documentation 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.
"D" RISK. Under the "D" risk category, there is a general disregard for
the prospective mortgagors prior record relating to revolving consumer debt, nor
is the prospective mortgagor's past payment history relating to an existing
mortgage examined. All collection accounts or unpaid charge-offs or judgments
which are not against the title of the subject property do not need to be paid
off, however, BOMAC will not permit open accounts if the prospective mortgagor's
credit history blatantly shows that unpaid creditors are actively going after
the prospective mortgagor for payment. Non-creditor judgments, delinquent taxes,
A-7
<PAGE>
past due child support and alimony are permitted, but must be paid at the
closing or brought current. Current bankruptcy or foreclosure is permitted,
however a bankruptcy must be discharged at the closing. On a case by case basis
borrowers may be bought out of a Chapter 13 Bankruptcy and to bring a borrower
out of foreclosure senior underwriter and regional manager approval is required.
Moreover, when buying out of foreclosure the borrower's debt service-to-income
is reduced and the reasons for extending the loan must be clearly documented.
Additionally, verification of when the pending sale of the foreclosed property
will occur is required so that the mortgage loan may be properly funded prior to
the creditor who is foreclosing takes title to the subject property. A maximum
Loan-to-Value Ratio of 70% for mortgage loans originated under the Full
Documentation program, (or 65% for a mortgage loan originated under the Lite
Documentation program and 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 65% for a mortgage loan originated
under the Full Documentation (or 60% for a mortgage loan originated under the
Lite Documentation program and 60% 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 60%, however, this can be increased
to 65% for an accepted .38% point increase in the mortgage loan rate and gross
margin rate. The maximum loan amount is $300,000 for an owner-occupied property
for a mortgage loan originated under the Full Documentation, Lite Documentation
or Stated Income Documentation programs. The maximum loan amount is $200,000 for
a non-owner occupied property or second home under the Full Documentation
program, Lite Documentation program or Stated Income Documentation Program. The
maximum cash-out loan amount is $500 under the Full documentation, Lite
Documentation and the Stated 1003 programs for an owner occupied residence and
is not available for a non-owner occupied residence or second home.
EXCEPTIONS. As described above, BOMAC 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, BOMAC 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.
A-8
<PAGE>
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 September 24, 1997.
-1-
<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 and Certain Contracts.....................66
Repossession with respect to Contracts.............................68
Rights of Redemption...............................................69
Anti-Deficiency Legislation and Other Limitations on
Lenders...................................................69
Environmental Legislation..........................................71
Consumer Protection Laws with respect to Contracts
.........................................................72
Enforceability of Certain Provisions...............................72
Subordinate Financing..............................................73
Applicability of Usury Laws........................................74
Alternative Mortgage Instruments...................................74
Formaldehyde Litigation with respect to Contracts..................75
Soldiers' and Sailors' Civil Relief Act of 1940....................75
Junior Mortgages...................................................76
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................77
General ..........................................................77
REMICS ..........................................................77
Notes ..........................................................91
Grantor Trust Funds................................................92
STATE AND OTHER TAX CONSEQUENCES...........................................100
ERISA CONSIDERATIONS.......................................................100
Tax Exempt Investors..............................................104
Consultation with Counsel.........................................104
USE OF PROCEEDS............................................................106
METHODS OF DISTRIBUTION....................................................106
LEGAL MATTERS..............................................................107
FINANCIAL INFORMATION......................................................107
RATING ..................................................................107
INDEX OF PRINCIPAL DEFINITIONS.............................................108
-2-
<PAGE>
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.
-3-
<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 will
pledge the Trust
-4-
<PAGE>
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
Security Interest Rate, which may be a
fixed, variable or adjustable Security
Interest Rate, or any
-5-
<PAGE>
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
respective affiliates or by any other
person, unless otherwise specified in
the related Prospectus Supplement.
-6-
<PAGE>
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.
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
-7-
<PAGE>
(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 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
-8-
<PAGE>
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
"Description 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 in the
Prospectus Supplement relating to a
series of Securities. See "Description
of Credit Enhancement" and
"Subordination."
-9-
<PAGE>
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; Reti rement of
Securities" and in the related
Prospectus Sup plement.
Legal Investment........................At the date of issuance, as to each
series, each class of Offered Securities
will be rated at the request of the
Company in one of the four highest
rating categories by one or more
nationally recognized statistical rating
agencies (each, a "Rating Agency").
Unless otherwise specified in the
related Prospectus Supplement, each
class of Offered Securities that is
rated in one of the two
-10-
<PAGE>
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 or evidence
ownership of 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."
-11-
<PAGE>
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 remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should
-12-
<PAGE>
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 directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for
-13-
<PAGE>
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.
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.
-14-
<PAGE>
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 may have
-15-
<PAGE>
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 highest, lowest and weighted average
Note Margin with respect to the ARM Loans in the related Mortgage Pool.
- --------
* 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.
-16-
<PAGE>
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 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
-17-
<PAGE>
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 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
-18-
<PAGE>
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.
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
-19-
<PAGE>
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, re-underwriting 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
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
-20-
<PAGE>
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 of
whether
-21-
<PAGE>
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.
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
-22-
<PAGE>
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 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
-23-
<PAGE>
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 Pooling Agreement or
Servicing Agreement that govern the administration of such Mortgage Securities
and identify the party responsible
-24-
<PAGE>
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 or amend any term of such
Mortgage Loan, including deferring payments, extending the stated maturity date
or otherwise adjusting the payment
-25-
<PAGE>
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.
-26-
<PAGE>
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 continue in default
-27-
<PAGE>
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 with such defaulted
-28-
<PAGE>
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 will be entitled to
retain such gain
-29-
<PAGE>
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 Attestation 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 other
-30-
<PAGE>
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 Attestation 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 Attestation
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 or
otherwise; (iv) hazard insurance policies, Primary Insurance Policies and FHA
insurance policies, if any, maintained in respect
-31-
<PAGE>
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
-32-
<PAGE>
"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 Trustee
-33-
<PAGE>
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 so notify
-34-
<PAGE>
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
-35-
<PAGE>
securities and other investment grade obligations specified in the related
Pooling Agreement or the 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";
-36-
<PAGE>
(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;
-37-
<PAGE>
(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
-38-
<PAGE>
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
-39-
<PAGE>
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.
-40-
<PAGE>
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.
-41-
<PAGE>
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;
(viiithe 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;
-42-
<PAGE>
(xiiiin 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
-43-
<PAGE>
to repurchase certain Mortgage Loans or fund certain losses pursuant to a
Purchase Obligation, which obligations may be supported by a Letter of Credit,
surety bonds or other types of insurance policies, certain other secured or
unsecured corporate guarantees or in such other form as may be described in the
related Prospectus Supplement, or in the form of a combination of two or more of
the foregoing. The credit support may be provided by an assignment of the right
to receive certain cash amounts, a deposit of cash into a Reserve Fund or other
pledged assets, or by banks, insurance companies, guarantees or any combination
thereof identified in the applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Offered 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
crosssupport 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
-44-
<PAGE>
credit enhancement, will be specified in the applicable Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Letter of Credit may
permit draws only in the event of certain types of losses and shortfalls. The
Letter of Credit may also provide for the payment of advances which the Master
Servicer would be obligated to make with respect to delinquent monthly mortgage
payments. The amount available under the Letter of Credit will, in all cases, be
reduced to the extent of the unreimbursed payments thereunder and may otherwise
be reduced as described in the related Prospectus Supplement. The Letter of
Credit will expire on the expiration date set forth in the related Prospectus
Supplement, unless earlier terminated or extended in accordance with its terms.
MORTGAGE POOL INSURANCE POLICIES
Any Mortgage Pool Insurance Policy obtained by the Company for each
Trust Fund will be issued by the Pool Insurer named in the applicable Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans on the Cut-off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the related Trustee and the
related 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,
-45-
<PAGE>
among other things, (i) fraud or negligence in the origination or servicing of a
Mortgage Loan, including misrepresentation by the Mortgagor, the Seller or other
persons involved in the origination thereof, or (ii) failure to construct a
Mortgaged Property in accordance with plans and specifications. Depending upon
the nature of the event, a breach of representation made by a Seller may also
have occurred. Such a breach, if it materially and adversely affects the
interests of 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
-46-
<PAGE>
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard
Insurer"),
the amount that the Special Hazard Insurer will pay will be the amount under
(ii) above reduced by the net proceeds of the sale of the property. No claim may
be validly presented under the Special Hazard Insurance Policy unless hazard
insurance on the property securing a defaulted Mortgage Loan has been kept in
force and other reimbursable protection, preservation and foreclosure expenses
have been paid (all of which must be approved in advance by the Special Hazard
Insurer). If the unpaid principal balance plus accrued interest and certain
expenses is paid by the insurer, the amount of further coverage under the
related Special Hazard Insurance Policy will be reduced by such amount less any
net proceeds from the sale of the property. Any amount paid as the cost of
repair of the property will further reduce coverage by such amount. Restoration
of the property with the proceeds described under (i) above will satisfy the
condition under each Mortgage Pool Insurance Policy that the property be
restored before a claim under such Mortgage Pool Insurance Policy may be validly
presented with respect to the defaulted Mortgage Loan secured by such property.
The payment described under (ii) above will render presentation of a claim in
respect of such Mortgage Loan under the related Mortgage Pool Insurance Policy
unnecessary. Therefore, so long as a Mortgage Pool Insurance Policy remains in
effect, the payment by the insurer under a Special Hazard Insurance Policy of
the cost of repair or of the unpaid principal balance of the related Mortgage
Loan plus accrued interest and certain expenses will not affect the total
Insurance Proceeds paid to 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
-47-
<PAGE>
to Securityholders, or applied to reimburse the Master Servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, any such Reserve Fund will not be deemed to be
part of the related Trust Fund. If set forth in the related Prospectus
Supplement, a Reserve Fund may provide coverage to more than one series of
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
-48-
<PAGE>
be obligated to exercise its best reasonable efforts to obtain from another
Qualified Insurer a replacement insurance policy as described above, subject to
the same cost limit. Any losses associated with any reduction or withdrawal in
rating by an applicable Rating Agency shall be borne by the related
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 to a
-49-
<PAGE>
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
-50-
<PAGE>
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.
-51-
<PAGE>
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
-52-
<PAGE>
by respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. Where the improvements securing a
Mortgage Loan are located in a federally designated flood area at the time of
origination of such Mortgage Loan, the Pooling Agreement 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.
-53-
<PAGE>
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are
reasonably necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a wholly-owned subsidiary of 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".
-54-
<PAGE>
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 make a
required deposit to the Certificate Account or, if the Master Servicer is so
required, to distribute to the holders of
-55-
<PAGE>
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; (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 failure of the
Master Servicer to make certain advances as described herein under "Description
of the Securities--Advances." 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) or (iv) 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.
-56-
<PAGE>
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 for the
payment
-57-
<PAGE>
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 material
respect the interests of any
-58-
<PAGE>
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
-59-
<PAGE>
at an office or agency appointed by the Trustee which will 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
-60-
<PAGE>
thereunder either directly or by or through agents or attorneys, and the Trustee
will not be responsible for any willful misconduct or gross negligence on the
part of any such agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
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
-61-
<PAGE>
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 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-toValue 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.
-62-
<PAGE>
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class or classes of
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
-63-
<PAGE>
decrease such Mortgage Rates by more than a fixed percentage amount on each
adjustment date, (ii) not increase such Mortgage Rates over a fixed percentage
amount during the life of any ARM Loan and (iii) be based on an index (which may
not rise and fall consistently with mortgage interest rates) plus the related
Note Margin (which may be different from margins being used at the time for
newly originated adjustable rate mortgage loans). As a result, the Mortgage
Rates on the ARM Loans at any time may not equal the prevailing rates for
similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of 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, and if
applicable, Contracts, 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, and may have first, second or third priority. Mortgages and deeds to
secure debt are herein referred to as "mortgages." Contracts evidence both the
obligation of the obligor to repay the loan evidenced thereby and grant a
security interest in the related Manufactured Homes to secure repayment of such
loan. However, 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. See "--
Contracts" below. In some states, a mortgage or deed of trust creates a lien
upon the real property encumbered by the mortgage or deed of trust. However, in
other states, the mortgage or deed of trust conveys legal title to the property
respectively, to the mortgagee or to a trustee for the benefit of the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The lien created by the mortgage or deed of trust is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages depends on their terms or
on the terms of separate subordination or inter-creditor agreements, the
knowledge of the parties in some cases and generally on the order of recordation
of the mortgage in the appropriate recording office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower is the beneficiary; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note. Although a deed of trust is similar to a
-64-
<PAGE>
mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in certain 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
Except as set forth below, 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 prior to the end of each five year period. 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
-65-
<PAGE>
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Company's rights as the secured party. However, in
some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Company or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Company
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the 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 AND CERTAIN CONTRACTS
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 a specified
manner prior to the date of trustee's sale. 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.
-66-
<PAGE>
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in
arrears plus the costs and expenses incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and such remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
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, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of Securities. See "Description of Credit Enhancement".
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
-67-
<PAGE>
borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession 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.
-68-
<PAGE>
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
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 post-sale 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
-69-
<PAGE>
against which such deficiency judgment may be executed. Some state 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 Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include 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.
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
-70-
<PAGE>
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.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain states,
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise distributable to the holders of the related series
of Certificates. Moreover, certain federal statutes and certain states by
statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "Environmental Lien").
All subsequent liens on such property generally are subordinated to such an
Environmental Lien and, in some states, even prior recorded liens are
subordinated to Environmental Liens. In the latter states, the security interest
of the Trustee in a related parcel of real property that is subject to such an
Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a deedin-lieu
of foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Certificateholders of the related series.
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 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. If an obligor is successful in asserting any such claim or
defense, and if the Seller had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Seller to
repurchase the Contract because of a breach of its Seller's representation and
warranty that no claims or defenses exist that would affect the obligor's
obligation to make the required payments under the Contract. The Seller would
then have the right to require the originating dealer to repurchase the Contract
from it and might also have the right to recover from the dealer any losses
suffered by the Seller with respect to which the dealer would have been
primarily liable to the obligor.
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 without the prior consent of the lender. 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.
-71-
<PAGE>
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee on
the contract upon any such sale or transfer that is not consented to. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will, to the extent it has knowledge of such conveyance or proposed conveyance,
exercise or cause to be exercised its rights to accelerate the maturity of the
related Contracts through enforcement of due-on-sale clauses, subject to
applicable state law. In certain cases, the transfer may be made by a delinquent
obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages,
as well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In certain states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the 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.
-72-
<PAGE>
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision 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.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum Mortgage Rates for ARM Loans, as set forth in the related Prospectus
Supplement.
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, (i) 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, (ii) 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
(iii) 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.
-73-
<PAGE>
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
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related 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.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
-74-
<PAGE>
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by 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 mortgagee under a
junior mortgage, are subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loan to be sold upon default of the mortgagor, which may extinguish the
junior mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the property in foreclosure litigation and, in certain cases, either
reinitiates or satisfies the defaulted senior loan or loans. A junior mortgagee
may satisfy a defaulted senior loan in full or, in some states, may cure such
default and bring the senior loan current thereby reinstating the senior loan,
in either event usually adding the amounts expended to the balance due on the
junior loan. In most states, absent a provision in the mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee. Where
applicable law or the terms of the senior mortgage or deed of trust do not
require notice of default to the junior mortgagee, the lack of any such notice
may prevent the junior mortgagee from exercising any right to reinstate the loan
which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender
to make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
-75-
<PAGE>
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") (although
portions thereof may also apply to Securityholders who do not hold Securities as
"capital assets") and does not purport to discuss all federal income tax
consequences that may be applicable to the individual circumstances of
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special treatment under the
Code. 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. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS") with respect to any of the federal income tax consequences discussed
below, and no assurance can be given the IRS will not take contrary positions.
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 as to which no REMIC election will be made and (iii) certificates ("Grantor
Trust Certificates") representing interests in a Trust Fund ("Grantor Trust
Fund") as to which no REMIC 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.
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,
-76-
<PAGE>
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 inadvertently 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 Administrator 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 any 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 of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is considered part of
the Mortgage Loans for purposes of Section 856(c)(5)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
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 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.
-77-
<PAGE>
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 "constant yield" 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 reasonable 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" is interest that is unconditionally
payable at least annually (during the entire term of the instrument) 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 the day prior to each Distribution Date, in some cases, as a
consequence of this "long first accrual period," some or all interest payments
may be required to be included in the stated redemption price of the REMIC
Regular Certificate and accounted for as original issue discount. Because
interest on REMIC Regular Certificates must in any event be accounted for under
an accrual method, applying this analysis would result in only a slight
difference in the timing of the inclusion in income of the yield on the REMIC
Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns to the Certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the
-78-
<PAGE>
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 the day prior to each 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, (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 and (iii) taking into account events (including
actual prepayments) that have occurred before the close of the accrual period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price
-79-
<PAGE>
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) in income as
interest, and to amortize premium, 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, except with the
approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to
-80-
<PAGE>
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 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
-81-
<PAGE>
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, 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"
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. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
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
-82-
<PAGE>
discount and reduced by any premium on issuance) on the REMIC Regular
Certificates (and any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby), amortization of any premium on the
Mortgage Loans, bad debt losses with respect to the Mortgage Loans and, except
as described below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, 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,
-83-
<PAGE>
no item of income, gain, loss or deduction allocable to a prohibited transaction
will be taken into account. See "--Prohibited Transactions Tax and Other Taxes"
below. Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the 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
-84-
<PAGE>
of the product of the "adjusted issue price" of the REMIC Residual Certificate
at the beginning of the calendar quarter and 120% of the "long-term Federal
rate" in effect on the Closing Date. For this purpose, the adjusted issue price
of a REMIC Residual Certificate as of the beginning of any calendar quarter will
be equal to the issue price of the REMIC Residual Certificate, increased by the
sum of the daily accruals for all prior quarters and decreased (but not below
zero) by any distributions made with respect to such REMIC Residual Certificate
before the beginning of such quarter. The issue price of a REMIC Residual
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the REMIC Residual Certificates
were sold. The "long-term Federal rate" is an average of current yields on
Treasury securities with a remaining term of greater than nine years, computed
and published monthly by the IRS. Although it has not done so, the Treasury has
authority to issue regulations that would treat the entire amount of 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
-85-
<PAGE>
at some future date may be disregarded in accordance with the above-described
rules which would result in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. On December 24, 1996, the IRS released final
regulations (the "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 Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Certificate issued after January 4, 1995
is not treated as a security and thus may not be marked to market. Prospective
purchasers of a Residual Certificate should consult their tax advisors regarding
the possible application of the mark-to-market requirement to Residual
Certificates.
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 consult with their 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 four
-86-
<PAGE>
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.
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
-87-
<PAGE>
(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 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 taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the
-88-
<PAGE>
second preceding sentence is excluded from the gross income of the partnership
allocated to the partners (in lieu of allocating to the partners a deduction for
such tax paid by the partnership).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the 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.
The REMIC Administrator, as the tax matters person or as agent for the
tax matters person, 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 IRS 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. 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 IRS; 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 IRS. 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.
-89-
<PAGE>
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Except as set forth in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
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
(except, in the case of a partnership, to the extent provided in regulations),
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. To the extent prescribed in regulations by the Secretary
of the Treasury, which regulations have not yet been issued, a trust which was
in existence on August 20, 1996 (other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Code), and
which was treated as a United States person on August 19, 1996, may elect to
continue to be treated as a United States person notwithstanding the previous
sentence. 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
-90-
<PAGE>
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) taxable as a corporation or as a
taxable mortgage pool. 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
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).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "-REMICs --
Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
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 and upon issuance of such Grantor
Trust Certificates, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of Chapter 1 of the Code
and not as a partnership or an association taxable as a corporation.
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, 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" 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.
-91-
<PAGE>
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.
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)
-92-
<PAGE>
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.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, for taxable years beginning after August 5,
1997, 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. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997 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 with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
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 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
-93-
<PAGE>
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.
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 1.1286-1, 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 "Characteristics of Investments
in Grantor Trust 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" is 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 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. The determination as to whether original issue discount
will be considered to be de minimis will be calculated using the same test
described in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
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 Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
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. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool
-94-
<PAGE>
of debt instruments the yield on which may be affected by reason of prepayments.
Accordingly, for certificates backed by such pools, it is intended to base
information reports and returns to the IRS and Certificateholders for taxable
years beginning after August 5, 1997, on the use of a prepayment assumption.
However, in the case of certificates not backed by such pools or with respect to
taxable years beginning prior to August 5, 1997, it currently is not intended to
base such reports and returns on the use of a prepayment assumption.
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 Master Servicer or the Trustee,
except as 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.
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
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
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
-95-
<PAGE>
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 may be considered to be
de minimis and, if so, will be includible in income under de minimis rules
similar to those described above in "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" with the exception that it is less likely
that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, 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 "Characterization of Investments in
Grantor Trust 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
-96-
<PAGE>
discussion under "--Possible Application of 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 "Characterization of Investments in Grantor Trust
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. To the extent the
Grantor Trust Strip Certificates represent an interest in any pool of debt
instruments the yield on which may be affected by reason of prepayments, those
provisions will apply to the Grantor Trust Strip Certificates for taxable years
beginning after August 5, 1997. It is unclear whether those provisions would be
applicable to the Grantor Trust Strip Certificates that do not represent an
interest in any such pool or for taxable years beginning prior to August 5,
1997, or whether use of a prepayment assumption may be required or permitted in
the absence of such provisions. 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. 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 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. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code, as
described above, or due to their similarity to other mortgage-backed securities
(such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code) that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from
-97-
<PAGE>
such regulations. Like the OID Regulations, the Contingent Payment 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 Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the "noncontingent bond method." Under the "noncontingent
bond method," the issuer of a Grantor Trust Strip Certificate determines a
projected payment schedule on which interest will accrue. Holders of Grantor
Trust Strip Certificates are bound by the issuer's projected payment schedule.
The projected payment schedule consists 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 is determined so that the projected payment schedule reflects the
projected yield. The projected amount of each payment must reasonably reflect
the relative expected values of the payments to be received by the holder of a
Grantor Trust Strip Certificate. The projected yield referred to above is a
reasonable rate, not less than the "applicable Federal rate" that, as of the
issue date, reflects 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, and would add to,
or subtract from, such income any variation between the payment actually
received in such month and the payment originally projected to be made in such
month.
Assuming that a prepayment assumption were used, if the Contingent
Payment 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 or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such 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.
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. Except as set forth in the related Prospectus
Supplement, the Master Servicer or 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
-98-
<PAGE>
to interest thereon at the related Pass-Through Rate. In addition, the Master
Servicer or 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 Master Servicer or 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 IRS 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 IRS
will agree with the Trust Fund's information reports of such items of income and
expense. Moreover, such information reports, even if otherwise accepted as
accurate by the IRS, 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.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
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"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related Prospectus 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.
-99-
<PAGE>
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 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). Without regard to whether the Notes are
characterized as equity interests, the purchase, sale and holding of Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if the Issuer, the Trustee or any of their respective affiliates is or becomes a
Party in Interest with respect to such Plan. 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
("Exemption") to certain underwriters, 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)
-100-
<PAGE>
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 Structured Rating Group, 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
interests in such other investment pools must have been rated in one of the
three highest generic 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 or transfer of Securities in the
initial issuance of such Securities or the direct or indirect acquisition or
disposition in the secondary market of Securities by a Plan or with Plan Assets
or the continued holding of Securities acquired by a Plan or with Plan Assets
pursuant to either of the foregoing. 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 Security 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 or with Plan Assets and (3) the continued holding of
Securities acquired by a Plan or with Plan Assets pursuant to either of the
foregoing.
-101-
<PAGE>
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 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
-102-
<PAGE>
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.
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.
-103-
<PAGE>
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is rated in one of the
two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve
Board,
the Office of the Comptroller of the Currency, the FDIC and the OTS with an
effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Offered Securities 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 Securities. 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 Securities. 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.
-104-
<PAGE>
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Offered Securities or to purchase any
class of Offered Securities 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 Securities 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 Securities 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 Securities from time
to time, but the timing and amount of any such additional offerings will be
dependent upon a number of factors, including the volume of mortgage loans
purchased by the Company, prevailing interest rates, availability of funds and
general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Company from such sale.
The Company intends that Offered Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Securities 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 Securities 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 Securities (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 Securities 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 Securities, underwriters may
receive compensation from the Company or from purchasers of such Certificates in
the form of discounts, concessions or commissions. Underwriters
-105-
<PAGE>
and dealers participating in the distribution of the Offered Securities 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 Securities 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 Securities 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 Securities 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 Securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of such Certificates. Holders of Offered Securities should consult with
their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement,
certain legal matters in connection with the Certificates of each series will be
passed upon for the Company by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of
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.
-106-
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
----
401(c) Regulations...........................................................103
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, 71
Certificate Account...........................................................35
Certificate Registrar.........................................................33
Certificates .............................................................1
Class Exemptions ...........................................................103
Closing Date ............................................................79
Code .........................................................6, 77
Commission .............................................................3
Committee Report ............................................................79
Company ..........................................................1, 4
Conservation Act ............................................................71
Contingent Payment Regulations................................................98
Contracts ............................................................15
Contributions Tax ............................................................89
Convertible Mortgage Loan.....................................................19
Crime Control Act ............................................................75
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
DIDMC ............................................................76
Distribution Date .............................................................8
DOL ...........................................................101
DOL Regulations ...........................................................101
DTC ............................................................33
DTC Registered Securities.....................................................33
Due Period ............................................................41
Environmental Lien............................................................71
Equity Certificates............................................................5
Equity Participation..........................................................18
-107-
<PAGE>
ERISA .......................................................11, 100
ERISA Plans ...........................................................100
Event of Default ............................................................57
Exchange Act .............................................................3
Excluded Plan ...........................................................102
Exemption Rating Agencies....................................................102
Extraordinary Losses..........................................................43
FDIC ............................................................15
FHA ............................................................15
FHA Loans ............................................................15
FHLMC ............................................................21
FIRREA ............................................................21
FNMA ............................................................21
Fraud Loss ............................................................43
FTC Rule ............................................................72
Garn-St Germain Act...........................................................72
Grantor Trust Certificates................................................11, 77
Grantor Trust Fractional Interest Certificate.................................92
Grantor Trust Fund............................................................77
Grantor Trust Strip Certificate...............................................92
Holder ............................................................33
Housing Act ............................................................22
HUD ............................................................53
Indenture .......................................................1, 4, 5
Index ............................................................16
Insurance Proceeds............................................................36
Intermediaries ............................................................33
IRS ........................................................77, 79
Issue Premium ............................................................84
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
Mark-to-Market Regulations....................................................87
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
-108-
<PAGE>
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
OID Regulations ............................................................77
OTS ...........................................................105
Owner Trust .............................................................4
Owner Trustee ..........................................................4, 5
Participants ............................................................33
Parties in Interest..........................................................100
Pass-Through Rate .............................................................5
Permitted Investments.........................................................36
Plan ............................................................11
Plan Assets ...........................................................101
Plans ...........................................................100
Policy Statement ...........................................................105
Pool Insurer ............................................................37
Pooling Agreement ......................................................1, 5, 54
Pre-Funding Account...........................................................32
Prepayment Assumption.....................................................79, 95
Prepayment Interest Shortfall.................................................62
Prepayment Penalty............................................................18
Primary Insurance Policy......................................................51
Primary Insurer ............................................................51
Prohibited Transactions Tax...................................................88
Prospectus Supplement..........................................................1
PTCE ...........................................................103
PTCE 83-1 ...........................................................103
Purchase Obligation...........................................................50
Purchase Price ............................................................23
Qualified Substitute Mortgage Loan............................................23
Rating Agency ............................................................10
Realized Losses ............................................................43
Record Date ............................................................39
Related Proceeds ............................................................41
Relief Act ............................................................75
REMIC ......................................................1, 6, 77
REMIC Administrator...........................................................77
REMIC Certificates............................................................77
REMIC Provisions ............................................................77
REMIC Regular Certificates................................................11, 77
REMIC Regulations ............................................................77
REMIC Residual Certificates...............................................11, 77
REO Mortgage Loan ............................................................29
REO Property ............................................................27
Reserve Fund ............................................................47
RICO ............................................................75
RTC ............................................................15
Securities ..........................................................1, 4
Securities Act ........................................................3, 107
Security ............................................................54
-109-
<PAGE>
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
Senior/Subordinate Series.....................................................32
Servicing Default ............................................................57
Servicing Standard............................................................25
Single Family Loans...........................................................15
Single Family Property........................................................15
SMMEA .......................................................11, 105
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 ...........................................................100
Tax-Exempt Investor..........................................................104
Tiered REMICs ............................................................78
Title V ............................................................74
Title VIII ............................................................74
Trust Agreement .............................................................4
Trust Fund ..........................................................1, 5
Trustee .............................................................5
UBTI ...........................................................104
Unaffiliated Sellers..........................................................15
Underwriter ...........................................................101
United States person..........................................................91
Value ............................................................18
-110-
