Registration No. 333-62771
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
SOUTHERN PACIFIC SECURED ASSETS CORP.
(Exact name of Registrant as specified in its Charter)
California
(State of Incorporation)
33-0659688
(I.R.S. Employer Identification Number)
4949 Meadows Road, Suite 600
Lake Oswego, Oregon 97035
503-684-4700
(Address and telephone number of Registrant's principal executive offices)
Barney Guy
Southern Pacific Secured Assets Corp.
4949 Meadows Road, Suite 600
Lake Oswego, Oregon 97035
503-684-4700
(Name, address and telephone number of agent for service)
----------------
Copies to:
Paul D. Tvetenstrand, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
================================================================================
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED (1) PER UNIT (2) PRICE (2) FEE (1)(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates, $850,000,000 100% $850,000,000 $250,750.00
issued in series
========================================================================================================================
Mortgage-Backed Notes, issued in series $150,000,000 100% $150,000,000 $ 44,250.00
========================================================================================================================
</TABLE>
<PAGE>
(1) $531,719,000.00 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-52577 referred to below and not previously sold are consolidated in this
Registration Statement pursuant to Rule 429. All registration fees in connection
with such unsold amount of Mortgage Pass-Through Certificates have been
previously paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount of Mortgage Pass-Through Certificates registered
under the Registration Statement as so consolidated as of the date of this
filing is $1,381,719,000.00. The total amount of Mortgage Backed Notes
registered under the Registration Statement as of the date of this filing is
$150,000,000.00.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid in connection with the initial filing.
--------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is part
of this Registration Statement is a combined prospectus and includes all the
information currently required in a prospectus relating to the securities
Covered by Registration Statement No. 333-52577 previously filed by the
Registrant. This Registration Statement, which is a new registration statement,
also constitutes a post-effective amendment to Registration Statement No.
333-52577. Such post-effective amendment shall hereafter become effective
concurrently with the effectiveness of this Registration Statement in accordance
with Section 8(a) of the Securities Act of 1933.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus, (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes ("Version 1") (ii) an illustrative form of prospectus supplement for use
in an offering of Mortgage Pass-Through Certificates which provides for credit
support in the form of a letter of credit ("Version 2") (iii) an illustrative
form of prospectus supplement for use in an offering of Mortgage-Backed Notes
("Version 3") and the current form of Prospectus Supplement for a September
securitization ("Version 4").
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
VERSION 1
=========
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 21, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________, 19__)
$----------------
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
[NAME OF MASTER SERVICER]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
$__________ ____% CLASS A-1 CERTIFICATES
$__________ ____% CLASS A-2 CERTIFICATES
$__________ ____% CLASS A-3 CERTIFICATES
$__________ ____% CLASS A-4 CERTIFICATES
$ 0 ____%* CLASS A-5 CERTIFICATES
$__________ ____% CLASS A-6 CERTIFICATES
$ 0 Variable Rate* CLASS A-7 CERTIFICATES
*ACCRUAL OF INTEREST BASED ON THE RELATED NOTIONAL AMOUNT AS DESCRIBED HEREIN.
THE SERIES 19__-__ MORTGAGE PASS-THROUGH CERTIFICATES WILL INCLUDE THE
FOLLOWING SEVEN CLASSES (THE "SENIOR CERTIFICATES"): (I) CLASS A-1 CERTIFICATES,
CLASS A-2 CERTIFICATES, CLASS A-3 CERTIFICATES, CLASS A-4 CERTIFICATES, (II)
CLASS A-5 CERTIFICATES (THE "FIXED STRIP CERTIFICATES"), (III) CLASS A-6
CERTIFICATES AND (IV) CLASS A-7 CERTIFICATES (THE "VARIABLE STRIP
CERTIFICATES"). IN ADDITION TO THE SENIOR CERTIFICATES, THE SERIES 19__-__
MORTGAGE PASS-THROUGH CERTIFICATES WILL ALSO CONSIST OF ONE CLASS OF SUBORDINATE
CERTIFICATES WHICH IS DESIGNATED AS THE CLASS B CERTIFICATES (THE "SUBORDINATE
CERTIFICATES") AND ONE CLASS OF RESIDUAL CERTIFICATES WHICH IS DESIGNATED AS THE
CLASS R CERTIFICATES (THE "RESIDUAL CERTIFICATES" AND, COLLECTIVELY WITH THE
SENIOR CERTIFICATES AND THE SUBORDINATE CERTIFICATES, THE "CERTIFICATES"). ONLY
THE SENIOR CERTIFICATES (THE "OFFERED CERTIFICATES") ARE OFFERED HEREBY.
THE SENIOR CERTIFICATES IN THE AGGREGATE WILL EVIDENCE AN INITIAL
UNDIVIDED INTEREST OF APPROXIMATELY _____% IN A TRUST FUND (THE "TRUST FUND")
CONSISTING PRIMARILY OF A POOL OF CERTAIN CONVENTIONAL FIXED-RATE ONE- TO
FOUR-FAMILY FIRST LIEN MORTGAGE LOANS (THE "MORTGAGE LOANS") TO
<PAGE>
-2-
be deposited by Southern Pacific Secured Assets Corp. (the "Company") into the
Trust Fund for the benefit of the Certificateholders. Certain characteristics of
the Mortgage Loans are described herein under "Description of the Mortgage
Pool."
Distributions on the Senior 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 on ____________, 19__ (each, a "Distribution Date"). As more
fully described herein, interest distributions on the Senior Certificates will
be based on the Certificate Principal Balance thereof (or the Notional Amount
(as defined herein) in the case of the Fixed Strip Certificates and Variable
Strip Certificates) and the then applicable Pass-Through Rate thereof, which
will be variable for the Variable Strip Certificates and fixed for all other
classes of Certificates. Distributions in respect of principal of the Senior
Certificates will be allocated among the various classes of the Senior
Certificates as described herein under "Description of the
Certificates--Principal Distributions." The rights of the holders of the
Subordinate Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to the rights of the holders of the Senior
Certificates. Certain losses incurred due to defaults on the Mortgage Loans and
not covered by the Subordinate Certificates will be allocated on a pro rata
basis between the Class A-1, Class A-5 and Class A-6 Certificates (collectively,
the "Tiered Certificates"), on the one hand, and the Class A-2, Class A-3, Class
A-4 and Variable Strip Certificates, on the other, as more particularly
described herein. Any such losses so allocated to the Tiered Certificates will
be allocated first to the Class A-6 Certificates until the Certificate Principal
Balance thereof is reduced to zero, and then on a pro rata basis to the Class
A-1 Certificates and Class A-5 Certificates, as more particularly described
herein.
There is currently no secondary market for the Senior Certificates.
__________________________________ (the "Underwriter") intends to make a
secondary market in the Senior Certificates, but is not obligated to do so.
There can be no assurance that a secondary market for the Senior Certificates
will develop or, if it does develop, that it will continue. The Senior
Certificates will not be listed on any securities exchange.
It is a condition of the issuance of the Senior Certificates that they
be rated "___" by _____________________________ and "____" by
____________________________________.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made in connection with the Trust Fund for federal
income tax purposes. Each class of Senior Certificates will constitute "regular
interests" in the REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
THE YIELD TO MATURITY ON THE SENIOR CERTIFICATES WILL DEPEND ON THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING AS A RESULT OF PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY
MAY BE PREPAID IN FULL OR IN PART AT ANY
<PAGE>
-3-
TIME WITHOUT PENALTY. THE YIELD TO INVESTORS ON THE SENIOR CERTIFICATES MAY BE
ADVERSELY AFFECTED BY ANY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS
DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. THE YIELD TO INVESTORS ON THE
FIXED STRIP CERTIFICATES AND THE VARIABLE STRIP CERTIFICATES WILL BE EXTREMELY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
AND DEFAULTS ON THE MORTGAGE LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY OVER
TIME. A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN
THE FAILURE OF INVESTORS IN SUCH CERTIFICATES TO RECOVER THEIR INITIAL
INVESTMENTS. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD
CONSIDERATIONS" IN THE PROSPECTUS.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY
THE COMPANY, THE MASTER SERVICER OFFERED 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.
The Offered Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter 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
Offered Certificates will be equal to _________% of the initial aggregate
principal balance of the Offered Certificates, plus accrued interest thereon
from ___________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by
the Company.
The Offered Certificates are offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the Offered Certificates will be made on
or about ____________, 19__ at the office of __________________________________,
<PAGE>
-4-
_______________, _____________________ against payment therefor in immediately
available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
<PAGE>
-5-
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART
OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO
ITS PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS
A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL __________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
-6-
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 Pass-Through Certificates,
Series 19__-__.
Company..................................Southern Pacific Secured Assets Corp.
(the "Company"), a wholly-owned
subsidiary of Southern Pacific Funding
Corporation ("SPFC"). See "The Company"
in the Prospectus.
Seller[s]................................[Southern Pacific Funding Corporation]
[Name of Seller] (["SPFC" or] the
"Seller[s]"). See ["The Master
Servicer"] ["Southern Pacific Funding
Corporation"] herein.
Master Servicer..........................[Name of Master Servicer] (the "Master
Servicer"), an affiliate of the
Company]. See "Pooling and Servicing
Agreement--The Master Servicer" herein.
Trustee.................................._______________, ___________________
___________________ (the "Trustee").
Cut-off Date.............................____________ 1, 19__ (the "Cut-off
Date").
Delivery Date............................On or about ____________, 19__ (the
"Delivery Date").
Denominations............................The Senior Certificates will be issued
in registered, certificated form, in
minimum denominations of $______ (or in
minimum Notional Amounts of $_____ in
the case of the Fixed Strip
Certificates or Variable Strip
Certificates) and integral multiples of
$_____ in excess thereof.
<PAGE>
-7-
The Mortgage Pool........................The Mortgage Pool will consist of a
pool of conventional, fixed-rate, fully
amortizing mortgage loans (the
"Mortgage Loans") with an aggregate
principal balance as of the Cut-off
Date of approximately $___________. The
Mortgage Loans are secured by first
liens on one- to four-family
residential real properties (each, a
"Mortgaged Property"). The Mortgage
Loans have individual principal
balances at origination of at least
$______ but not more than $_________
with an average principal balance at
origination of approximately
$_________. The Mortgage Loans have
terms to maturity from the date of
origination or modification of not more
than __ years, and a weighted average
remaining term to stated maturity of
approximately ___ months as of the
Cut-off Date. The Mortgage Loans will
bear interest at Mortgage Rates of at
least ____% per annum but not more than
_____% per annum, with a weighted
average Mortgage Rate of approximately
_______% per annum as of the Cut-off
Date. For a further description of the
Mortgage Loans, see "Description of the
Mortgage Pool" herein.
The Senior Certificates..................The Senior Certificates in the
aggregate evidence an initial interest
of approximately _____% in a trust fund
(the "Trust Fund") consisting primarily
of the Mortgage Pool. The Senior
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 Senior Certificates
will have the following Pass-Through
Rates and Certificate Principal
Balances as of the Cut-off Date:
Class A-1 Certificates ____% $__________
Class A-2 Certificates ____% $__________
<PAGE>
-8-
Class A-3 Certificates ____% $__________
Class A-4 Certificates ____% $__________
Class A-5 Certificates ____% $ 0
Class A-6 Certificates ____% $__________
Class A-7 Certificates Variable Rate $ 0
The Offered Certificates are subject to
various priorities for payment of
interest and principal as described
herein. For a description of the
allocation of interest and principal
distributions among the Senior
Certificates, see "Summary--Interest
Distributions," "--Principal
Distributions," "Description of the
Certificates--Interest Distributions"
and "--Principal Distributions on the
Senior Certificates" herein.
Interest Distributions...................The Pass-Through Rates on the Senior
Certificates (other than the Variable
Strip Certificates) are fixed and set
forth on the cover hereof. The
Pass-Through Rate on the Variable Strip
Certificates on each Distribution Date
will equal the weighted average, as
determined on the Due Date in the month
preceding the month in which such
Distribution Date occurs, of the Pool
Strip Rates on each of the Mortgage
Loans. The Pool Strip Rate on each
Mortgage Loan is equal to the Net
Mortgage Rate thereon minus ____%. The
Net Mortgage Rate on each Mortgage Loan
is equal to the Mortgage Rate thereon
minus the rate per annum at which the
related master servicing fees accrue
(the "Servicing Fee Rate"). The Pool
Strip Rates on the Mortgage Loans range
between _____% and _____%. The initial
Pass-Through Rate on the Variable Strip
Certificates is approximately _____%.
The Fixed Strip Certificates and
Variable Strip Certificates have no
Certificate Principal Balance and will
<PAGE>
-9-
accrue interest at the then applicable
Pass-Through Rate on the Notional
Amount (as defined herein).
Holders of the Senior Certificates will
be entitled to receive on each
Distribution Date, to the extent of the
Available Distribution Amount (as
defined herein) for such Distribution
Date, interest distributions in an
amount equal to the aggregate of all
Accrued Certificate Interest (as
defined below) with respect to such
Certificates for such Distribution Date
and, to the extent not previously paid,
for all prior Distribution Dates (the
"Senior Interest Distribution Amount").
With respect to any Distribution Date,
the Accrued Certificate Interest in
respect of each class of Senior
Certificates will be equal to one
month's interest accrued at the
applicable Pass- Through Rate on the
Certificate Principal Balance (or, in
the case of the Fixed Strip
Certificates and Variable Strip
Certificates, the Notional Amount (as
defined below)) of the Certificates of
such class immediately prior to such
Distribution Date, less any interest
shortfalls not covered by Subordination
(as defined herein) and allocated to
the Certificates of such class as
described herein, including any
Prepayment Interest Shortfall (as
defined herein), if any, for such
Distribution Date.
If the Senior Interest Distribution
Amount for any Distribution Date is
less than the Available Distribution
Amount for such date, then such
shortfall shall be allocated among the
respective classes of Senior
Certificates as described herein, and
the unpaid Accrued Certificate Interest
in respect of the Certificates of each
such class will be payable to the
<PAGE>
-10-
holders thereof on subsequent
Distribution Dates, to the extent of
available funds.
The Notional Amount of the Fixed Strip
Certificates and Variable Strip
Certificates as of any date of
determination is equal to the aggregate
Certificate Principal Balance of the
Certificates of all classes, including
the Subordinate Certificates, as of
such date. See "Description of the
Certificates--Interest Distributions"
herein.
References herein to the Notional
Amount of the Fixed Strip Certificates
and Variable Strip Certificates are
used solely for certain calculations
and do not represent the right of the
holders of the Fixed Strip Certificates
and Variable Strip Certificates to
receive distributions of such amount.
Principal Distributions..................Holders of the Senior Certificates will
be entitled to receive on each
Distribution Date, in the manner and
priority set forth herein, to the
extent of the portion of the Available
Distribution Amount remaining after the
Senior Interest Distribution Amount is
distributed to the holders of the
Senior Certificates, a distribution
allocable to principal which will, as
more fully described herein, include
(i) the Senior Percentage (as defined
herein) of scheduled principal payments
due on the Mortgage Loans and of the
principal portion of any unscheduled
collections of principal (other than
mortgagor prepayments and amounts
received in connection with a Final
Disposition (as defined herein) of a
Mortgage Loan described in clause (ii)
below), including repurchases of the
Mortgage Loans, (ii) in connection with
the Final Disposition of a Mortgage
Loan that did not incur any Excess
Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy
<PAGE>
-11-
Losses or Extraordinary Losses (each as
defined herein), an amount equal to the
lesser of (a) the Senior Percentage of
the Stated Principal Balance (as
defined herein) of such Mortgage Loan
and (b) the Senior Accelerated
Distribution Percentage (as defined
herein) of the related collections,
including any Insurance Proceeds and
Liquidation Proceeds, to the extent
applied as recoveries of principal and
(iii) the Senior Accelerated
Distribution Percentage (as defined
below) of mortgagor prepayments on each
Mortgage Loan.
Distributions in respect of principal
of the Senior Certificates on any
Distribution Date will be allocated
among the classes then entitled to such
distributions, as described herein. See
"Summary--Special Prepayment
Considerations" and "--Special Yield
Considerations" and "Certain Yield and
Prepayment Considerations" herein. The
Fixed Strip Certificates and Variable
Strip Certificates will not be entitled
to receive any principal distributions.
The Senior Percentage initially will be
approximately _____% and will be
recalculated after each Distribution
Date as described herein to reflect the
entitlement of the holders of the
Senior Certificates to subsequent
distributions allocable to principal.
For each Distribution Date occurring
prior to the Distribution Date in
________, ________, the Senior
Accelerated Distribution Percentage
will equal 100%. Thereafter, as further
described herein, during certain
periods, subject to certain loss and
delinquency criteria described herein,
the Senior Accelerated Distribution
Percentage may be 100% or otherwise
disproportionately large relative to
the Senior Percentage. See "Description
of the
<PAGE>
-12-
Certificates--Principal Distributions
on the Senior Certificates" herein.
Advances.................................The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest on the Mortgage Loans, subject
to the limitations described herein.
See "Description of the
Certificates--Advances" herein and in
the Prospectus.
Allocation of Losses;
Subordination..........................Subject to the limitations set forth
below, Realized Losses (as more
particularly described herein) on the
Mortgage Loans will be allocated first
to the Subordinate Certificates and
then to the Senior Certificates. The
subordination provided by the
Subordinate Certificates will cover
Realized Losses on the Mortgage Loans
that constitute Defaulted Mortgage
Losses, Special Hazard Losses, Fraud
Losses and Bankruptcy Losses (each as
defined in the Prospectus) to the
extent described herein. The aggregate
amounts of Special Hazard Losses, Fraud
Losses and Bankruptcy Losses which may
be allocated to the Subordinate
Certificates are initially limited to
$__________, $_________ and $_______,
respectively. All of the foregoing
amounts are subject to periodic
reduction as described herein. In the
event the Certificate Principal Balance
of the Subordinate Certificates is
reduced to zero, all additional losses
will be borne by the Senior
Certificateholders. In addition, any
Special Hazard Losses, Fraud Losses and
Bankruptcy Losses, in excess of the
respective amounts of coverage therefor
will be borne by the holders of Senior
Certificates and Subordinate
Certificates on a pro rata basis. Any
Default Losses (as defined herein)
incurred on the Mortgage Loans and not
covered by the Subordinate Certificates
will be
<PAGE>
-13-
allocated on a pro rata basis between
the Class A-1, Class A-5 and Class A-6
Certificates (the "Tiered
Certificates"), on the one hand, and
the Class A-2, Class A-3, Class A-4 and
Variable Strip Certificates, on the
other, as more particularly described
herein. Any such losses so allocated to
the Tiered Certificates will be
allocated first to the Class A-6
Certificates until the Certificate
Principal Balance thereof is reduced to
zero and then on a pro rata basis
between the Class A-1 Certificates and
the Class A-5 Certificates, as more
particularly described herein. Because
principal distributions are paid to
certain classes of Senior Certificates
before other classes, holders of
classes of Senior Certificates having a
later priority of payment bear a
greater risk of such losses than
holders of classes of Senior
Certificates having earlier priorities
for distribution of principal. See
"Description of the
Certificates--Allocation of Losses;
Subordination" herein.
Subordinate Certificates.................The Class B Certificates (the
"Subordinate Certificates") have an
aggregate initial Certificate Principal
Balance of approximately $__________,
evidencing an initial Subordinate
Percentage of approximately ____%, and
a Pass-Through Rate of ____%. The
Subordinate Certificates are not being
offered hereby.
Optional Termination.....................At its option, on any Distribution Date
when the aggregate principal balance of
the Mortgage Loans is less than [__]%
of the aggregate principal balance of
the Mortgage Loans as of the Cut-off
Date, the Master Servicer or the
Company may (i) purchase from the Trust
Fund all remaining Mortgage Loans and
other assets thereof, and thereby
effect early retirement of the
Certificates or (ii)
<PAGE>
-14-
purchase in whole, but not in part, the
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 Senior Certificates
will depend on the rate and timing of
principal payments (including by reason
of prepayments, defaults and
liquidations) on the Mortgage Loans. As
is the case with mortgage-backed
securities generally, the Senior
Certificates are subject to substantial
inherent cash-flow uncertainties
because the Mortgage Loans may be
prepaid at any time. 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
Senior Certificates results in the
allocation of prepayments among certain
classes as follows [TO BE INCLUDED AS
APPROPRIATE]:]
[SEQUENTIALLY PAYING CLASSES: [All]
classes of the Senior Certificates are
subject to various priorities for
payment of principal as described
herein. Distributions of principal on
classes having an earlier priority of
payment will be affected by the rates
of prepayments of the Mortgage Loans
early in the life of the Mortgage Pool.
The timing of commencement of principal
distributions and the weighted
<PAGE>
-15-
average lives of classes of
Certificates with a later priority of
payment will be affected by the rates
of prepayments experienced both before
and after the commencement of principal
distributions on such classes.]
[PAC CERTIFICATES: Principal
distributions on the PAC Certificates
generally will be payable in amounts
determined based on schedules as
described herein, assuming that the
prepayments on the Mortgage Loans occur
each month at a constant level between
approximately ___% SPA and
approximately ___% SPA and based on
certain other assumptions. However, as
discussed herein, actual principal
distributions may be greater or less
than the described amounts. If the
prepayments on the Mortgage Loans occur
at a level below or above the PAC
Targeted Range, the amount of principal
distributions may deviate from the
described amounts and the weighted
average lives of the remaining PAC
Certificates may be extended or
shortened. The classes of PAC
Certificates with later priorities of
payment are less likely to benefit from
the stabilization of principal
distributions provided by the Companion
Certificates as described herein) than
the PAC Certificates with earlier
priorities of payment. Investors in the
PAC Certificates should be aware that
the stabilization provided by the
Companion Certificates is limited.]
[TAC CERTIFICATES: Principal
distributions on the TAC Certificates
generally will be payable thereon in
the amounts determined by using the
schedules described herein, assuming
that prepayments on the Mortgage Loans
occur each month at a constant level of
approximately ___% SPA, and based on
certain other assumption. However, as
discussed herein, actual principal
distributions
<PAGE>
-16-
may be greater or less than the
described amounts, because it is highly
unlikely that the actual prepayment
speed of the Mortgage Loans each month
will remain at or near ___% SPA. If the
Companion Certificates are retired
before all of the TAC Certificates are
retired, the rate of principal
distributions and the weighted average
lives of the remaining TAC Certificates
will become significantly more
sensitive to changes in the prepayment
speed of the Mortgage Loans, and
principal distributions thereon will be
more likely to deviate from the
described amounts.]
[COMPANION CERTIFICATES: Because all
amounts available for principal
distributions among the Senior
Certificates in any given month will be
applied first to the [PAC] [TAC]
Certificates up to the described
amounts and any excess other such
amounts will be applied to the
Companion Certificates, the rate of
principal distributions on, and the
weighted average lives of the Companion
Certificates will be more sensitive to
changes in the rates of prepayment of
the Mortgage Loans than the rate of
principal distributions on and the
weighted average lives of the [PAC]
[TAC] Certificates.
See "Description of the
Certificates--Principal Distributions
on the Senior Certificates," and
"Certain Yield and Prepayment
Considerations" herein, and "Maturity
and Prepayment Considerations" in the
Prospectus.
Special Yield
Considerations.........................The yield to maturity on each class of
the Senior Certificates will depend on
the rate and timing of principal
payments (including by reason of
prepayments, defaults and liquidations)
on the Mortgage Loans and the
allocation thereof to reduce the
Certificate
<PAGE>
-17-
Principal Balance or Notional Amount of
such class. The yield to maturity on
each class of the Senior Certificates
will also depend on the Pass-Through
Rate and any adjustments thereto (as
applicable) and the purchase price for
such Certificates. The yield to
investors on any class of Senior
Certificates will be adversely affected
by any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage
Loans, which are expected to result
from the distribution of interest only
to the date of prepayment (rather than
a full month's interest) in connection
with prepayments in full and the lack
of any distribution of interest on the
amount of any partial prepayments.
Prepayment Interest Shortfalls
resulting from principal prepayments in
full in any calendar month will not
adversely affect the yield to investors
in the Offered Certificates to the
extent such prepayment interest
shortfalls are covered by the Master
Servicer as discussed herein.
In general, if a class of Senior
Certificates is purchased at a premium
and principal distributions thereon
occur at a rate faster than anticipated
at the time of purchase, the investor's
actual yield to maturity will be lower
than that assumed at the time of
purchase. Conversely, if a class of
Senior 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 Senior Certificates were structured
based on a number of assumptions,
including a prepayment assumption of
___% SPA and corresponding weighted
average lives as set forth herein under
"Special Prepayment
<PAGE>
-18-
Considerations." The prepayment, yield
and other assumptions for the
respective classes that are to be
offered hereunder will vary as
determined at the time of sale.
[The multiple class structure of the
Senior Certificates causes the yield of
certain classes to be particularly
sensitive to changes in the prepayment
speed of the Mortgage Loans and other
factors, as follows [TO BE INCLUDED AS
APPROPRIATE]:]
[INTEREST STRIP AND INVERSE FLOATER
CLASSES: The yield to investors on the
[identify classes] will be extremely
sensitive to the rate and timing of
principal payments on the Mortgage
Loans (including by reason of
prepayments, defaults and
liquidations), which may fluctuate
significantly over time. A rapid rate
of principal payments on the Mortgage
Loans could result in the failure of
investors in the [identify interest
strip and inverse floater strip
classes] to recover their initial
investments, and a slower than
anticipated rate of principal payments
on the Mortgage Loans could adversely
affect the yield to investors on the
[identify non-strip inverse floater
classes].]
[VARIABLE STRIP CERTIFICATES: In
addition to the foregoing, the yield on
the Variable Strip Certificates will be
materially adversely affected to a
greater extent than the yields on the
other Senior Certificates if the
Mortgage Loans with higher Mortgage
Rates prepay faster than the Mortgage
Loans with lower Mortgage Rates,
because holders of the Variable Strip
Certificates generally have rights to
relatively larger portions of interest
payments on the Mortgage Loans with
higher Mortgage Rates than on Mortgage
Loans with lower Mortgage Rates.]
<PAGE>
-19-
[ADJUSTABLE RATE (INCLUDING INVERSE
FLOATER) CLASSES: The yield to
investors on the [identify floating
rate classes] will be sensitive, and
the yield to investors on the [identify
inverse floater classes] will be
extremely sensitive, to fluctuations in
the level of [the Index]. THE
PASS-THROUGH RATE ON THE [IDENTIFY
INVERSE FLOATER CLASSES] WILL VARY
INVERSELY WITH, AND AT A MULTIPLE OF,
[THE INDEX].]
[INVERSE FLOATER COMPANION CLASSES: In
addition to the foregoing, in the event
of relatively low prevailing interest
rates (including [the Index]) and
relatively high rates of principal
prepayments over an extended period,
while investors in the [identify
inverse floater companion classes] may
then be experiencing a high current
yield on such Certificates, such yield
may be realized only over a relatively
short period, and it is unlikely that
such investors would be able to
reinvest such principal prepayments on
such Certificates at a comparable
yield.]
[RESIDUAL CERTIFICATES: Holders of the
Residual Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have
tax liabilities with respect to their
Certificates during the early years of
the term of the REMIC that
substantially exceed the principal and
interest payable thereon during such
periods. See "Certain Yield and
Prepayment Considerations," especially
"--Additional Yield Considerations
Applicable Solely to the Residual
Certificates" herein, "Certain Federal
Income Tax Consequences" herein and in
the Prospectus and "Yield
Considerations" in the Prospectus.]
<PAGE>
-20-
See "Certain Yield and Prepayment
Considerations" [, especially "--Yield
Considerations," "--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" and "Certain
Federal Income Tax Consequences"]
herein, and "Yield Considerations" in
the Prospectus.
Certain Federal Income
Tax Consequences.......................An election will be made to treat the
Trust Fund as a real estate mortgage
investment conduit ("REMIC") for
federal income tax purposes. Upon the
issuance of the Offered Certificates,
__________ ___________, counsel to the
Company, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the
Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a REMIC within the
meaning of Sections 860A through 860G
of the Internal Revenue Code of 1986
(the "Code").
For federal income tax purposes, the
Class R Certificates will be the sole
Class of "residual interests" in the
Trust Fund and the Senior Certificates
and the Subordinate Certificates will
constitute the "regular interests" in
the Trust Fund and will generally be
treated as representing ownership of
debt instruments in the Trust Fund.
For federal income tax reporting
purposes, the _______ Certificates will
not, and the ___________________
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 ___% SPA (as defined herein).
No representation is made that
<PAGE>
-21-
the Mortgage Loans will prepay at that
rate or at any other rate.
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Ratings..................................It is a condition of the issuance of
the Senior Certificates that they be
rated "___" by ________
________________ and "___" by
_________________________. 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. The ratings of the Fixed
Strip Certificates and Variable Strip
Certificates do not address the
possibility that the holders of such
Certificates may fail to fully recover
their initial investments. See "Certain
Yield and Prepayment Considerations"
and "Ratings" herein and "Yield
Considerations" in the Prospectus.
Legal Investment.........................The Senior Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA") for so long as they are rated
in at least the second highest rating
category by one or more nationally
recognized statistical rating agencies.
Institutions whose investment
activities are subject to legal
investment laws and regulations,
regulatory capital requirements or
review by regulatory authorities may be
subject to restrictions on investment
in the Offered Certificates and should
consult with their legal advisors. See
<PAGE>
-22-
"Legal Investment" herein and "Legal
Investment Matters" in the Prospectus.
<PAGE>
-23-
[RISK FACTORS]
[Prospective 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:]
[Appropriate Risk Factors as necessary.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, fixed-rate, fully-amortizing, level
monthly payment first lien Mortgage Loans with terms to maturity of not more
than ___ years from the due date of the first monthly payment. On or before the
Delivery Date, the Company will acquire the Mortgage Loans to be included in the
Mortgage Pool from Southern Pacific Funding Corporation ("SPFC"), an affiliate
of the Company [, which in turn acquired them pursuant to various mortgage loan
purchase agreements between SPFC [_________] (the "Sellers")]. The Seller[s]
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 and 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. Neither the Company nor any other entity or person will have
any responsibility to purchase or replace any Mortgage Loan if a Seller is
obligated but fails to do so. 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
[Sellers] in accordance with the underwriting criteria described herein. See
"--Underwriting" below. All percentages of the Mortgage Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
None of the Mortgage Loans will have been originated prior to
__________________ or will have a maturity date later than __________________.
No Mortgage Loan will have a remaining term to maturity as of the Cut-off Date
of less than ____ months. The weighted average remaining term to maturity of the
Mortgage Loans as of the Cut-off Date will be approximately ____ months. The
weighted average original term to maturity of the Mortgage Loans as of the
Cut-off Date will be approximately ____ months.
<PAGE>
-24-
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
Approximately _____% of the Mortgage Loans in the Mortgage Pool will
have been purchased from ______________, and each of _______ other Sellers sold
more than ____% but less than ____% of the Mortgage Loans to SPFC. Except as
indicated in the preceding sentence, no Seller sold more than ____% of the
Mortgage Loans to SPFC.
No Mortgage Loan provides for deferred interest or negative
amortization.
None of the Mortgage Loans in the Mortgage Pool will be Buydown
Mortgage Loans.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
All percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date.
<TABLE>
<CAPTION>
MORTGAGE RATES
NUMBER OF AGGREGATE PERCENTAGE
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE OF MORTGAGE POOL
- ------------------ -------------- ----------------- ----------------
<S> <C> <C> <C>
.................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
.................................... ------ ------------ ------
Total..................... $ . %
====== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans
was approximately ______% per annum.
<PAGE>
-25-
<TABLE>
<CAPTION>
CUT-OFF DATE MORTGAGE LOAN PRINCIPAL BALANCES
NUMBER OF AGGREGATE PERCENTAGE OF
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
----------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
.................................... .
.................................... ------ ------------ ------
Total..................... $ . %
====== ============ ======
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $_______.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS
NUMBER OF AGGREGATE PERCENTAGE OF
LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
.................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
.................................... .
.................................... ------ ------------ ------
Total..................... $ . %
====== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will have been approximately ____%.
<PAGE>
-26-
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
NUMBER OF AGGREGATE PERCENTAGE OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ----- -------------- ----------------- -------------
<S> <C> <C> <C>
[NAME OF STATE]..................... $ %
[NAME OF STATE].....................
[NAME OF STATE].....................
[NAME OF STATE].....................
[NAME OF STATE].....................
Other (1)........................... .
--- ------------ ----
Total..................... $ . %
=== ============ ====
</TABLE>
(1) "Other" includes states and the District of Columbia with less than __%
concentrations individually.
[No more than ____% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area].
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES
NUMBER OF AGGREGATE PERCENTAGE OF
PROPERTY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- -------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached............... $ %
Planned Unit Developments (detached).
Two- to four-family units............
Condo Low-Rise (less than 5 stories).
Condo Mid-Rise (5 to 8 stories)......
Condo High-Rise (9 stories or more)..
Townhouse............................
Planned Unit Developments (attached).
Leasehold............................ .
------ ------------ ------
Total..................... $ . %
====== ============ ======
</TABLE>
<PAGE>
-27-
<TABLE>
<CAPTION>
MORTGAGE LOAN PURPOSES
NUMBER OF AGGREGATE PERCENTAGE OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase............................ $ %
Rate/Term Refinance.................
Equity Refinance.................... .
--- ------------- ----
Total...................... $ . %
=== ============= ====
</TABLE>
The weighted average Loan-to-Value Ratio at origination of equity
refinance Mortgage Loans will have been ____%. The weighted average
Loan-to-Value Ratio at origination of rate and term refinance Mortgage Loans
will have been ____%.
<TABLE>
<CAPTION>
MORTGAGE LOAN DOCUMENTATION
NUMBER OF AGGREGATE PERCENTAGE OF
TYPE OF PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Full................................ $ %
Reduced............................. .
--- ------------- ----
Total...................... $ . %
=== ============= ====
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans which were underwritten under a reduced loan documentation program will
have been ____%. No more than ____% of such reduced loan documentation Mortgage
Loans will be secured by Mortgaged
Properties located in California.
<TABLE>
<CAPTION>
OCCUPANCY TYPES
NUMBER AGGREGATE PERCENTAGE OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence................................... $ %
Second/Vacation.....................................
Non Owner-occupied.................................. .
---- ---------------- ------
Total..................................... $ . %
==== ================ ======
</TABLE>
<PAGE>
-28-
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Certificates on or before the time of issuance of
such Certificates. If not included in the Prospectus Supplement, such
information will be included in the Form 8-K.]
UNDERWRITING
[Underwriting standards as appropriate. The following underwriting
standards are those presently applicable for SPFC].
[The Mortgage Loans originated by SPFC were originated under SPFC's
Standard NonConforming Program. The Standard Non-Conforming Program is the
"Non-Conforming Credit Program" applicable to residential loans which, for
credit reasons, do not conform to FNMA or FHLMC underwriting guidelines.
THE STANDARD NON-CONFORMING PROGRAM
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten in accordance with the underwriting criteria of SPFC.
SPFC began underwriting mortgage loans in accordance with such standards in
July, 1993.
SPFC's underwriting standards under the Standard Non-Conforming Program
are primarily intended to assess creditworthiness of the mortgagor, the value of
the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. While SPFC's primary consideration in
underwriting a mortgage loan is the mortgagor's employment stability and debt-
to-income ratio, the value of the mortgaged property relative to the amount of
the mortgage loan is another critical factor. In addition, it also considers,
among other things, a mortgagor's credit history and repayment ability, as well
as the type and use of the mortgaged property. The Mortgage Loans underwritten
under this program are adjustable and fixed rate loans, and generally bear
higher rates of interest than mortgage loans that are originated in accordance
with FNMA and FHLMC standards.
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten pursuant to the "Non-Conforming Full Documentation,"
"Non-Conforming Lite Documentation" and "Non-Conforming Stated Income"
residential loan programs. Under each of these programs, SPFC reviews the loan
applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed and reviews the property for compliance with SPFC's
standards. In determining the ability of the applicant to repay the Mortgage
Loan, SPFC uses a rate (the "Qualifying Rate") which, for the mortgage loans
<PAGE>
-29-
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 Non-Conforming Stated Income
program, borrowers may be qualified based upon monthly income as stated on the
mortgage loan application, without verification; however, self-employed
borrowers are required to submit a business license and one year's bank
statements. A business credit report, if applicable, is obtained. Verification
of the source of funds (if any) required to be deposited by the applicant into
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
<PAGE>
-30-
program but 75% if the borrower is self-employed) is permitted for a mortgage
loan on a nonowner 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 Non-Conforming Stated Income
Program. The maximum loan amount is $400,000 (or $350,000 for mortgage loans
originated under the Non-Conforming Stated Income Program) for mortgage loans on
a single-family non-owner-occupied properties or second homes.
"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
<PAGE>
-31-
mortgagor accepts a 25 basis point increase on the Mortgage Loan Rate. No
bankruptcy or notice of default filings by the borrower may have occurred during
the preceding 18 months. A maximum Loan-to-Value Ratio of 80% is permitted for a
mortgage loan on a single family, owner-occupied property. A maximum
Loan-to-Value Ratio of 70% (or 65% for mortgage loans originated under the
Non-Conforming Stated Income Program) is permitted for a mortgage loan on a
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
Non-Conforming Full Documentation Program. The maximum loan amount is $350,000
(or $300,000 for mortgage loans originated under the NonConforming Stated Income
Program) for a mortgage loan on a non-owner-occupied property or a second home.
"C" RISK. Under the "C" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. A maximum of twelve
30-day late payments or six 60-day late payments, or four 90-day late payments,
on consumer debt within the last twelve months is acceptable. A maximum of five
30-day late payments or three 30-day late payments and two 60- day late payments
or three 30-day late payments and one 90-day late payment within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage obligation can be up to 45 days past due at the funding of the
loan. As to non-mortgage credit, significant prior defaults may have occurred.
There may be open collections or charge-offs not to exceed $4,000 and up to
$6,000 in isolated circumstances. However, collection accounts, unpaid
charge-offs or judgments are not required to be paid from the proceeds of the
mortgage loan, provided the mortgagor accepts a 25 basis point increase on the
Mortgage Loan Rate. No bankruptcy or notice of default filings by the borrower
may have occurred during the preceding year. A maximum Loan-to-Value Ratio of
75% (or 65% for mortgage loans originated under the Non-Conforming Stated Income
Program, but 70% if the borrower is self-employed) is permitted for a mortgage
loan on a single-family owner-occupied property. A maximum Loan-to-Value Ratio
of 70% (or 60% for mortgage loans originated under the Non-Conforming Stated
Income Program, but 65% if the borrower is self-employed) is permitted for a
mortgage loan on a non- owner-occupied property or a second home. The debt
service-to-income ratio is generally 55% or less based on the Qualifying Rate.
The maximum loan amount is $500,000 (or $400,000 for a mortgage loan originated
under the Non-Conforming Stated Income Program) for a mortgage loan on a
single-family owner-occupied property. The maximum loan amount is $300,000 (or
$200,000 for mortgage loans originated under the Non-Conforming Stated Income
Program) for a mortgage loan on a non-owner-occupied property or second home.
"D" RISK. Under the "D" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, such
<PAGE>
-32-
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.]
See also "The Mortgage Pools--Underwriting Standards" in the
Prospectus.
[Delinquency and foreclosure experience as appropriate. The following disclosure
is presently applicable for SPFC:
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, MARCH 31,
1995 1996 1997 1998
---- ---- ---- ----
% OF LOANS
% OF LOANS % OF LOANS IN % OF LOANS
IN SERVICING IN SERVICING SERVICING IN SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Serviced.............. $270,193 100.0% $908,220 100.0% $2,477,194 100.0% $2,872,287 100.0%
30-59 days delinquent....... 3,072 1.1 23,486 2.6 71,928 2.9 74,210 2.6
60-89 days delinquent....... 1,896 0.7 16,183 1.8 27,095 1.1 21,587 0.8
90 days or more delinquent.. 4,396 1.6 22,751 2.5 6,384 0.3(1) 8,267 0.3(1)
-------- ----- -------- ----- --------- ----- ---------- -----
Total delinquencies......... $ 9,364 3.4% $ 62,420 6.9% $ 105,407 4.3%(1) $ 104,064 3.6%(1)
======== ===== ======== ===== ========= ===== ========== =====
<PAGE>
-33-
Delinquent loans in
foreclosure................. $ 4,883 1.8% $ 20,546 2.3% $ 100,283 4.1% $ 130,416 4.5%
Total real estate owned..... $ 141 ----- $ 1,227 0.1% $ 22,007 0.9% $ 28,914 1.0%
</TABLE>
(1) For reporting purposes delinquencies do not include loans in foreclosure or
real estate owned properties.
As of December 31, 1997, statements to certificateholders prepared by
the trustee for each of the ten securitizations in which loans originated and
purchased by the Seller were included total reported losses of approximately
$4.6 million and such statements reported losses of approximately $3.4 million
for the quarter ended March 31, 1998; 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.
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 Senior
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Senior 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 Senior Certificates are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Senior 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 Senior 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.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans"
in the Prospectus.
<PAGE>
-34-
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 19__-_ Mortgage Pass-Through Certificates will include the
following seven classes (the "Senior Certificates"): (i) Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates and Class A-4 Certificates, (ii)
Class A-5 Certificates (the "Fixed Strip Certificates"), (iii) Class A-6
Certificates and (iv) Class A-7 Certificates (the "Variable Strip
Certificates"). In addition to the Senior Certificates, the Series 19__-_
Mortgage Pass-Through Certificates will also consist of one class of subordinate
certificates which is designated as the Class B Certificates (the "Subordinate
Certificates") and one class of residual certificates which is designated as the
Class R Certificates (the "Residual Certificates"). Only the Senior Certificates
(the "Offered Certificates") are offered hereby.
The Senior Certificates (together with the Subordinate Certificates and
Residual 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 Account (as described in the Prospectus) and
belonging to the Trust Fund; (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure; and (iv) any applicable insurance
policies and all proceeds thereof.
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date will
generally consist of (i) the aggregate amount of scheduled payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related master servicing fees
(the "Servicing Fees"), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (i) the "Due
Date" is the first day of the month in which such Distribution Date occurs and
(ii) the "Determination Date" is the [__th] day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
succeeding business day. See "Description of the Certificates--Distributions" in
the Prospectus.
<PAGE>
-35-
INTEREST DISTRIBUTIONS
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date, interest distributions in an amount equal to the aggregate of
all Accrued Certificate Interest with respect to such Certificates for such
Distribution Date and, to the extent not previously paid, for all prior
Distribution Dates (the "Senior Interest Distribution Amount"). On each
Distribution Date, the Available Distribution Amount for such Distribution Date
will be applied to make interest distributions on the various classes of Senior
Certificates pro rata in accordance with the respective amounts of Accrued
Certificate Interest then payable with respect thereto, provided, however, that,
in the case of the Tiered Certificates, following the Credit Support Depletion
Date, such distributions shall be made in the priority set forth in the _____th
paragraph under the heading "Principal Distributions". With respect to any
Distribution Date, the Accrued Certificate Interest in respect of each class of
Senior Certificates will be equal to one month's interest accrued at the
applicable Pass-Through Rate on the Certificate Principal Balance (or, in the
case of the Fixed Strip Certificates and Variable Strip Certificates, the
Notional Amount) of the Certificates of such class immediately prior to such
Distribution Date; in each case less interest shortfalls, if any, for such
Distribution Date not covered by the Subordination provided by the Subordinate
Certificates, including in each case (i) any Prepayment Interest Shortfall (as
defined below), (ii) the interest portions (in each case, adjusted to the
related Net Mortgage Rate) of Realized Losses (including Special Hazard Losses,
in excess of the Special Hazard Amount ("Excess Special Hazard Losses"), Fraud
Losses in excess of the Fraud Loss Amount ("Excess Fraud Losses"), Bankruptcy
Losses in excess of the Bankruptcy Amount ("Excess Bankruptcy Losses") and
losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses")) not covered
by the Subordination (which, with respect to the pro rata portion thereof
allocated to the Tiered Certificates, to the extent such losses are Default
Losses, will be allocated first to the Class A-6 Certificates and second to the
Class A-1 Certificates and Class A-5 Certificates), (iii) the interest portion
of any Advances that were made with respect to delinquencies that were
ultimately determined to be Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses or Extraordinary Losses and (iv) any other interest
shortfalls not covered by Subordination, including interest shortfalls relating
to the Relief Act (as defined in the Prospectus) or similar legislating on or
regulations, all allocated as described below. Accrued Certificate Interest is
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Prepayment Interest Shortfall for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates) resulting from mortgagor prepayments on the Mortgage
Loans during the preceding calendar month, to the extent not offset by the
Master Servicer's application of servicing compensation as described below. Such
shortfalls will result because interest on prepayments in full is collected only
to the
<PAGE>
-36-
date of prepayment, and because no interest is collected on prepayments in part,
as such prepayments are applied to reduce the outstanding principal balance of
the related Mortgage Loan as of the Due Date in the month of prepayment.
If the Available Distribution Amount for any Distribution Date is less
than the Accrued Certificate Interest payable on the Senior Certificates for
such Distribution Date, the shortfall will be allocated among the holders of all
classes of Senior Certificates in proportion to the respective amounts of
Accrued Certificate Interest for such Distribution Date on each such class, and
will be distributable to holders of the Certificates of such classes, on
subsequent Distribution Dates, to the extent of available funds, provided,
however, that following the Credit Support Depletion Date, distributions will be
made to the Tiered Certificates in the priority set forth in the _____ paragraph
under the heading "--Principal Distributions on the Senior Certificates" and
therefore the pro rata portion of such shortfall that is allocated to the Tiered
Certificates will be allocated first to the Class A-6 Certificates. Any such
amounts so carried forward will not bear interest.
The Pass-Through Rates on each class of Senior Certificates, other than
the Variable Strip Certificates, are fixed and are set forth on the cover
hereof. The Pass-Through Rate on the Variable Strip Certificates for each
Distribution Date will equal the weighted average, as determined as of the Due
Date in the month preceding the month in which such Distribution Date occurs, of
the Pool Strip Rates on each of the Mortgage Loans in the Mortgage Pool. The
"Pool Strip Rate" on any Mortgage Loan is equal to the Net Mortgage Rate thereon
minus ___%. The "Net Mortgage Rate" on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the Servicing Fee Rate. The initial Pass-Through
Rate on the Variable Strip Certificates is approximately _____% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Senior Certificates is based on the Certificate Principal Balance
thereof or, in the case of the Variable Strip Certificates, on the Notional
Amount. The Certificate Principal Balance of any Senior Certificate as of any
date of determination is equal to the initial Certificate Principal Balance
thereof reduced by the aggregate of (a) all amounts allocable to principal
previously distributed with respect to such Certificate and (b) any reductions
in the Certificate Principal Balance thereof deemed to have occurred in
connection with allocations of Realized Losses (as defined herein) in the manner
described herein. The Notional Amount of the Fixed Strip Certificates and
Variable Strip Certificates as of any date of determination is equal to the
aggregate Certificate Principal Balance of the Certificates of all classes
(including the Subordinate Certificates) as of such date. Reference to the
Notional Amount of the Fixed Strip Certificates or Variable Strip Certificates
is solely for convenience in certain calculations and does not represent the
right to receive any distributions allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
<PAGE>
-37-
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after the Senior Interest Distribution Amount is distributed to
such holders, a distribution allocable to principal in the
following amount (the "Senior Principal Distribution Amount"):
(i) the product of (A) the then applicable Senior Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the Mortgage Loans due on the related Due Date,
whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions (as defined below) which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of any Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal
adjustment) as required by the Pooling and Servicing Agreement
during the preceding calendar month;
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial principal prepayments made by the
respective mortgagors and any amounts received in connection
with a Final Disposition (as defined below) of a Mortgage Loan
described in clause (ii) below), to the extent applied as
recoveries of principal;
(ii) in connection with the Final Disposition of a Mortgage Loan
(x) that occurred in the preceding calendar month and (y) that did not
result in any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, an amount equal to the
lesser of (a) the then-applicable Senior Percentage of the Stated
Principal Balance of such Mortgage Loan immediately prior to such
Distribution Date and (b) the then-applicable Senior Accelerated
Distribution Percentage (as defined below) of the related collections,
including Insurance Proceeds and Liquidation Proceeds, to the extent
applied as recoveries of principal;
(iii) the then applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial principal
prepayments made by the respective mortgagors during the preceding
calendar month; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above) that remain undistributed to the
<PAGE>
-38-
extent that any such amounts are not attributable to Realized Losses
which were allocated to the Subordinate Certificates.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
the principal portion of any Realized Loss thereon has been allocated to one or
more classes of Certificates on or before the date of determination.
The Senior Percentage, which initially will equal approximately _____%
and will in no event exceed 100%, will be adjusted for each Distribution Date to
be the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans immediately
prior to such Distribution Date. The Subordinate Percentage as of any date of
determination is equal to 100% minus the Senior Percentage as of such date.
The Senior Accelerated Distribution Percentage for any Distribution
Date occurring prior to the Distribution Date in _________, _________ will be
100%. The Senior Accelerated Distribution Percentage for any Distribution Date
occurring after _____, ____ will be as follows: for any Distribution Date during
in the sixth year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 70% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date during the seventh year after the Delivery Date,
the Senior Percentage for such Distribution Date plus 60% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date during the
eighth year after the Delivery Date, the Senior Percentage for such Distribution
Date plus 40% of the Subordinate Percentage for such Distribution Date; for any
Distribution Date during the ninth year after the Delivery Date, the Senior
Percentage for such Distribution Date plus 20% of the Subordinate Percentage for
such Distribution Date; and for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any such Distribution Date the
Senior Percentage exceeds the initial Senior Percentage, in which case the
Senior Accelerated Distribution Percentage for such Distribution Date will once
again equal 100%). Any scheduled reduction to the Senior Prepayment Percentage
described above shall not be made as of any Distribution Date unless either
(a)(i) the outstanding principal balance of the Mortgage Loans delinquent __
days or more (including foreclosure and REO Property) averaged
<PAGE>
-39-
over the last ___ months, as a percentage of the aggregate outstanding principal
balance of all Mortgage Loans averaged over the last ___ months, does not exceed
_% and (ii) Realized Losses on the Mortgage Loans to date for such Distribution
Date, if occurring during the sixth, seventh, eighth, ninth or tenth year (or
any year thereafter) after __________ 19__, are less than __%, __%, __%, __% or
__%, respectively, of the initial Certificate Principal Balance of the
Subordinate Certificates or (b)(i) the aggregate outstanding principal balance
of the Mortgage Loans delinquent __ days or more (including foreclosure and REO
Property) averaged over the last ___ months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last ___
months, does not exceed __% and (ii) Realized Losses on the Mortgage Loans to
date are less than __% of the initial Certificate Principal Balance of the
Subordinate Certificates.]
Distributions of the Senior Principal Distribution Amount to the Senior
Certificates (other than the Fixed Strip Certificates and Variable Strip
Certificates) will be made (to the extent of the Available Distribution Amount
remaining after distributions of the Senior Interest Distribution
Amount as described under "--Interest Distributions"), as follows:
(a) prior to the occurrence of the Credit Support Depletion
Date (as defined below):
(i) first, concurrently, to the Class A-1 and Class
A-6 Certificates, with the amount to be distributed allocated
as between such classes on a pro rata basis in proportion to
the respective Certificate Principal Balances thereof, until
the Certificate Principal Balance of each such class is
reduced to zero;
(ii) second, to the Class A-2 Certificates until the
Certificate Principal Balance thereof is reduced to zero;
(iii) third, to the Class A-3 Certificates until the
Certificate Principal Balance thereof is reduced to zero; and
(iv) fourth, to the Class A-4 Certificates until the
Certificate Principal Balance thereof is reduced to zero.
(b) On each Distribution Date occurring on or after the Credit
Support Depletion Date, all priorities relating to sequential
distributions in respect of principal among the various classes of
Senior Certificates will be disregarded, and the Senior Principal
Distribution Amount will be distributed to all classes of Senior
Certificates pro rata in accordance with their respective outstanding
Certificate Principal Balances; provided, that the aggregate amount
distributable to the Class A-1, Class A-5 and Class A-6 Certificates
(the "Tiered Certificates") in respect of Accrued Certificate Interest
thereon and in respect
<PAGE>
-40-
of their pro rata portion of the Senior Principal Distribution Amount
shall be distributed among the Tiered Certificates in the amounts and
priority as follows: first, to the Class A-1 Certificates and the Class
A-5 Certificates, up to an amount equal to, and pro rata based on, the
Accrued Certificate Interest thereon; second to the Class A-1
Certificates, up to an amount equal to the Optimal Principal
Distribution Amount thereof (as defined below), in reduction of the
Certificate Principal Balances thereof; third to the Class A-6
Certificates, up to an amount equal to the Accrued Certificate Interest
thereon; and fourth to the Class A-6 Certificates the remainder of the
amount so distributable among the Tiered Certificates.
(c) The "Optimal Principal Distribution Amount" is equal to
the product of (i) the then applicable Optimal Percentage and (ii) the
Senior Principal Distribution Amount. The "Optimal Percentage" is equal
to a fraction, expressed as a percentage, the numerator of which is the
aggregate Certificate Principal Balance of the Class A-1 Certificates
immediately prior to the applicable Distribution Date and the
denominator of which is the aggregate Certificate Principal Balance of
all of the Senior Certificates immediately prior to such Distribution
Date.
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the
Subordinate Certificates will cover Realized Losses on the Mortgage Loans that
are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy Losses (each as defined
in the Prospectus) and Special Hazard Losses (as defined herein) to the extent
described herein. Any such Realized Losses which do not constitute Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses will be allocated first to the Subordinate Certificates
until the Certificate Principal Balance of the Subordinate Certificates has been
reduced to zero, and then except as provided below on a pro rata basis to the
Senior Certificates based on their then outstanding Certificate Principal
Balance or the Accrued Certificate Interest thereon, as applicable. Any
allocation of a Realized Loss (other than
<PAGE>
-41-
a Debt Service Reduction) to a Senior Certificate will be made by reducing the
Certificate Principal Balance thereof, in the case of the principal portion of
such Realized Loss, and the Accrued Certificate Interest thereon, in the case of
the interest portion of such Realized Loss, by the amount so allocated as of the
Distribution Date occurring in the month following the calendar month in which
such Realized Loss was incurred. Allocations of Realized Losses which are
Default Losses (as defined below) to Senior Certificates will be made on a pro
rata basis, based on their then outstanding Certificate Principal Balances, or
the Accrued Certificate Interest thereon, as applicable, between the Tiered
Certificates, on the one hand, and the Class A-2, Class A-3, Class A-4 and
Variable Strip Certificates, on the other. Any such Realized Losses so allocated
to the Tiered Certificates will be allocated first to the Class A-6 Certificates
until the Certificate Principal Balance thereof or the Accrued Certificate
Interest thereon, as appropriate, is reduced to zero and then to the Class A-1
Certificates and Class A-5 Certificates on a pro rata basis. "Default Losses"
are Realized Losses that are attributable to the mortgagor's failure to make any
payment of principal or interest as required under the Mortgage Note, and do not
include Special Hazard Losses (or any other loss resulting from damage to a
Mortgaged Property), Bankruptcy Losses, Fraud Losses, or other losses of a type
not covered by the Subordination. Allocations of Debt Service Reductions to the
Subordinate Certificates will result from the priority of distributions to the
Senior Certificateholders of the Available Distribution Amount as described
under the captions "--Interest Distributions" and "--Principal Distributions on
the Senior Certificates" herein. Any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated on a
pro rata basis between the Senior Certificates and the Subordinate Certificates
(any such Realized Losses so allocated to the Senior Certificates, as well as
any Realized Losses that are not Default Losses which are allocated to the
Senior Certificates, will be allocated without priority among the various
classes of Senior Certificates).
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will generally equal the portion
of the unpaid principal balance remaining, if any, plus interest thereon through
the last day of the month in which such Mortgage Loan was finally liquidated,
after application of all amounts recovered (net of amounts reimbursable to the
Master Servicer for Advances and certain expenses, including attorneys' fees)
towards interest and principal owing on the Mortgage Loan. Such amount of loss
realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses are
referred to herein as "Realized Losses." As used herein, "Debt Service
Reductions" means reductions in the amount of monthly payments due to certain
bankruptcy proceedings, but does not include any forgiveness of principal.
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount and the Senior Principal Distribution
Amount, holders of Senior Certificates will have a
<PAGE>
-42-
prior right, on each Distribution Date, to the Available Distribution Amount, to
the extent necessary to satisfy the Senior Interest Distribution Amount and the
Senior Principal Distribution Amount. The Senior Principal Distribution Amount
is subject to adjustment on each Distribution Date to reflect the then
applicable Senior Percentage and the Senior Accelerated Distribution Percentage,
as described herein under "--Principal Distributions" on the Senior
Certificates, each of which may be increased (to not more than 100%) in the
event of delinquencies or Realized Losses on the Mortgage Loans. The application
of the Senior Accelerated Distribution Percentage (when it exceeds the Senior
Percentage) to determine the Senior Principal Distribution Amount will
accelerate the amortization of the Senior Certificates relative to the actual
amortization of the Mortgage Loans. To the extent that the Senior Certificates
are amortized faster than the Mortgage Loans, the percentage interest evidenced
by the Senior Certificates in the Trust Fund will be decreased (with a
corresponding increase in the interest in the Trust Fund evidenced by the
Subordinate Certificates), thereby increasing, as a relative matter, the
Subordination afforded by the Subordinate Certificates. Similarly, holders of
Class A-1 Certificates and Class A-5 Certificates will have a prior right, on
each Distribution Date occurring on or after the Credit Support Depletion Date,
to that portion of the Available Distribution Amount allocated to the Tiered
Certificates, to the extent necessary to satisfy the Accrued Certificate
Interest on the Class A-1 Certificates and Class A-5 Certificates. Therefore,
any shortfalls in the amounts that would otherwise be distributable to Class A-1
Certificateholders and Class A-5 Certificateholders, whether resulting from
Mortgage Loan delinquencies or Realized Losses, will be borne by the holders of
the Class A-6 Certificates for so long as the Class A-6 Certificates are
outstanding.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $_________. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$_________ less the sum of (i) any amounts allocated through Subordination in
respect of Special Hazard Losses and (ii) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, "Special
Hazard Losses" has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Fraud Losses (the "Fraud Loss
Amount") through Subordination shall initially be equal to $_________. As of any
date of determination after the Cut-off Date the Fraud Loss Amount shall equal
(i) up to and including the [first] anniversary of the Cut-off Date, an amount
equal to ____% of the aggregate principal balance of all of the Mortgage Loans
as of the Cut-off Date minus the aggregate amounts allocated solely to the
Subordinate Certificates through Subordination with respect to Fraud Losses up
to such date of determination, and (ii) from
<PAGE>
-43-
the [first] through [fifth] anniversary of the Cut-off Date, an amount equal to
(a) the lesser of (1) the Fraud Loss Amount as of the most recent anniversary of
the Cut-off Date and (2) ____% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (b)
the aggregate amounts allocated solely to the Subordinate Certificates through
Subordination with respect to Fraud Losses since the most recent anniversary of
the Cut-off Date up to such date of determination. On or after the fifth
anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero and Fraud
Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated solely
to the Subordinate Certificates in connection with Bankruptcy Losses (the
"Bankruptcy Amount") Subordination will initially be equal to $_________. As of
any day of determination on or after the [first] anniversary of the Cut-off
Date, the Bankruptcy Amount will equal the excess, if any, of (i) the lesser of
(a) the Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date (the "Relevant Anniversary") and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Amount, over
(ii) the aggregate amount of Bankruptcy Losses allocated solely to the
Subordinate Certificates through Subordination since the Relevant Anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (i) the related Mortgage Loan is not in default with regard to payments
due thereunder or (ii) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer, in either
case without giving effect to the particular Bankruptcy Loss.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are
subject to further reduction with the consent of the Rating Agencies.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to
make advances (each an "Advance") for the benefit of Certificateholders (out of
its own funds or funds held in the Certificate Account (as described in the
Prospectus) for future distribution or withdrawal) 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 delinquent on the
business day next preceding the related Determination Date.
<PAGE>
-44-
Such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or amounts otherwise payable to the
holders of the Subordinate Certificates as described below. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, 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
Debt Service Reductions or the application of the Relief Act or similar
legislation or regulations. 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 Master
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 on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, from any
amounts otherwise distributable on the Subordinate Certificates; provided,
however, that only the Subordinate Percentage of such Advances are reimbursable
from amounts otherwise distributable on the Subordinate Certificates in the
event that such Advances were made with respect to delinquencies which
ultimately were determined to be Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses and the Senior
Percentage of such Advances which may not be so reimbursed from amounts
otherwise distributable on the Subordinate Certificates may be reimbursed to the
Master Servicer out of any funds in the related Certificate Account prior to
distributions on the Senior Certificates. In the latter event, the aggregate
amount otherwise distributable on the Senior Certificates will be reduced by an
amount equal to the Senior Percentage of such Advances. In addition, if the
Certificate Principal Balance of the Subordinate Certificates has been reduced
to zero, any Advances previously made which are deemed by the Master Servicer to
be nonrecoverable from related late collections, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the related Certificate Account prior to distributions on the Senior
Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to the holders of the Offered Certificates will be
lower than the yield otherwise produced by the applicable Pass-Through Rate and
purchase price because monthly distributions will not be made to such holders
until the 25th day (or if such day is not a business
<PAGE>
-45-
day, then on the next succeeding business day) of the month following the month
in which interest accrues on the Mortgage Loans (without any additional
distributions of interest or earnings thereon in respect of such delay). See
"Yield Considerations" in the Prospectus.
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of mortgagor defaults
resulting in Realized Losses. Such yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. 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 due to certain breaches
of representations and warranties. The timing of changes in the rate of
prepayments, liquidations and purchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield 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 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 Offered
Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. The Mortgage Loans
generally contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" herein, during
certain periods all or a disproportionately large percentage of principal
prepayments on the Mortgage Loans will be allocated among the Senior
Certificates. Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the Offered Certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
Mortgage Loans. Factors affecting prepayment (including defaults and
liquidations) of mortgage loans include changes in mortgagors' housing needs,
job transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments (including refinancings) would be expected to
increase. Conversely, if prevailing mortgage rates rose significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayments on the Mortgage
Loans would be expected to decrease.
The 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
<PAGE>
-46-
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.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Senior Certificates (other than the Variable Strip Certificates)
are fixed, such rates will not change in response to changes in market interest
rates. The Pass-Through Rate on the Variable Strip Certificates is based on the
weighted average of the Pool Strip Rates on the Mortgage Loans, and such rates
will also not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
the Senior Certificates were to rise, the market value of the Senior
Certificates may decline. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayment on the Mortgage Loans would be expected
to decrease.
The amount of interest otherwise payable to holders of the Senior
Certificates will be reduced by any interest shortfalls not covered by
Subordination, including Prepayment Interest Shortfalls. Such shortfalls will
not be offset by a reduction in the Servicing Fees payable to the Master
Servicer or otherwise. See "Yield Considerations" in the Prospectus and
"Description of the Certificates--Interest Distributions" herein for a
discussion of the effect that principal prepayments on the Mortgage Loans may
have on the yield to maturity of the Senior Certificates and certain possible
shortfalls in the collection of interest.
The timing of changes in the rate of prepayments, liquidations and
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. Because all or a
disproportionate percentage of principal prepayments will be allocated to the
Senior Certificates during not less than the first nine years after the Delivery
Date, the rate of prepayments on the Mortgage Loans during this period may
significantly affect the yield to maturity of the Senior Certificates.
In addition, the yield to maturity of the Senior Certificates will
depend on the price paid by the holders of the Senior Certificates and the
related Pass-Through Rate. The extent to which the yield to maturity of a Senior
Certificate may vary from the anticipated yield thereon will
<PAGE>
-47-
depend upon the degree to which it is purchased at a discount or premium and the
degree to which the timing of payments thereon is sensitive to prepayments.
Because principal distributions are paid to certain classes of Senior
Certificates before other classes, holders of classes of Senior Certificates
having a later priority of payment bear a greater risk of losses than holders of
classes of Senior Certificates having earlier priorities for distribution of
principal. In addition, the Class A-6 Certificates bear a greater risk of losses
than the other Tiered Certificates because Default Losses on the Mortgage Loans
not covered by the Subordination which are allocated to the Tiered Certificates
are allocated first to the Class A-6 Certificates prior to allocation to the
Class A-1 and Class A-5 Certificates to the extent described herein. For
additional considerations relating to the yield on the Certificates, see "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The assumed final Distribution Date with respect to each class of
Senior Certificates is _____ __, 20__. The assumed final Distribution Date is
the Distribution Date immediately following the latest scheduled maturity date
of any Mortgage Loan in the Mortgage Pool.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until a dollar amount in payment
of principal equal to the original principal balance of such security (less
losses) is distributed to the investor. The weighted average life of the Senior
Certificates will be influenced by among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA (no prepayments). Correspondingly, "___% SPA" assumes prepayment
rates equal to ___% of SPA, and so forth. SPA does not purport 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 table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are
<PAGE>
-48-
expected to be included in the Trust Fund as described under "Description of the
Mortgage Pool" herein and the performance thereof. The table assumes, among
other things, that: (i) as of the date of issuance of the Senior Certificates,
the aggregate principal balance of the Mortgage Loans is approximately
$____________ and each Mortgage Loan has a Mortgage Rate of _____% per annum, an
original term of ___ months, a remaining term to maturity of ___ months and a
related Servicing Fee calculated at ___% per annum, (ii) the scheduled monthly
payment for each Mortgage Loan has been based on its outstanding balance,
Mortgage Rate and remaining term to maturity, such that the Mortgage Loan will
amortize in amounts sufficient for repayment thereof over its remaining term to
maturity, (iii) none of the Sellers, the Master Servicer or the Company will
repurchase any Mortgage Loan, as described under "The Mortgage Loan
Pools--Representations by Sellers" and "Description of the
Certificates--Assignment of the Trust Fund Assets" in the Prospectus, and the
Master Servicer will not exercise its option to purchase the Mortgage Loans and
thereby cause a termination of the Trust Fund, (iv) there are no delinquencies
or Realized Losses on the Mortgage Loans, and scheduled monthly payments on the
Mortgage Loans will be timely received together with prepayments, if any, at the
respective constant percentages of SPA set forth in the table, (v) there is no
Prepayment Interest Shortfall or any other interest shortfall in any month, (vi)
payments on the Mortgage Loans earn no reinvestment return; (vii) there are no
additional ongoing Trust Fund expenses payable out of the Trust Fund; and (viii)
the Certificates will be purchased on _____________ __, 199_.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
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 a
constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA 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 classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of each class of Offered Certificates
(other than the Fixed Strip Certificates and Variable Strip Certificates), and
sets forth the percentages of the initial Certificate Principal Balance of each
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of SPA.
<PAGE>
-49-
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF SPA
Class A-1 Class A-2 Class A-3
--------- --------- ---------
DISTRIBUTION DATE % % % % % % % % % % % % % % %
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
</TABLE>
Weighted Average Life in Years (**)....
- -------------------
* Indicates a number that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each net distribution in reduction of
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 aggregate of the
net distributions described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE
THIRD PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
<PAGE>
-50-
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF SPA
Class A-4 Class A-6
------------------------------------ ------------------------------
DISTRIBUTION DATE % % % % % % % % % %
------------------------------------ ------------------------------
<S> <C> <C>
Initial Percentage
</TABLE>
Weighted Avg. Life in Years (**)
* Indicates a number that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each net distribution in reduction of
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 aggregate of the
net distributions described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE
THIRD PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
<PAGE>
-51-
(TABLE CONTINUED FROM PREVIOUS PAGE.)
<PAGE>
-52-
FIXED STRIP CERTIFICATES AND VARIABLE STRIP CERTIFICATES YIELD CONSIDERATIONS
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates and Variable Strip Certificates to
various rates of prepayment on the Mortgage Loans by projecting the monthly
aggregate payments of interest on the Fixed Strip Certificates and Variable
Strip Certificates and the corresponding pre-tax yields on a corporate bond
equivalent basis, based on distributions being made with respect to the Mortgage
Loans that are assumed to be included in the Trust Fund, as described in the
assumptions stated in clauses (i) through (viii) of the third paragraph
preceding the table entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA" under the heading "Certain
Yield and Prepayment Considerations--General" herein, including the assumptions
regarding the characteristics and performance of the Mortgage Loans which differ
from the actual characteristics and performance thereof and assuming the
aggregate purchase prices set forth below and assuming further that the
Pass-Through Rate and Notional Amount of the Fixed Strip Certificates and
Variable Strip Certificates are as set forth herein. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY ON THE FIXED
STRIP CERTIFICATES AND THE VARIABLE STRIP CERTIFICATES
AT THE FOLLOWING PERCENTAGES OF SPA
Assumed FIXED STRIP CERTIFICATES
Purchase
Price* % % % % %
- -------- ---- ---- ---- ---- ----
*Expressed as a percentage of the Initial Notional Amount
<PAGE>
-53-
Assumed VARIABLE STRIP CERTIFICATES
Purchase
Price* % % % % %
- -------- ---- ---- ---- ---- ----
*Expressed as a percentage of the Initial Notional Amount
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Fixed Strip Certificates and Variable
Strip Certificates, would cause the discounted present value of such assumed
streams of cash flows to equal the assumed purchase prices listed as percentages
of the initial Notional Amounts in the table for the Fixed Strip Certificates
and Variable Strip Certificates, respectively. Yields shown are corporate bond
equivalent and are based on the assumed prices given in the tables. The prices
shown do not include accrued interest but an amount of accrued interest
consistent with the assumptions was computed and was used to arrive at these
yields. Implicit in the use of any discounted present value or internal rate of
return calculation such as these is the assumption that cash flows are
reinvested at the discount rate or internal rate of return. Thus these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributed on the
Fixed Strip Certificates or Variable Strip Certificates. Consequently these
yields do not purport to reflect the return on any investment in the Fixed Strip
Certificates or Variable Strip Certificates when such reinvestment rates are
considered.
The preceding tables are based on a set of assumptions that vary from
other information provided herein. The differences between such assumptions and
the actual characteristics of the Mortgage Loans and of the Certificates may
result in actual yields being different from those shown in such tables. For
example, the Pass-Through Rate on the Variable Strip Certificates, which is
assumed to be fixed throughout the life of the Certificates, will actually be
likely to change from one period to the next, and the rate assumed may be
different from the actual initial Pass-Through Rate on the Variable Strip
Certificates. Such discrepancies between assumed and actual characteristics
underscore the hypothetical nature of the tables, which are provided to give a
general sense of the sensitivity of yields in varying prepayment scenarios.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yields on the Fixed Strip
<PAGE>
-54-
Certificates and Variable Strip Certificates are likely to differ from those
shown in such table, even if all of the Mortgage Loans prepay at the indicated
percentages of SPA over any given time period or over the entire life of the
Certificates. No representation is made as to the actual rate of principal
payment on the Mortgage Loans for any period or over the life of the Senior
Certificates or as to the yield on the Senior Certificates. In addition, the
various remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the preceding tables at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is ___ months. Investors are
urged to make their investment decisions based on their determinations as to
anticipated rates of prepayment under a variety of scenarios.
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, and the Mortgage Loans serviced and
administered, pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") dated as of __________ 1, 19__, among the Company, the
Master Servicer, and _____________________, as trustee (the "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 Senior Certificates. The Trustee will appoint
____________________ to serve as Custodian in connection with the Certificates.
The Senior Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will serve as Certificate Registrar and will
be responsible for making distributions on the Senior Certificates and
forwarding monthly reports with respect thereto to the holders of such
Certificates. In addition to the circumstances described in the Prospectus, the
Company may terminate the Trustee for cause under certain circumstances. The
fees payable to the Trustee will be payable directly from the Certificate
Account. The Company will provide a prospective or actual Certificateholder
without charge, on written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to the President, Southern
Pacific Secured Assets Corp., One Center Pointe Drive, Suite 500, Lake Oswego,
Oregon 97035. See "Description of the Certificates," "Servicing of Mortgage
Loans" and "The Pooling Agreement" in the Prospectus.
THE MASTER SERVICER
<PAGE>
-55-
[Name of Master Servicer] will act as master servicer (in such
capacity, the "Master Servicer") for the Certificates pursuant to the Pooling
and Servicing Agreement.
[Further disclosure as appropriate. The following disclosure is for
Imperial Credit Industries only, but will be similar to the disclosure if the
Master Servicer is a different entity.]
The Master Servicer, a [California corporation], is a publicly traded
mortgage banking company that originates or acquires conventional one- to
four-family residential mortgage loans nationwide. The Master Servicer primarily
originates or acquires mortgage loans from approved mortgage brokers through
either its wholesale, correspondent or conduit divisions. The Master Servicer is
a HUD approved lender, as well as an approved seller/servicer for FNMA and
FHLMC. The Master Servicer maintains loan origination offices in [list of
states].
The Master Servicer also engages in mortgage loan servicing which
includes the processing and administration of mortgage loan payments in return
for a servicing fee. At ______ __, 199__ the Master Servicer serviced
approximately ______ one- to four-family residential mortgage loans with an
outstanding principal balance of approximately $____ billion.
At ________ __, 199__, the Master Servicer had approximately ___
employees and --- wholesale and retail branches. The Master Servicer's executive
offices are located at ----------, and its telephone number is ______________.]
The following table sets forth certain information regarding the
principal balance of one- to four-family residential mortgage loans included in
the Master Servicer's servicing portfolio. The Master Servicer's servicing
portfolio includes mortgage loans held for sale and mortgage loans held for
investment which were originated or acquired by the Master Servicer's mortgage
banking operations.
<PAGE>
-56-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------
1990 1991 1992 1993 1994
------ ------ ------ ------ -----
(DOLLARS IN MILLIONS, EXCEPT AVERAGE LOAN SIZE)
<S> <C> <C> <C> <C> <C>
Beginning servicing portfolio(1)......... $ $ $ $ $
Add:
Loans originated or acquired....
Bulk purchase of servicing......
Deduct:
Sale of servicing rights........
Loans sold, servicing released..
Run-off(2)......................
Ending servicing portfolio(1)............ $ $ $ $ $
========== ========== ========== ========== =========
Number of loans serviced.................
Average loan size........................ $ $ $ $ $
- ---------------
</TABLE>
(1) Includes mortgage loans held for investment originated or acquired as
part of the Servicer's mortgage banking operations which totalled $____
million, $____ million, $____ million, $____ million and $_____ million
at ________ __, 1990, 1991, 1992, 1993, and June 30, 1994,
respectively.
(2) Includes amortization, prepayments and foreclosures.
The information set forth in this section concerning the Master
Servicer has been provided by the Master Servicer.
[There can be no assurance that the delinquency and foreclosure
experience set forth above will be representative of the results that may be
experienced with respect to the Mortgage
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 in respect of each
Mortgage Loan will accrue at _____% per annum (the "Servicing Fee Rate") on the
outstanding principal balance of each Mortgage Loan. The Master Servicer is
obligated to pay certain ongoing expenses associated with
<PAGE>
-57-
the Trust Fund and incurred by the Master Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement. See "Servicing of
Mortgage Loans--Servicing and Other Compensation and Payment of Expenses;
Spread" in the Prospectus for information regarding other possible compensation
to the Master Servicer and for information regarding expenses payable by the
Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. __% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Fixed
Strip Certificates, Variable Strip Certificates and Residual Certificates) in
proportion to their then outstanding Certificate Principal Balances, and _%, _%
and _% of all Voting Rights will be allocated among holders of the Fixed Strip
Certificates, Variable Strip Certificates and Class R Certificates,
respectively, in proportion to the percentage interests evidenced by their
respective Certificates. The Pooling and Servicing Agreement will be subject to
amendment without the consent of the holders of the Residual Certificates in
certain circumstances.
TERMINATION
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Senior Certificates are
described in "The Pooling Agreement--Termination; Retirement of Certificates" in
the Prospectus. The Master Servicer or the Company will have the option on any
Distribution Date on which the aggregate principal balance of the Mortgage Loans
is less than ___% of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date either (i) to purchase all remaining Mortgage Loans and other
assets in the Trust Fund, thereby effecting early retirement of the Senior
Certificates or (ii) purchase in whole, but not in part, the Certificates other
than the Residual Certificates. Any such purchase of Mortgage Loans and other
assets of the Trust Fund shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan (or, the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such underlying Mortgaged Properties has
been acquired if such fair market value is less than such unpaid principal
balance) (net of any unreimbursed Advance attributable to principal) as of the
Distribution Date on which the purchase proceeds are to be distributed plus (b)
accrued interest thereon at the Net Mortgage Rate to, but not including, the
first day of the month of repurchase.
Upon presentation and surrender of the Senior Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described
<PAGE>
-58-
above, the holders of the Senior Certificates will receive an amount equal to
the Certificate Principal Balance of such class plus one month's interest
thereon (or with respect to the Variable Strip Certificates, one month's
interest on the Notional Amount) at the applicable Pass-Through Rate plus any
previously unpaid Accrued Certificate Interest subject to the priority in
"Description of the Certificates--Interest Distributions" and "--Principal
Distributions on the Senior Certificates".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, delivered its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
Sections 860A through 860G (the "REMIC Provisions") of the Internal Revenue Code
of 1986 (the "Code"). For federal income tax purposes, (i) the Residual
Certificates are the sole Class of "residual interests" in the Trust Fund; and
(ii) the Certificates constitute the "regular interests" in the Trust Fund. See
"Certain Federal Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Certificates will not
and the 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 based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
% SPA. No representation is made that the Mortgage Loans will prepay at that
rate or at any other rate. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount," "--Market Discount" and "--Premium" 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 Offered Certificates should be aware that the OID Regulations
and Section 1272(a)(6) of the Code do not adequately address certain issues
relevant to, or are not applicable to, securities such as the Offered
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 Offered Certificates.
Because of the uncertainties 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 Certificates should be treated as having been issued with
original issue
<PAGE>
-59-
discount or that one or more of such Class of Certificates 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
Offered Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered 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 Index will remain constant for purposes of determining the original yield to
maturity of, and projecting future distributions on, each class of such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described herein can be
applied, and (ii) by accounting for any positive or negative variation in the
actual value of the Index in any period from its assumed value as a current
adjustment to original issue discount with respect to such period.
If the rules of the OID Regulations were applied literally to the
Offered Certificates, it appears that such rules would (i) require that the
weighted average interest rate paid on such Certificates be modified and treated
as if it were an adjustable rate based on the Index (plus or minus a fixed
number of basis points) rather than a fixed rate prior to the first adjustment
date of each Mortgage Loan, with the adjustable rate being such that the fair
market value of such Certificates would not be affected by the substitution of
the adjustable rate for the fixed rate, (ii) accrue original discount, if any,
on the Certificates as so modified by assuming that the Index will remain
constant for purposes of determining the constant yield to maturity of, and the
cash flow projections on, the Certificates as so modified and (iii) make a
positive (or negative) adjustment to interest income in any period in which the
actual interest paid on such Certificates (including interest paid at a fixed
rate prior to the first adjustment date of each Mortgage Loan) were greater or
less than the interest assumed to be paid thereon (including the interest
assumed to be paid thereon at an adjustable rate prior to the first adjustment
date).
The OID Regulations appear to permit in some circumstances the holder
of a debt instrument to recognize original issue discount under a method that
differs from that of the issuer. Accordingly, it is possible that holders of the
Offered Certificates may be able to select a method for recognizing original
issue discount that differs from that used in preparing reports to holders of
Offered Certificates and the IRS. Prospective purchasers of Offered Certificates
issued with original issue discount are advised to consult their tax advisors
concerning the tax treatment of such Certificates in this regard.
Under Section 166 of the Code, both corporate holders of the Offered
Certificates and noncorporate holders of the Offered Certificates that acquire
such Certificates in connection with a trade or business should be allowed to
deduct, as ordinary losses, any losses sustained during
<PAGE>
-60-
a taxable year in which their Certificates become wholly or partially worthless
as the result of one or more realized losses or distribution shortfalls on the
Mortgage Loans that are allocable to such Offered Certificates. However, it
appears that a noncorporate holder that does not acquire an Offered Certificate
in connection with its trade or business will not be entitled to deduct a loss
under Section 166 of the Code until such holder's Certificate becomes
demonstrably wholly worthless and that the loss will be characterized as a
short-term capital loss.
Each holder of an Offered Certificate will be required to accrue
original issue discount with respect to such Certificate without giving effect
to any reductions in distributions attributable to a default or delinquency on
the Mortgage Loans until it can be established that any such reduction
ultimately will not be recoverable. As a result, the amount of income required
to be reported for tax purposes in any period by the holder of such a
Certificate could exceed the amount of economic income actually realized by the
holder in such period. Although the holder of such a Certificate eventually will
recognize a loss or a 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.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code. In addition, interest (including original
issue discount, if any) on the Offered 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. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "Certain Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
To the extent permitted by then applicable law, 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
Trust Fund will be borne by the 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 Pooling and Servicing Agreement and in respect of
compliance with then applicable law. Any such tax not borne by the Master
Servicer or the Trustee will be payable out of the Trust Fund which may reduce
the amounts otherwise payable to holders of the Offered Certificates. See
"Certain Federal Income Tax Considerations-REMICs-Prohibited Transactions Tax
and Other Taxes" in the Prospectus.
<PAGE>
-61-
For further information regarding the federal income tax consequences
of investing in the Subordinate Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
[SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The Residual Certificates will be subject to tax rules that differ
significantly from those that would apply if the Residual Certificates were
treated for federal income tax purposes as direct ownership interest in the
Mortgage Loans or as debt instruments issued by the Trust Fund. For further
information regarding the federal income tax consequences of investing in the
Residual Certificates, see "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
The IRS has issued regulations under the provisions of the Code related
to REMICs (the "REMIC Regulations") that significantly affect holders of the
Residual Certificates. The REMIC Regulations impose restrictions on the transfer
or acquisition of certain residual interests, including the Residual
Certificates. The REMIC Regulations include restrictions that apply to: (i)
thrift institutions holding residual interests lacking "significant value" and
(ii) the transfer of "noneconomic" residual interests to United States persons.
Pursuant to the Pooling and Servicing Agreement, the Residual Certificates may
not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether a
residual interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based on the
REMIC Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includible by holders of the Residual
Certificates. See "Certain Federal Income Tax Consequences--Taxation of Owners
of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
taxable income on such residual interests, if "a significant purpose of the
transfer was to enable the transferor to impede the assessment or collection of
tax." Based on the REMIC Regulations, the Residual Certificates will constitute
"noneconomic" residual interests during some or all of their term for purposes
of the REMIC Regulations and, accordingly, unless no significant purpose of a
transfer is to enable the transferor to impede the assessment or collection of
tax, transfers of the Residual Certificates may be disregarded and
<PAGE>
-62-
purported transferors may remain liable for any taxes due with respect to the
income on the Residual Certificates. All transfers of the Residual Certificates
will be subject to certain restrictions under the terms of the Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded to the extent that the Residual Certificates
constitute noneconomic residual interests. Such transfers are prohibited under
the Pooling and Servicing Agreement. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Noneconomic
REMIC Residual Certificates" in the Prospectus.
As discussed above and in the Prospectus, the rules for accrual of
original issue discount with respect to the Senior and Subordinate Certificates
are subject to significant complexity and uncertainty. See "Certain Federal
Income Tax Consequences" in the Prospectus. Because original issue discount on
such classes of Certificates will be deducted by the Trust Fund in determining
its taxable income, any changes required by the IRS in the application of those
rules to such Certificates may significantly affect the timing of original issue
discount deductions to the Trust Fund and therefore the amount of the Trust
Fund's taxable income allocable to holders of the Residual Certificates.
The Residual Certificateholders will be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
REMIC that significantly exceeds the amount of cash distributions received by
such Residual Certificateholders from the REMIC with respect to such periods.
Furthermore, the tax on such income will exceed the cash distributions with
respect to such periods. Consequently, Residual Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due as a
result of their ownership of Residual Certificates. In addition, the required
inclusion of this amount of income during the REMIC's earlier accrual periods
and the deferral of corresponding tax losses or deductions until later accrual
periods or until the ultimate sale or disposition of a Residual Certificate (or
possibly later under the "wash sale" rules of Section 1091 of the Code) may
cause the Residual Certificateholders' after-tax rate of return to be zero or
negative even if the Residual Certificateholder's pre-tax rate of return is
positive. That is, on a present value basis, the Residual Certificateholders'
resulting tax liabilities could substantially exceed the sum of any tax benefits
and the amount of any cash distributions on such Residual Certificates over
their life.
An individual, trust or estate that holds (whether directly or
indirectly through certain pass-through entities) a Residual Certificate,
particularly a Residual Certificate, may have significant additional gross
income with respect to, but may be subject to limitations on the deductibility
of, servicing and trustee's fees and other administrative expenses properly
allocable to the REMIC in computing such Certificateholder's regular tax
liability and will not be able to deduct such fees or expenses to any extent in
computing such Certificateholder's alternative minimum tax liability. Such
expenses will be allocated for federal income tax information reporting purposes
entirely to the Residual Certificates. However, it is possible that the IRS may
require all or some portion of
<PAGE>
-63-
such fees and expense to be allocable to the Residual Certificates. See "Certain
Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Possible Pass-Through of Miscellaneous Itemized Deductions" in the
Prospectus.
The Trustee will be designated as the "tax matters person" as defined
in Treasury Regulation Section 301.6231(a)(7)-1T with respect to the Trust Fund,
and in connection therewith will be required to hold not less than a 0.01%
Percentage Interest of the Residual Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
such Residual Certificates.
For further information regarding the federal income tax consequences
of investing in the Residual Certificates, see "Yield Considerations--Additional
Yield Considerations Applicable Solely to the Residual Certificates" herein and
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates" in the
Prospectus.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated __________, 19__, the Underwriter has agreed to purchase and the
Company has agreed to sell to the Underwriter each class of Senior Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Senior 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 Senior Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Senior Certificates, before deducting expenses payable by
the Company, will be _________% of the aggregate Certificate Principal Balance
of the Senior Certificates plus accrued interest thereon from the Cut-off Date.
The Underwriter may effect such transactions by selling the Senior Certificates
to or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for whom
they act as agent. In connection with the sale of the Senior Certificates, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers
<PAGE>
-64-
that participate with the Underwriter in the distribution of the Senior
Certificates may be deemed to be underwriters and any profit on the resale of
the Senior 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 will indemnify the
Underwriter, and that under limited circumstances the Underwriter 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 Senior
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Senior
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 Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certificates, even if a secondary market for
the Senior Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Company by _________________________________, ________ and for the
Underwriter by ________________________________.
RATINGS
It is a condition to the issuance of the Senior Certificates that they
be rated not lower than "___" by _________________ ___________ ("_____________")
and "___" by ("_______").
The ratings of _______ on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. _______ ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The rating does not
address the possibility that Certificateholders might suffer a lower than
anticipated yield.
<PAGE>
-65-
_________________ ratings on mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. _________________ 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. _________________ 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 Company has not requested a rating on the Senior Certificates by
any rating agency other than _______ and ________. However, there can be no
assurance as to whether any other rating agency will rate the Senior
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 Senior
Certificates by _______ and _________.
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. The rating of the Fixed Strip
Certificates or Variable Strip Certificates does not address the possibility
that the holders of such Certificates may fail to fully recover their initial
investment. In the event that the rating initially assigned to the Senior
Certificates is subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to the Senior Certificates.
LEGAL INVESTMENT
The Senior Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in at least the second highest rating category by one
of the Rating Agencies, and, as such, are legal investments for certain entities
to the extent provided in SMMEA. SMMEA provides, however, that states could
override its provisions on legal investment and restrict or condition investment
in mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.
The Company makes no representations as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory
<PAGE>
-66-
authorities should consult with their legal advisors in determining whether and
to what extent any class of the Offered Certificates constitutes a legal
investment or is subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
--------------
TABLE OF CONTENTS
PAGE
Prospectus Supplement
Summary.............................................. S-
Description of the Mortgage Pool..................... S-
Description of the Certificates...................... S-
Certain Yield and Prepayment
Considerations.................................. S-
Pooling and Servicing Agreement...................... S-
Certain Federal Income Tax
Consequences.................................... S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Ratings.............................................. S-
Legal Investment..................................... S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Mortgage Pools...................................
Servicing of Mortgage Loans..........................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Purchase Obligations.................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................
The Company..........................................
Southern Pacific Funding Corporation.................
The Pooling Agreement................................
Yield Considerations.................................
Maturity and Prepayment
Considerations..................................
Certain Legal Aspects of Mortgage
Loans...........................................
Certain Federal Income Tax
Consequences....................................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Principal Definitions.......................
================================================================================
SOUTERH PACIFIC SECURED
ASSETS CORP.
$__________________
Mortgage Pass-Through
Certificates
Series 199_-____
$ ____% Class A-1 Certificates
$ ____% Class A-2 Certificates
$ ____% Class A-3 Certificates
$ ____% Class A-4 Certificates
$ ____% Class A-5 Certificates
$ ____% Class A-6 Certificates
$ Variable Rate* Class A-7 Certificates
-------------
PROSPECTUS SUPPLEMENT
-------------
-------------------------------------
____________, 19__
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
VERSION 2
=========
SUBJECT TO COMPLETION SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 21, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ______________, 19__)
$____________
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
[NAME OF MASTER SERVICER]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
WEIGHTED AVERAGE ADJUSTABLE PASS-THROUGH RATE
The Series 19__-__ Mortgage Pass-Through Certificates (the
"Certificates") will evidence the entire beneficial ownership interest in a
trust fund (the "Trust Fund") consisting primarily of a pool of conventional
adjustable-rate one- to four-family first lien mortgage loans (the "Mortgage
Loans"), exclusive of the Spread (as defined herein), to be deposited by
Southern Pacific Secured Assets Corp. (the "Company") into the Trust Fund for
the benefit of the Certificateholders. Certain characteristics of the Mortgage
Loans are described herein under "Description of the Mortgage Pool."
A limited amount of losses on the Mortgage Loans will initially be
covered by an irrevocable letter of credit (the "Letter of Credit") to be issued
by ________________ (the "Letter of Credit Bank"). The maximum amount available
to be drawn under the Letter of Credit will initially be equal to approximately
_____% of the aggregate principal balance of the Mortgage Loans as of
_______________, 19__ (the "Cut-off Date").
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully herein.
Distributions on the 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 commencing on ____________, 19__ (each, a "Distribution Date"). As
more fully described herein, interest distributions on the Certificates will be
based on the principal balance of the Mortgage Loans and the then applicable
Weighted Average Adjustable Pass-Through Rate, which will equal the weighted
average of the Net Mortgage Rates on the Mortgage Loans for the month preceding
such Distribution Date, as described more fully herein. The "Net Mortgage Rate"
for each Mortgage
<PAGE>
Loan is generally equal the Mortgage Rate thereon from time to time, net of the
per annum rates applicable to the calculation of the related servicing fee and
Spread. The initial Weighted Average Adjustable Pass-Through Rate for the
Certificates will be _______% per annum. The Weighted Average Adjustable
Pass-Through Rate on the Certificates may increase or decrease from month to
month. Distributions in respect of principal of the Certificates will be made as
described herein under "Description of the Certificates--Distributions."
Certain Mortgage Loans provide that, at the option of the related
Mortgagors, the adjustable rate on such Mortgage Loans may be converted to a
fixed rate (the "Convertible Mortgage Loans"), provided that certain conditions
have been satisfied. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable rate to a fixed rate and prior to the
conversion of any such Mortgage Loan (a "Converting Mortgage Loan"), the Master
Servicer [or the related Subservicer] will be obligated to purchase the
Converting Mortgage Loan at a net price of par plus accrued interest thereon
(the "Conversion Price"). [In the event of a failure by a Subservicer to
purchase a Converting Mortgage Loan, the Master Servicer shall use its best
efforts to purchase any Converted Mortgage Loan (as defined herein) from the
Mortgage Pool at the Conversion Price during the one month period following the
date of conversion to a Converted Mortgage Loan.] In the event that neither the
Master Servicer [nor the related Subservicer] purchases a Converting or
Converted Mortgage Loan, the Mortgage Pool will thereafter include both fixed
rate and adjustable rate Mortgage Loans. See "Certain Yield and Prepayment
Considerations" herein. Except as set forth herein, the Master Servicer's only
obligations with respect to the Certificates are its contractual obligations as
Master Servicer under the terms of the Pooling and Servicing Agreement (as
defined herein).
As described herein, the Trust Fund will be treated as a grantor trust
for federal income tax purposes.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
THE YIELD TO MATURITY ON THE CERTIFICATES WILL DEPEND ON THE RATE OF
PAYMENT OF PRINCIPAL (INCLUDING AS A RESULT OF PREPAYMENTS, DEFAULTS,
LIQUIDATIONS AND PURCHASES OF CONVERTING MORTGAGE LOANS AND CONVERTED MORTGAGE
LOANS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS MAY BE PREPAID IN FULL OR IN
PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO INVESTORS ON THE CERTIFICATES
WILL BE ADVERSELY AFFECTED BY ANY SHORTFALLS IN INTEREST COLLECTED ON THE
MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. SEE "CERTAIN YIELD
AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY
-2-
<PAGE>
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER
OFFERED 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.
The Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter 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 Certificates will
be equal to _________% of the initial aggregate principal balance of the
Certificates, plus accrued interest thereon from ___________ 1, 19__ (the
"Cut-off Date"), net of any expenses payable by the Company.
The Certificates are offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
certain other conditions. The Underwriter reserves 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 Certificates will be made on or about ____________, 19__ at
the office of __________________________________, _______________,
_____________________ against payment therefor in immediately available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
-3-
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED _____________, 19__, 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 CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL _____________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
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.
-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 Pass-Through Certificates, Weighted
Average Adjustable Pass-Through Rate, Series
19__-__.
Company.................... Southern Pacific Secured Assets Corp. (the
"Company"), a wholly-owned subsidiary of
Southern Pacific Funding Corporation. See
"The Company" in the Prospectus.
Master Servicer............ [Name of Master Servicer] (the "Master
Servicer")[, an affiliate of the Company].
See "Pooling and Servicing Agreement--The
Master Servicer" herein.
Trustee.................... ________________, ______________ (the
"Trustee").
Cut-off Date............... ___________, 19__ (the "Cut-off Date").
Delivery Date.............. On or about __________, 19__ (the "Delivery
Date").
Denominations.............. The Certificates will be issued in
registered, certificated form, in minimum
denominations of $______ and integral
multiples of $_____ in excess thereof.
The Mortgage Pool.......... The Mortgage Pool will consist of a pool of
adjustable rate, fully-amortizing mortgage
loans (the "Mortgage Loans"), exclusive of
the Spread (as defined herein). The aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date will be approximately
$______________.
The Mortgage Loans are secured by first liens
on one- to four-family residential real
properties (each, a "Mortgaged Property").
The Mortgage Loans have individual principal
balances at origination of at least $______
but not more than $_________ with an average
principal balance at origination of
approximately $_________. The Mortgage Loans
have terms to maturity of __ years from the
date of origination and a weighted average
remaining term to stated maturity of
approximately ____ years and __ months as of
the Cut-off Date. The Mortgage Rate on each
Mortgage Loan will adjust semi-annually on
its Adjustment Date (as defined herein),
-5-
<PAGE>
with corresponding adjustments in the amount
of monthly payments, to equal the sum
(rounded as described herein) of the Index
described below and a fixed percentage set
forth in the related Mortgage Note (the "Note
Margin"). However, (i) on any Adjustment Date
such Mortgage Rate may not increase or
decrease by more than 1% (the "Periodic Rate
Cap"), (ii) over the life of such Mortgage
Loan, such Mortgage Rate may not exceed the
related maximum Mortgage Rate (such maximum
Mortgage Rate is equal to the Mortgage Rate
at origination plus a lifetime rate cap (the
"Lifetime Rate Cap")), which maximum Mortgage
Rates will range from ______% to ______% and
(iii) with respect to approximately ____% of
the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, over the life
of such Mortgage Loan, such Mortgage Rate may
not be lower than the minimum Mortgage Rate.
The difference between the Mortgage Rate on
each Mortgage Loan at origination and the
minimum Mortgage Rate on such Mortgage Loan
will equal the lifetime rate floor (the
"Lifetime Rate Floor"). The minimum Mortgage
Rates will range from _____% to ______% per
annum.
Accordingly, changes in the Weighted Average
Adjustable Pass-Through Rate will not
necessarily correspond to changes in the
Index or other prevailing interest rates.
Additionally, the initial Mortgage Rates in
effect on the Mortgage Loans will likely be
lower than the sum of the Index and related
Note Margin that would have been applicable
at origination. Because the maximum Mortgage
Rate on any Mortgage Loan is determined by
adding the Lifetime Rate Cap to the Mortgage
Rate at origination, the maximum rate on a
Mortgage Loan will likely be less than the
sum of the Index and the Note Margin that
would have been applicable at origination
plus the Lifetime Rate Cap. No Mortgage Loan
provides for payment caps on any Adjustment
Date which would result in deferred interest
or negative amortization. The Mortgage Loans
will bear interest at Mortgage Rates of at
least _____% per annum but not more than
______% per annum, as of the Cut-off Date.
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein.
The Index...................... As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the
-6-
<PAGE>
related Mortgage Rate will be a rate equal
to the monthly weighted average cost of
funds for members of the Federal Home Loan
Bank of San Francisco as most recently
available 45 days prior to the Adjustment
Date (the "Cost of Funds Index" or "Index").
Conversion of Mortgage Loans... Approximately _____% of the Mortgage Loans,
by aggregate principal balance as of the
Cut-off Date, are Convertible Mortgage
Loans. Upon notification from a Mortgagor of
such Mortgagor's intent to convert from an
adjustable rate to a fixed rate and prior to
the conversion thereof, the Master Servicer
[or the related Subservicer] will be
obligated to purchase the Converting
Mortgage Loan at a net price of par plus
accrued interest thereon (the "Conversion
Price"). [In the event of a failure by a
Subservicer to purchase a Converting
Mortgage Loan, the Master Servicer shall use
its best efforts to purchase any Converted
Mortgage Loan (as defined herein) from the
Mortgage Pool at the Conversion Price during
the one- month period following the date of
conversion to a Converted Mortgage Loan.] In
the event that neither the Master Servicer
[nor the related Subservicer] purchases a
Converting or Converted Mortgage Loan, the
Mortgage Pool will thereafter include both
fixed-rate and adjustable- rate Mortgage
Loans. See "Certain Yield and Prepayment
Considerations" herein.
The Certificates............... The Certificates evidence the entire
beneficial ownership interest in a trust
fund (the "Trust Fund") consisting primarily
of the Mortgage Pool, exclusive of the
Spread. The 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").
Interest Distributions......... The Weighted Average Adjustable Pass-Through
Rate applicable to the Certificates in
respect of each Distribution Date will equal
the weighted average of the Net Mortgage
Rates on the Mortgage Loans for the month
preceding such Distribution Date. The
initial Weighted Average Adjustable
Pass-Through Rate will be ______% per annum.
The Net Mortgage Rate on each Mortgage Loan
is generally equal to the Mortgage Rate
thereon minus the rate per annum at which
the related servicing fee accrues (the
"Servicing Fee
-7-
<PAGE>
Rate") and the per annum rate at which the
Spread referred to below under "Pooling and
Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses; Spread"
accrues.
Holders of the Certificates will be entitled
to receive distributions allocable to
interest in proportion to their respective
Percentage Interests (as defined herein) on
each Distribution Date, to the extent of
available funds, in an aggregate amount equal
to one month's interest, at the then
applicable Weighted Average Adjustable
Pass-Through Rate, on the principal balance
of the Certificates outstanding as of the
close of business on the immediately
preceding Distribution Date, subject to
reduction in the event of any full and
partial prepayments or any interest
shortfalls not covered by the Letter of
Credit (as defined herein) as well as certain
losses and delinquencies on the Mortgage
Loans as described herein. See "Description
of the Certificates--Distributions" herein
and in the Prospectus.
Principal Distributions.... Principal payments (including prepayments)
received on the Mortgage Loans will be passed
through on each Distribution Date to holders
of the Certificates in proportion to their
respective Percentage Interests. See
"Description of the
Certificates--Distributions" herein and in
the Prospectus.
Advances....................... The Master Servicer is required to make
advances ("Advances") to holders of the
Certificates 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.
Credit Enhancement......... Neither the Certificates nor the Mortgage
Loans are insured or guaranteed by any
governmental agency or instrumentality or by
the Company, the Master Servicer or any
affiliate thereof. However, a limited amount
of losses on the Mortgage Loans will be
covered initially by an irrevocable letter of
credit (the "Letter of Credit") to be issued
by ________________ (the "Letter of Credit
Bank") in favor of the Trustee for the
benefit of the holders of the Certificates.
The maximum amount available under the Letter
of Credit to cover losses with respect to the
Mortgage Loans will initially equal
$_________ (the initial "Available
-8-
<PAGE>
Amount") which is equal to approximately
_____% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date.
The Available Amount is subject to periodic
reduction as described herein.
The Letter of Credit will cover losses on the
Mortgage Loans that constitute Defaulted
Mortgage Losses, Special Hazard Losses, Fraud
Losses and Bankruptcy Losses (each as defined
in the Prospectus), to the extent described
herein. Amounts that may be drawn under the
Letter of Credit to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses
are initially limited to $___________,
$___________ and $______________,
respectively. All of the foregoing amounts
are subject to periodic reduction as
described herein. Any draws under the Letter
of Credit, including draws for Special Hazard
Losses, Fraud Losses and Bankruptcy Losses,
will reduce the Available Amount. The Letter
of Credit will expire on ______________,
19__, unless earlier terminated or extended
in accordance with its terms or replaced in a
manner as herein described.
In the event losses on Mortgage Loans occur
which are not covered by the Letter of Credit
or any replacement credit enhancement, such
losses will be borne by the
Certificateholders. See "Description of
Credit Enhancement" herein.
Optional Termination....... At its option, on any Distribution Date when
the principal balance of the Mortgage Loans
is less than [___]% of the aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date, the Master Servicer or the
Company may (i) purchase from the Trust Fund
all remaining Mortgage Loans and other assets
thereof and thereby effect early retirement
of the Certificates or (ii) purchase in
whole, but not in part, the Certificates. See
"Pooling and Servicing
Agreement--Termination" herein and "The
Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
Special Prepayment
Considerations.............. The rate of principal payments on the
Certificates collectively will depend on the
rate and timing of principal payments
(including by reason of prepayments, defaults
and liquidations) on the Mortgage Loans. As
is the case with
-9-
<PAGE>
mortgage-backed securities generally, the
Certificates are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage
loans tend to decrease, resulting in a
reduced return of principal to investors at a
time when reinvestment at such higher
prevailing rates would be desirable.
Conversely, when prevailing interest rates
are declining, prepayment rates on mortgage
loans tend to increase, resulting in a
greater return of principal to investors at a
time when reinvestment at comparable yields
may not be possible.
See "Description of the
Certificates--Distributions" and "Certain
Yield and Prepayment Considerations" herein,
and "Maturity and Prepayment Considerations"
in the Prospectus.
Special Yield
Considerations.............. The yield to maturity on the Certificates
will depend on the rate and timing of
principal payments (including by reason of
prepayments, defaults, liquidations [and
purchases of Mortgage Loans converting to a
fixed rate]) on the Mortgage Loans, as well
as other factors such as changes in the
Index, provisions of the Mortgage Loans
limiting changes in the Mortgage Rates and
the purchase price for such Certificates, as
described herein. The Weighted Average
Adjustable Pass-Through Rate will be reduced
to the extent that prepayments, liquidations
and purchases occur at a faster rate for
Mortgage Loans having higher Net Mortgage
Rates than for Mortgage Loans having lower
Net Mortgage Rates. The yield to investors on
the Certificates will be adversely affected
by any allocation thereto of prepayment
interest shortfalls on the Mortgage Loans,
which are expected to result from the
distribution of interest only to the date of
prepayment (rather than a full month's
interest) in connection with prepayments in
full, and the lack of any distribution of
interest on the amount of any partial
prepayments.
See "Certain Yield and Prepayment
Considerations" herein, and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
-10-
<PAGE>
Consequences............. No election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit for federal income tax purposes.
_______________________, counsel to the
Depositor, will deliver its opinion generally
to the effect that, assuming compliance with
all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes
the Trust Fund will be classified as a
grantor trust under the Internal Revenue Code
of 1986 (the "Code"), and not as a
partnership or an association taxable as a
corporation.
For further information regarding the federal
income tax consequences of investing in the
Certificates see "Certain Federal Income Tax
Consequences" herein.
Rating......................... It is a condition of the issuance of the
Certificates that they be rated at least
"___" by __________________. _________ RATING
OF THE CERTIFICATES WILL NOT REPRESENT ANY
ASSESSMENT OF THE MASTER SERVICER'S [NOR THE
RELATED SUBSERVICER'S] ABILITY TO PURCHASE
CONVERTING MORTGAGE LOANS, OR THE REMARKETING
AGENT'S ABILITY TO ARRANGE FOR THE PURCHASE
OF CONVERTED MORTGAGE LOANS. In the event
that neither the Master Servicer [nor the
related Subservicer] purchases a Converting
or Converted Mortgage Loan, investors in the
Certificates might suffer a lower than
anticipated yield. 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. See "Certain Yield and
Prepayment Considerations" and "Rating"
herein and "Yield Considerations" in the
Prospectus.
Legal Investment........... The Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated
in at least the second highest rating
category by one or more nationally recognized
statistical rating agencies. Institutions
whose investment activities are subject to
legal investment laws and regulations,
regulatory capital requirements or review by
regulatory authorities may be
-11-
<PAGE>
subject to restrictions on investment in the
Certificates and should consult with their
legal advisors. See "Legal Investment" herein
and "Legal Investment Matters" in the
Prospectus.
-12-
<PAGE>
[RISK FACTORS]
[Prospective 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:]
[Appropriate Risk Factors as necessary.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of approximately
$___________. The Mortgage Pool will consist of conventional, adjustable-rate,
fully-amortizing Mortgage Loans with terms to maturity of not more than 30 years
from the due date of the first monthly payment. On or before the Delivery Date,
the Company will acquire the Mortgage Loans to be included in Mortgage Pool from
Southern Pacific Funding Corporation ("SPFC"), an affiliate of the Company [,
which in turn acquired them pursuant to various mortgage loan purchase
agreements from [SPFC] [_________] (the "Sellers")]. The Seller[s] 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 and 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. Neither the Company nor any other entity or person will have
any responsibility to purchase or replace any Mortgage Loan if a Seller is
obligated but fails to do so. 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
[Sellers] in accordance with the underwriting criteria described herein. See
"--Underwriting" below. All percentages of the Mortgage Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank
-13-
<PAGE>
of San Francisco (the "FHLB of San Francisco") as published by the FHLB of San
Francisco (the "Cost of Funds Index" or "Index") and as most recently available
as of the day 45 days prior to such Adjustment Date or, in the event that such
Index is no longer available, an index selected by the Master Servicer and
reasonably acceptable to the Trustee that is based on comparable information,
and (b) the related Note Margin, subject to the following limitations. The
Mortgage Rate on the Mortgage Loan on any Adjustment Date may not increase or
decrease by more than the Periodic Rate Cap applicable to such Mortgage Loan
and, over the life of such Mortgage Loan, generally may not exceed the Mortgage
Rate at origination plus the Lifetime Rate Cap, or be less than the Mortgage
Rate at origination minus any Lifetime Rate Floor, applicable to such Mortgage
Loan. No Mortgage Loan provides for payment caps on any Adjustment Date which
would result in deferred interest or negative amortization. Effective with the
first payment due date on a Mortgage Loan after an Adjustment Date therefor, the
monthly principal and interest payment will be adjusted to an amount that will
fully amortize the then outstanding principal balance of such Mortgage Loan at
its stated maturity and pay interest at the adjusted Mortgage Rate. Because the
amortization schedule of each Mortgage Loan will be recalculated semi-annually,
any partial prepayments thereof will not reduce the term to maturity of such
Mortgage Loan. An increase in the Mortgage Rate on a Mortgage Loan will result
in a larger monthly payment and in a larger percentage of such monthly payment
being allocated to interest and a smaller percentage being allocated to
principal, and conversely, a decrease in the Mortgage Rate on the Mortgage Loan
will result in a lower monthly payment and in a larger percentage of each
monthly payment being allocated to principal and a smaller percentage being
allocated to interest.
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
The Wall Street Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
COST OF FUNDS INDEX
Month 1990 1991 1992 1993 1994 1995
===== ==== ==== ==== ==== ==== ====
January.................
February................
March...................
April...................
-14-
<PAGE>
May.....................
June....................
July....................
August..................
September...............
October.................
November................
December................
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. Mortgage Loans that have the same
initial Mortgage Rate may not always bear interest at the same Mortgage Rate
because the Mortgage Loans may have different Adjustment Dates (and the Mortgage
Rate therefore may reflect different Index values), different Note Margins,
different Lifetime Rate Caps and different Lifetime Rate Floors, if any.
Approximately ____% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are Convertible Mortgage Loans. The first month
in which any of the Mortgage Loans could convert is _______, 19__ and the last
month in which any of the Mortgage Loans may convert is ________ 1, 19__. Upon
conversion, the monthly payments of principal and interest will be adjusted to
provide for full amortization at scheduled maturity. Upon notification from a
Mortgagor of such Mortgagor's intent to convert from an adjustable rate to a
fixed rate and prior to the conversion thereof, the Master Servicer [or the
related Subservicer] will be obligated to purchase the Converting Mortgage Loan
at the Conversion Price. [In the event of a failure by a Subservicer to purchase
a Converting Mortgage Loan, the Master Servicer shall use its best efforts to
purchase such Mortgage Loan following its conversion (a "Converted Mortgage
Loan") at the Conversion Price during the one-month period following the date of
conversion to a Converted Mortgage Loan.]
In the event that the Master Servicer [nor the related Subservicer]
fails to purchase a Converting Mortgage Loan and the Master Servicer does not
purchase a Converted Mortgage Loan, neither the Company nor any of its
affiliates nor any other entity is obligated to purchase or arrange for the
purchase of any Converted Mortgage Loan. Any such Converted Mortgage Loan will
remain in the Mortgage Pool as a fixed-rate Mortgage Loan and will result in the
Mortgage Pool having both fixed rate and adjustable rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
-15-
<PAGE>
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the Trustee
of such Mortgage Loan and the purchaser will thereafter own such Mortgage Loan
free of any further obligation to the Trustee or the Certificateholders with
respect thereto.
The Principal Balance of any Mortgage Loan as of any time of
determination is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor at the close of business on the Cut-off Date, after
deduction of all payments due on or before the Cut-off Date whether or not paid,
reduced by all amounts distributed to Certificateholders with respect to such
Mortgage Loan and reported to them as allocable to principal, including the
principal components of any Advances (as described below under "Description of
the Certificates--Advances").
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans.........................
Weighted Average Adjustable Pass-Through Rate(1).
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Net Note Margin(2)................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (3):
Weighted Average.............................
Range........................................
Weighted Average Months to Next
Adjustment Date after ____________, 19__(4)......
(1) The Weighted Average Adjustable Pass-Through Rate is equal to the
weighted average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Note Margin is the Note Margin on each Mortgage Loan minus the
Servicing Fee Rate and the rate at which the Spread accrues.
(3) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(4) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
-16-
<PAGE>
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage Loans having such characteristics
relative to the aggregate principal balance of all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately ____ years and __
months. The weighted average Adjustment Date of the Mortgage Loans in
the Mortgage Pool next following the Cut-off Date is ____________,
19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to-Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
-17-
<PAGE>
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Mortgage Pool which were underwritten under such reduced
loan documentation program will be approximately ____% and no more than
approximately ____% of such Mortgage Loans will be secured by Mortgaged
Properties located in California. See "Pooling and Servicing
Agreement--The Master Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
-18-
<PAGE>
MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
=============== ============== ================= =============
Total..................
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- ----- ------- ---- -----
<S> <C> <C> <C> <C>
Total, Average or Weighted Average................. _______ $____________ ________% _______%
</TABLE>
UNDERWRITING STANDARDS
[Additional disclosure as necessary. See Version 1 for
underwriting disclosure for ICI and Southern Pacific Thrift & Loan.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
[Additional disclosure as necessary. See Version 1 for sample
disclosure for this section.]
-19-
<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 before such date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as they will be
constituted at the time the 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 containing a detailed description of
the Mortgage Loans will be available to purchasers of the Certificates and will
be filed, together with the Pooling and Servicing Agreement, with the Securities
and Exchange Commission within fifteen days after initial issuance. The Current
Report on Form 8-K will specify the aggregate principal balance of the Mortgage
Loans in the Mortgage Pool outstanding as of the Cut-off Date and will set forth
the other approximate information presented in this Prospectus Supplement.
See also "The Mortgage Pools" and "Certain Legal Aspects of
Mortgage Loans" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates evidence in the aggregate the entire beneficial
ownership of the Trust Fund. The Trust Fund will consist of (i) the Mortgage
Loans, exclusive of the Company's rights in and to the Spread with respect to
each Mortgage Loan; (ii) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Certificate Account (as
described in the Prospectus) and belonging to the Trust Fund; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
(iv) any applicable insurance policies and all proceeds thereof; and (v) the
Letter of Credit (or any alternate form of credit support substituted therefor)
and all proceeds thereof, other than any amount drawn thereunder and deposited
in a reserve fund.
DISTRIBUTIONS
Distributions to holders of Certificates will be made on each
Distribution Date based on their respective Percentage Interests. The undivided
Percentage Interest of a Certificate will be equal to the percentage obtained by
dividing the initial principal balance of such Certificate by
-20-
<PAGE>
the aggregate initial principal balance of all Certificates, which will equal
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The "Available Distribution Amount" for any Distribution Date will
generally consist of (i) the aggregate amount of scheduled payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related master servicing fees
(the "Servicing Fees"), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (i) the "Due
Date" is the first day of the month in which such Distribution Date occurs and
(ii) the "Determination Date" is the [__th] day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
succeeding business day. See "Description of the Certificates--Distributions" in
the Prospectus.
Holders of Certificates will be entitled to receive distributions
of interest on each Distribution Date, to the extent of the Available
Distribution Amount for such Distribution Date, in an aggregate amount equal to
one month's interest, at the then applicable Weighted Average Adjustable
Pass-Through Rate on the principal balance of the Mortgage Loans outstanding as
of the close of business on the immediately preceding Distribution Date (or, in
the case of the first Distribution Date, outstanding as of the Delivery Date),
subject to reduction in the event of any interest shortfalls not covered by the
Letter of Credit, including any Prepayment Interest Shortfalls (as defined
below) resulting from full and partial prepayments, as well as certain losses
and delinquencies on the Mortgage Loans as described below. The Weighted Average
Adjustable Pass-Through Rate for any Distribution Date will equal the average of
the Net Mortgage Rates on the Mortgage Loans (weighted by the principal balances
of such Mortgage Loans as of the Due Date occurring in the preceding month).
Subject to the following limitations, for each period beginning on the related
Adjustment Date therefor, the Net Mortgage Rate on a Mortgage Loan will equal
the sum of the Cost of Funds Index (rounded to the nearest multiple of ______%)
and the Net Note Margin. The Net Note Margin for each Mortgage Loan will be
______%. The Net Mortgage Rate on any Mortgage Loan on any Adjustment Date may
not increase or decrease by more than the Periodic Rate Cap, and the Net
Mortgage Rate on any Mortgage Loan will not exceed the maximum Net Mortgage Rate
(the "Maximum Net Mortgage Rate") applicable to such Mortgage Loan as specified
in the Pooling and Servicing Agreement. The difference between the Net Mortgage
Rate as of the Cut-off Date and the Maximum Net Mortgage Rate will not exceed,
and may be less than, the Lifetime Rate Cap. With respect to each Mortgage Loan,
the Net Mortgage Rate is the rate per annum equal to the Mortgage Rate for such
Mortgage Loan, net of the Servicing Fee Rate and the per annum rate at which the
Spread accrues. See "Description of
-21-
<PAGE>
the Mortgage Pool" and "Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses; Spread" herein.
Holders of the Certificates will be entitled to receive on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date after distributions of interest as set forth above, an amount
equal to the "Principal Distribution Amount" for such Distribution Date, which
will equal the sum of: (a) the principal portion of any Advances for such
Distribution Date; (b) any amount required to be paid by the Master Servicer due
to the operation of a deductible clause in any blanket policy maintained by it
to cover hazard losses on the Mortgage Loans as described in the Prospectus
under "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder"; (c) all
payments in respect of the Mortgage Loans on account of principal (including,
without limitation, principal prepayments, the principal portion of any
Liquidation Proceeds and Insurance Proceeds, the principal portion of proceeds
from repurchased Mortgage Loans and the principal portion of proceeds from the
purchase of Converting Mortgage Loans and the sale of Converted Mortgage Loans)
on deposit in the Certificate Account on the Determination Date immediately
preceding such Distribution Date, exclusive or net of (i) Liquidation Proceeds,
Insurance Proceeds and principal prepayments received during the month in which
such Distribution Date occurs (unless such amounts are deemed to have been
received in the prior month pursuant to the Pooling and Servicing Agreement as
described below), (ii) scheduled payments of principal due on a date or dates
subsequent to the first day of the month in which such Distribution Date occurs,
(iii) late payments of principal which have been the subject of a previous
Advance or Advances that have not been reimbursed to the Master Servicer and
(iv) an amount equal to liquidation expenses incurred by the Master Servicer to
the extent not reimbursed from related Liquidation Proceeds; and (d) all amounts
required to be deposited in the Certificate Account on the Business Day
immediately preceding such Distribution Date, with respect to draws or payments
under the Letter of Credit which are allocable to payments on account of
principal of the Mortgage Loans, except for payments of principal which have
been the subject of a previous Advance or Advances and which are eligible for
withdrawal in reimbursement to the Master Servicer.
The Prepayment Interest Shortfall for any Distribution Date is
equal to the aggregate shortfall, if any, in collections of interest (adjusted
to the related Net Mortgage Rates) resulting from mortgagor prepayments on the
Mortgage Loans during the preceding calendar month. Such shortfalls will result
because interest on prepayments in full is collected only to the date of
prepayment, and no interest is collected on prepayments in part, as such
prepayments are applied to reduce the outstanding principal balance of the
related Mortgage Loan as of the Due Date in the month of prepayment. The
Prepayment Interest Shortfall and other interest shortfalls (such as those
resulting from the application of the Relief Act (as defined herein)) not
covered by the Letter of Credit on any Distribution Date will be allocated to
the holders of the Certificates pro rata based on distributions of interest to
be made on such Distribution Date, before taking into account any such
reduction. Prepayment Interest Shortfalls and other interest shortfalls will not
be offset by a reduction of the servicing compensation of the Master Servicer or
otherwise.
-22-
<PAGE>
Distributions for any Distribution Date will also be reduced if
net Liquidation Proceeds or net Insurance Proceeds (together with any net
amounts payable as described below under "Description of Credit Enhancement")
received on a defaulted Mortgage Loan liquidated during the month preceding the
month in which such Distribution Date occurs are less than the outstanding
principal balance of such Mortgage Loan, plus interest thereon at the related
Net Mortgage Rate. If an Advance by the Master Servicer was previously made in
respect thereof, late payments of principal and interest, if any, remitted to
the Master Servicer for deposit into the Certificate Account will not be passed
through to Certificateholders but rather will be subject to withdrawal by the
Master Servicer from the Certificate Account in reimbursement to itself for such
Advance. To the extent that an Advance is not made, the distributions for such
Distribution Date will be reduced accordingly. Reimbursement of the Master
Servicer or the Company for any other advances or expenses reimbursable to
either as described in the Prospectus, out of amounts otherwise distributable to
the Certificateholders, will also reduce the distributions for the related
Distribution Date. Distributions for any Distribution Date will be reduced to
the extent that losses on any Mortgage Loans in the Mortgage Pool are not
covered by the Letter of Credit or any substitute form of credit enhancement.
With respect to Insurance Proceeds, Liquidation Proceeds and other
unscheduled collections (not including prepayments by the mortgagors) received
in any calendar month, the Master Servicer may elect to treat such amounts as
part of the distribution to be made on the Distribution Date in the month of
receipt, but is not obligated to do so. If the Master Servicer so elects, such
amounts will be deemed to have been received (and any related loss which
requires a draw on the Letter of Credit shall be deemed to have occurred) on the
last day of the month prior to the receipt thereof.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required
to make Advances for the benefit of the Certificateholders (out of its own funds
or funds held in the Custodial Account (as described in the Prospectus) for
future distribution or withdrawal) with respect to any payments of principal and
interest (net of the related Servicing Fees and the Spread) which were due on
the Mortgage Loans on the immediately preceding Due Date and delinquent on the
business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or draws on the Letter of Credit. The
purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, 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
bankruptcy proceedings or the application of the Relief Act or similar
legislation or regulations.
All Advances will be reimbursable to the Master Servicer on a
first priority basis from late collections, Insurance Proceeds, Liquidation
Proceeds and draws on the Letter of Credit on
-23-
<PAGE>
or in respect of the Mortgage Loan as to which such unreimbursed Advance was
made. In addition, any Advances previously made which are deemed by the Master
Servicer to be nonrecoverable from related late collections, Insurance Proceeds,
Liquidation Proceeds or draws on the Letter of Credit may be reimbursed to the
Master Servicer out of any funds in the Custodial Account or Certificate Account
prior to distributions on the Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The effective yield to the holders of Certificates will be lower
than the yield otherwise produced by the applicable Weighted Average Adjustable
Pass-Through Rate and purchase price because monthly distributions will not be
made to such holders until the 25th day (or if such day is not a business day,
then on the next succeeding business day) of the month following the month in
which interest accrues on the Mortgage Loans (without any additional
distributions of interest or earnings thereon in respect of such delay). See
"Yield Considerations" in the Prospectus.
The yield to maturity and the aggregate amount of distributions on
the Certificates will be directly related to the rate of payment of principal on
the Mortgage Loans. Such yield may be adversely affected by a higher or lower
than anticipated rate of payment of principal on the Mortgage Loans in the Trust
Fund. The rate of payment of principal on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans (which will change
periodically as described above), the rate of principal prepayments thereon by
the Mortgagors, liquidations of defaulted Mortgage Loans and purchases of
Mortgage Loans due to certain breaches of representations or the conversion of
Convertible Mortgage Loans. The principal component of the monthly payments on
the Mortgage Loans may change on each related Adjustment Date. In addition, the
amortization schedule of a Mortgage Loan may be changed in connection with the
receipt of a partial prepayment thereon, provided however that such changes will
not include a change in the maturity date of the related Mortgage Loan. See
"Description of the Mortgage Pool--General" herein.
Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, mortgage market interest
rates, unemployment, mortgagors' net equity in the mortgaged properties, changes
in the value of the mortgaged properties and servicing decisions. If prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayment (and refinancing) would be expected to increase.
Conversely, if prevailing mortgage rates rose significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans would
be expected to decrease. There can be no certainty as to the rate of prepayments
on, or conversions of, the Mortgage Loans during any period or over the life of
the Certificates. However, in the event that substantial numbers of Mortgagors
exercise their conversion rights, and [the related Subservicers and] the Master
Servicer purchase the Converting and Converted Mortgage Loans, the Mortgage Pool
will experience substantial prepayment of principal.
-24-
<PAGE>
The Mortgage Loans may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. In addition, certain of the
Mortgage Loans provide that the Mortgagors may, during a specified period of
time, convert the adjustable rate of such Mortgage Loans to a fixed rate. The
Company is not aware of any publicly available statistics that set forth
principal prepayment or conversion experience or prepayment or conversion
forecasts of comparable adjustable rate mortgage loans over an extended period
of time, and its experience with respect to comparable adjustable rate mortgages
is insufficient to draw any conclusions with respect to the expected prepayment
or conversion rates on the Mortgage Loans included in the Mortgage Pool. The
rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. As is
the case with conventional fixed rate mortgage loans, adjustable rate mortgage
loans may be subject to a greater rate of principal prepayments or purchases due
to their conversion to fixed interest rate loans in a low interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable rate mortgage loans could be subject to higher prepayment and
conversion rates than if prevailing interest rates remain constant because the
availability of fixed rate or other adjustable rate mortgage loans at
competitive interest rates may encourage Mortgagors to refinance their
adjustable rate mortgages to "lock in" a lower fixed interest rate or take
advantage of the availability of such other adjustable rate mortgage loans, or,
in the case of convertible adjustable rate mortgage loans, to exercise their
option to convert the adjustable interest rates to fixed interest rates. The
conversion feature may also be exercised in a rising interest rate environment
as Mortgagors attempt to limit their risk of higher rates. Such a rising
interest rate environment may also result in an increase in the rate of defaults
on the Mortgage Loans. In the event that [the Subservicers or] the Master
Servicer purchases Converting or Converted Mortgage Loans, a Mortgagor's
exercise of the conversion option will result in a pro rata distribution of the
principal portion thereof to the Certificateholders, as described herein.
Alternatively, to the extent Subservicers fail in their obligation to purchase
Converting Mortgage Loans and the Master Servicer does not purchase Converted
Mortgage Loans, as described herein, the Mortgage Pool will include fixed rate
Mortgage Loans, which will have the effect of limiting the extent to which the
Weighted Average Adjustable Pass-Through Rate can increase or decrease in
accordance with changes in the Index and accordingly may affect the yield to
Certificateholders.
The existence of Periodic Rate Caps, Lifetime Rate Caps and any
Lifetime Rate Floors also will affect the likelihood of prepayments resulting
from refinancing and the exercise of the conversion option. Although the
Mortgage Rates on the Mortgage Loans will adjust periodically, such increases
and decreases will be limited by the Periodic Rate Caps, Lifetime Rate Caps and
any Lifetime Rate Floors on each Mortgage Loan and will be based on the Index
(which may not rise and fall consistently with mortgage interest rates) plus the
related Note Margins (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the Mortgage Loans at
any time may not equal the prevailing rates for other adjustable rate loans and
accordingly, the rate of prepayment may be lower or higher than would otherwise
be anticipated.
With respect to those Mortgage Loans having Lifetime Rate Floors,
if prevailing mortgage rates were to fall below the minimum Mortgage Rates, the
rate of prepayment on such
-25-
<PAGE>
Mortgage Loans may be expected to increase and such Mortgage Loans may prepay at
a rate higher than would otherwise be anticipated for adjustable rate mortgage
loans.
All of the Mortgage Loans are assumable under certain
circumstances if, in the sole judgment of the Master Servicer, the prospective
purchaser of a Mortgaged Property is creditworthy and the security for such
Mortgage Loan is not impaired by the assumption. The extent to which the
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather than
prepaid by the related mortgagors in connection with the sales of the Mortgaged
Properties will affect the weighted average life of the Certificates and may
result in a prepayment experience on the Mortgage Loans that differs from that
on other conventional mortgage loans.
The yield to maturity of the Certificates will depend on the rate
of payment of principal (including by reason of principal prepayments, purchases
of Mortgage Loans in the Mortgage Pool which are Converting Mortgage Loans or
Converted Mortgage Loans or in respect of which a breach of a representation or
warranty has occurred, and liquidation of defaulted Mortgage Loans) on the
Mortgage Loans, the price paid by the holders of Certificates and the Weighted
Average Adjustable Pass-Through Rate in effect from time to time. Such yield may
be adversely affected by a higher or lower than anticipated rate of prepayments
on the Mortgage Loans. Because the Weighted Average Adjustable Pass-Through Rate
at any time is the weighted average of the Net Mortgage Rates on the Mortgage
Loans, the Weighted Average Adjustable Pass Through Rate (and the yield on the
Certificates) will be reduced as a result of prepayments, liquidations and
purchases at a faster rate for Mortgage Loans having higher Net Mortgage Rates
as opposed to Mortgage Loans having lower Net Mortgage Rates. Because Mortgage
Loans having higher Net Mortgage Rates generally have higher Mortgage Rates,
such Mortgage Loans are generally more likely to be prepaid at a faster rate
under most circumstances than are Mortgage Loans having lower Net Mortgage
Rates.
The rate of default on the Mortgage Loans will also affect the
rate of payment of principal on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years, although little data is available with respect to the rate of default on
adjustable rate mortgage loans. Increases in the monthly payments to an amount
in excess of the preceding monthly payment required at the time of origination
may result in a default rate higher than that on level payment mortgage loans.
Furthermore, the Mortgagor under each Mortgage Loan was qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of such Mortgage
Loans will be dependent on the ability of the Mortgagor to make larger monthly
payments following adjustments of the Mortgage Rate. The rate of default on
Mortgage Loans which are equity refinance or limited documentation mortgage
loans may be higher than for other types of Mortgage Loans.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to Certificateholders of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Furthermore, the rate of prepayments, defaults and liquidations on, or
conversions of, the Mortgage Loans will be affected by the general economic
condition of the region of the country where the related Mortgaged Properties
are located. The
-26-
<PAGE>
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
increasing unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the Prospectus. Since the rates of payment of principal on
the Mortgage Loans will depend on future events and a variety of factors (as
described more fully herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the rate of principal prepayments on the Certificates.
The amount of interest passed through to holders of the
Certificates will be reduced by shortfalls in collections of interest resulting
from full or partial principal prepayments or otherwise, which will not be
offset by a reduction in the Servicing Fees payable to the Master Servicer or
otherwise. See "Yield Considerations" in the Prospectus and "Description of the
Certificates--Distributions" herein for a discussion of the effect of principal
prepayments on the Mortgage Loans on the yield to maturity of the Certificates.
The timing of changes in the rate of prepayments, liquidations and
purchases 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 addition, the yield to maturity of the Certificates will depend
on the price paid by holders of the Certificates. If any Certificate is
purchased at initial issuance at a discount and the rate of prepayments on the
Mortgage Loans is lower than that originally anticipated, the purchaser's yield
to maturity will be lower than that assumed at the time of purchase. Conversely,
if any Certificate is purchased at initial issuance at a premium and the rate of
prepayments on the Mortgage Loans is higher than that originally anticipated,
the purchaser's yield to maturity will be lower than that assumed at the time of
purchase.
The first distribution on the Certificates reflecting an
adjustment to the scheduled monthly payments on a related Mortgage Loan will be
passed through to holders of Certificates on the second Distribution Date
following the date on which the adjustment to such Mortgage Rate was made.
Furthermore, adjustments in the Net Mortgage Rates are based on the Index as
reported 45 days prior to the Adjustment Date. Accordingly, the yield to
Certificateholders will be adjusted on a delayed basis relative to movements in
the Index. Although the Net Mortgage Rate of each Mortgage Loan will be adjusted
pursuant to the Index, such rate is subject to the Periodic Rate Cap and is also
limited by the Lifetime Rate Cap and any Lifetime Rate Floor applicable to such
Mortgage Loan. With respect to certain Mortgage Loans the difference between the
Net Mortgage Rate as of the Cut-off Date and the maximum Net Mortgage Rate will
be less than the Lifetime Rate Cap. Therefore, if the Index changes
substantially between Adjustment Dates, the Net Mortgage Rate may be lower than
if the Net Mortgage Rate could be adjusted based on the Index without such caps.
A number of factors affect the performance of the Index and may
cause the Index to move in a manner different from other indices. To the extent
that the Index may reflect changes in the general level of interest rates less
quickly than other indices, in a period of rising interest
-27-
<PAGE>
rates, increases in the yield to Certificateholders due to such rising interest
rates may occur later than that which would be produced by other indices, and in
a period of declining rates, the Index may remain higher than other market
interest rates which may result in a higher level of prepayments of Mortgage
Loans which adjust in accordance with the Index than mortgage loans which adjust
in accordance with other indices.
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, and the Mortgage Loans serviced
and administered, pursuant to a Pooling and Servicing Agreement (the "Pooling
and Servicing Agreement") dated as of __________ 1, 19__, among the Company, the
Master Servicer, and _____________________, as trustee (the "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 Certificates. The Trustee will appoint
____________________ to serve as Custodian in connection with the Certificates.
The Certificates will be transferable and exchangeable at the corporate trust
office of the Trustee, which will serve as Certificate Registrar and will be
responsible for making distributions on the Certificates and forwarding monthly
reports with respect thereto to the holders thereof. In addition to the
circumstances described in the Prospectus, the Company may terminate the Trustee
for cause under certain circumstances. The Company will provide a prospective or
actual Certificateholder without charge, on written request, a copy (without
exhibits) of the Pooling and Servicing Agreement. Requests should be addressed
to the President, Southern Pacific Secured Assets Corp., One Center Pointe
Drive, Suite 500, Lake Oswego, Oregon 97035. See "Description of the
Certificates," "Servicing of Mortgage Loans" and "The Pooling Agreement" in the
Prospectus.
THE MASTER SERVICER
[Name of Master Servicer] will act as master servicer (in such
capacity, the "Master Servicer") for the Certificates pursuant to the Pooling
and Servicing Agreement.
[Further disclosure as appropriate.]
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will accrue at ____% per annum (the "Servicing Fee Rate") on the
outstanding principal balance of each
-28-
<PAGE>
Mortgage Loan. The Master Servicer is obligated to pay certain ongoing expenses
associated with the Trust Fund and incurred by the Master Servicer in connection
with its responsibilities under the Pooling and Servicing Agreement, including
the expenses of the Letter of Credit and any substitute credit support and the
fees of the Trustee. See "Servicing of Mortgage Loans -- Servicing and Other
Compensation and Payment of Expenses; Spread" in the Prospectus for information
regarding other possible compensation to the Master Servicer and for information
regarding expenses payable by the Master Servicer.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Master Servicer will be obligated to remit to the Company or its designee, a
portion of the interest collected on each Mortgage Loan (the "Spread"). The rate
at which the Spread on each Mortgage Loan accrues
will be equal to ____% per annum.
TERMINATION
The circumstances under which the obligations created by the
Pooling and Servicing Agreement will terminate in respect of the Certificates
are described in "Description of the Certificates--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option (i) to purchase all remaining Mortgage Loans and other assets in the
Trust Fund, thereby effecting early retirement of the Certificates or (ii) to
purchase in whole, but not in part, the Certificates, but either such option
will not be exercisable until such time as the aggregate principal balance of
the Mortgage Loans as of the Distribution Date on which the purchase proceeds
are to be distributed to the Certificateholders is less than __% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. Any
such purchase of Mortgage Loans and other assets of the Trust Fund shall be made
at a price equal to the aggregate principal balance of all the Mortgage Loans
(or the fair market value of the related underlying Mortgaged Properties with
respect to defaulted Mortgage Loans as to which title to such Mortgaged
Properties has been acquired if such fair market value is less than such unpaid
principal balance) (net of any unreimbursed Advance attributable to principal),
together with one month's interest on such aggregate amount at the then
applicable Weighted Average Adjustable Pass-Through Rate.
Upon presentation and surrender of the Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Certificates will receive, in
proportion to their respective Percentage Interests, an amount equal to the sum
of the principal balances of the Mortgage Loans plus one month's accrued
interest thereon at the then applicable Weighted Average Adjustable Pass-Through
Rate.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
-29-
<PAGE>
All of the Mortgage Loans are the subject of credit support
coverage provided by the Letter of Credit. In addition, each Mortgage Loan is
covered by a Primary Hazard Insurance Policy as described under "Primary
Mortgage Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus. See
also "Description of the Mortgage Pool--Primary Mortgage Insurance" herein.
LETTER OF CREDIT
The Letter of Credit Bank will issue the Letter of Credit to the
Trustee for the benefit of the holders of the Certificates. Subject to the
limitations described below, the Letter of Credit will be available to cover
Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses and Bankruptcy
Losses. The maximum amount available to be drawn under the Letter of Credit with
respect to all losses will initially be equal to $_________ (the initial
"Available Amount") which is equal to approximately ____% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. The Available
Amount at any time will be reduced by any amounts previously drawn under the
Letter of Credit (net of any amounts received or collected by the Master
Servicer following each respective draw as subsequent recoveries on the Mortgage
Loans with respect to which such draws were made and, if appropriate, such draws
were reimbursed to the Letter of Credit Bank). The Available Amount will be
reinstated with respect to the subsequent recoveries described in the preceding
sentence, however in no event will the Available Amount be reinstated to an
amount in excess of the initial Available Amount. The Available Amount under the
Letter of Credit (if the Letter of Credit is extended in accordance with its
terms) is also subject to reduction pursuant to the terms of the Pooling and
Servicing Agreement annually beginning on the tenth anniversary of the Cut-off
Date and each anniversary thereafter, such that, beginning with the fourteenth
anniversary of the Cut-off Date and on each anniversary thereafter, the
Available Amount will not exceed ____% of the aggregate outstanding principal
balance of the Mortgage Loans, provided that such scheduled reductions will not
reduce the Available Amount below three times the principal balance of the
largest single Mortgage Loan outstanding on such anniversary, and further
provided that the Available Amount will not be reduced in accordance with the
preceding sentence if delinquency rates and losses on the Mortgage Loans exceed
certain levels as specified by the Rating Agency as set forth in the Pooling and
Servicing Agreement. The Amount Available may be further reduced from time to
time by such amounts as the Master Servicer may determine and direct the
Trustee, provided the then current rating of the Certificates is not adversely
affected.
Notwithstanding the foregoing, the maximum amount available under
the Letter of Credit in connection with Fraud Losses (the "Fraud Loss Amount")
shall initially be equal to $___________. As of any date of determination after
the Cut-off Date the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to ____% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amount of draws made under the Letter of Credit with respect to Fraud
Losses up to such date of determination, and (Y) from the first through fifth
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and (b)
____% of the aggregate principal balance of all of the Mortgage Loans
-30-
<PAGE>
as of the most recent anniversary of the Cut-off Date minus (2) the aggregate
amount of draws made under the Letter of Credit with respect to Fraud Losses
since the most recent anniversary of the Cut-off Date up to such date of
determination. After the fifth anniversary of the Cut-off Date the Fraud Loss
Amount shall be zero and no draws shall be made under the Letter of Credit
with respect to Fraud Losses.
The maximum amount available under the Letter of Credit in respect
of Special Hazard Losses (the "Special Hazard Amount") will equal $__________
less the sum of (A) any amounts drawn under the Letter of Credit in respect of
Special Hazard Losses (to the extent that such amounts do not exceed the lesser
of the cost of repair or replacement of the related Mortgaged Properties) and
(B) the Adjustment Amount. The Adjustment Amount on each anniversary of the
Cut-off Date will be equal to the amount, if any, by which the Special Hazard
Amount, without giving effect to the deduction of the Adjustment Amount for such
anniversary, exceeds the greater of (i) 1% (or, if greater than 1%, the highest
percentage of Mortgage Loans by principal balance in any California zip code
area) times the aggregate principal balance of all of the Mortgage Loans in the
Mortgage Pool on such anniversary and (ii) twice the principal balance of the
single Mortgage Loan in the Mortgage Pool having the largest principal balance.
As used in this Prospectus Supplement, "Special Hazard Losses" has the same
meaning set forth in the Prospectus except that Special Hazard Losses will not
include and the Letter of Credit will not cover losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
As of any date of determination prior to the first anniversary of
the Cut-off Date, the maximum amount available under the Letter of Credit in
respect of Bankruptcy Losses (the "Bankruptcy Amount") will equal $__________
less the sum of any amounts drawn under the Letter of Credit for such losses up
to such date of determination. As of any day of determination on or after the
first anniversary of the Cut-off Date, the Bankruptcy Amount will equal the
excess, if any, of (1) the lesser of (a) the Bankruptcy Amount as of the
business day next preceding the most recent anniversary of the Cut-off Date (the
"Relevant Anniversary") and (b) an amount calculated pursuant to the terms of
the Pooling and Servicing Agreement, which amount as calculated will provide for
a reduction in the Bankruptcy Amount, provided that delinquency rates and losses
on all of the Mortgage Loans do not exceed certain levels as set forth in the
Pooling and Servicing Agreement, over (2) the aggregate amount of draws made
under the Letter of Credit since the Relevant Anniversary in connection with
Bankruptcy Losses. The Bankruptcy Amount and the related automatic reductions
described above may be reduced or modified upon written confirmation from the
Rating Agency that such reduction or modification will not adversely affect the
then current rating assigned to the Certificates by such Rating Agency. Such a
reduction or modification may adversely affect the coverage provided by the
Letter of Credit with respect to Bankruptcy Losses.
[Described manner in which payments will be made under the Letter
of Credit.] See "Description of Credit Enhancement--Letter of Credit" in the
Prospectus. However, the Trustee shall not make such draws under the Letter of
Credit in connection with a Bankruptcy Loss so long as the Master Servicer has
notified the Trustee in writing that the Master Servicer is diligently
-31-
<PAGE>
pursuing any remedies that may exist in connection with the representations and
warranties made regarding the related Mortgage Loan and either (A) the related
Mortgage Loan is not in default with regard to payments due thereunder or (B)
delinquent payments of principal and interest under the related Mortgage Loan
and any premiums on any applicable Primary Hazard Insurance Policy and any
related escrow payments in respect of such Mortgage Loan are being advanced on a
current basis by the Master Servicer [or a Subservicer].
Any Mortgage Loan the unpaid principal balance of which is paid
pursuant to a draw under the Letter of Credit will be assigned to the Company
and will no longer be subject to the Pooling and Servicing Agreement. Any
subsequent recoveries with respect to such Mortgage Loans will be paid to the
Company and, following notice and, if appropriate, reimbursement of such draw to
the Letter of Credit Bank, the Available Amount under the Letter of Credit (and
the Special Hazard Amount, Fraud Loss Amount or Bankruptcy Amount, if
applicable) will be reinstated to the extent of such recovery.
The Master Servicer, in lieu of maintaining the Letter of Credit,
may reduce the coverage thereunder (including accelerating the manner in which
such coverage is reduced pursuant to the related automatic reductions),
terminate such coverage or obtain and maintain alternate forms of credit support
(including, but not limited to, other letters of credit, insurance policies,
surety bonds, reserve funds, and secured or unsecured corporate guaranties),
with respect to Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses
and Bankruptcy Losses, provided that prior to any such reduction, termination or
substitution the Master Servicer shall have obtained written confirmation from
the Rating Agency that such reduction, termination or substitution will not
adversely affect the then current rating assigned to the Certificates by such
Rating Agency and shall provide a copy of each confirmation to the Trustee. In
the event that the long-term debt obligations of the Letter of Credit Bank are
at any time downgraded by the Rating Agency, the Company may request the Master
Servicer to obtain alternate forms of credit support, in accordance with the
preceding sentence, but the Master Servicer is under no obligation to do so. In
lieu of making a draw under the Letter of Credit for Defaulted Mortgage Losses,
Special Hazard Losses, Fraud Losses or Bankruptcy Losses as provided above, the
Master Servicer, at its sole option, may pay the amount otherwise required to be
drawn, in which case the amount so paid will reduce the related coverage under
the Letter of Credit.
As to any Mortgage Loan which is delinquent in payment by 90 days
or more, the Master Servicer may, at its sole option, purchase such Mortgage
Loan at a price equal to 100% of the unpaid principal balance thereof plus all
accrued and unpaid interest thereon through the last day of the month in which
such purchase occurs. To the extent that the Master Servicer subsequently
experiences losses with respect to such purchased Mortgage Loans which would
have been covered by the Letter of Credit had such Mortgage Loans remained in
the Trust Fund, the Available Amount (and the Special Hazard Amount, Fraud Loss
Amount or Bankruptcy Amount, to the extent that such losses constitute Special
Hazard Losses, Fraud Losses or Bankruptcy Losses) will be reduced by an amount
equal to the entire amount of such losses.
-32-
<PAGE>
The Letter of Credit will expire on ___________, 19__ unless
earlier terminated or extended in accordance with its terms. The Letter of
Credit contains provisions to the effect that on or before the first day of the
sixth month immediately preceding the expiration date a request may be made to
extend the expiration date. It is within the Letter of Credit Bank's sole
discretion whether to agree to such an extension. If, as of the date 30 days
prior to the expiration date, or the expiration date thereof as so extended, a
replacement Letter of Credit or alternate form of credit support has not been
delivered to the Trustee, then, pursuant to the terms of the Pooling and
Servicing Agreement, the entire remaining amount of the Letter of Credit will be
drawn by the Trustee prior to such expiration date. In that event, the amount so
paid will be held by the Trustee in the form of a reserve fund held outside of
the Trust Fund (but pledged to the Trustee and held by it in trust for the
benefit of the Certificateholders), pending the substitution of any other form
of credit support therefor, and will be applied in the same manner as described
herein regarding draws under the Letter of Credit.
LETTER OF CREDIT BANK
The Letter of Credit will be issued by the Letter of Credit Bank,
which will be the ________________, a ________________ _________________
principal executive offices are located at .
____________________ is engaged in a broad range of banking and
financial services activities, including deposit-taking, lending and leasing,
securities brokerage services, investment management, investment banking,
capital markets activities and foreign exchange
transactions.
[Additional disclosure as appropriate.]
The information set forth in the preceding paragraphs concerning
the Letter of Credit Bank has been provided by the Letter of Credit Bank as of
the date hereof.
-33-
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates. This discussion is directed solely to a holder
of a Certificate as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code of 1986 (the "Code") and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. Taxpayers
and preparers of tax returns 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. A holder of a Certificate
is advised to consult its own tax advisors concerning the federal, state, local
or other tax consequences to it of the purchase, ownership and disposition of a
Certificate.
GRANTOR TRUST
CLASSIFICATION OF THE TRUST FUND
Upon issuance of the Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
the Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as an association taxable as a corporation or
as a partnership. Accordingly, a holder of a Certificate generally will be
treated as the owner of an undivided interest in the Mortgage Loans and other
assets held as part of the trust fund in which the Certificates evidence an
undivided interest.
CHARACTERIZATION OF THE INVESTMENT IN THE CERTIFICATES
The Certificates will represent interests in (i)
"qualifying real property loans" within the meaning of Section 593(d) of the
Code; (ii) "loans secured by an interest in real
-34-
<PAGE>
property" within the meaning of Section 7701(a)(19)(C) of the Code; (iii)
"obligations (including any participation or certificate of beneficial ownership
therein) which . . . are principally secured by an interest in real property"
within the meaning of Section 860G(a)(3)(A) of the Code; and (iv) "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code generally in the
same proportion that the assets of the Trust Fund would be so treated. In
addition, interest on the 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.
TAXATION OF OWNERS OF THE CERTIFICATES
A holder of a Certificate generally will be required to
report on its federal income tax returns its share of the entire income from the
Mortgage Loans (including amounts used to pay reasonable servicing fees and
other expenses) in accordance with the holder's normal method of accounting and
will be entitled to deduct its share of any such reasonable servicing fees and
other expenses. Because of market discount or premium, the amount includible in
income on account of the 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 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 a
holder of a Certificate that is subject to the limitations of either Section 67
or Section 68 of the Code may be substantial. Further, a holder of a Certificate
(other than corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income.
MARKET DISCOUNT. A holder of a Certificate may be subject
to the market discount rules of Sections 1276 through 1278 of the Code to the
extent an interest in the Mortgage Loans is considered to have been purchased at
a "market discount", that is, at a purchase price less than its adjusted issue
price. 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 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 the Mortgage Loans that is received by (or, in the case of
an accrual basis holder of a Certificate, due to) the Trust Fund in that month.
A holder of a Certificate may elect to include market discount in income
currently as it accrues (under a constant yield method based on the yield of the
Certificate to such holder) rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such holder during or after the first taxable year
-35-
<PAGE>
to which such election applies. In the absence of such an election, it may be
necessary to accrue such discount under a proportionate method. In addition,
Sections 1271 to 1275 of the Code addressing the treatment of debt instruments
issued with original issue discount (the "OID Regulations") would permit a
holder of a Certificate to elect to accrue all interest, discount (including DE
MINIMIS market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
the Mortgage Loans with market discount, such holder 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 holder acquires
during the taxable year of the election or thereafter, and possibly previously
acquired instruments. Similarly, a holder that made this election for a
Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such holder owns or acquires. Each of these elections to
accrue interest, discount and premium with respect to a Certificate on a
constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Loans should
accrue, at the holder's option: (i) on the basis of a constant yield method, or
(ii) in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining at the beginning of the accrual
period. 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 the Mortgage Loans purchased at a discount in the secondary
market.
Market discount with respect to the Mortgage Loans
generally will be considered to exceed a DE MINIMIS amount if it is greater than
0.25% of the stated redemption price of the Mortgage Loans multiplied by the
number of complete years to maturity remaining after the date of their purchase.
In interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, presumably taking into account the
prepayment assumption used, if any. If market discount is treated as DE MINIMIS
under the foregoing rule, it appears that such market discount 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 market 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 Mortgage Loans.
Further, 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
-36-
<PAGE>
market discount not yet includible in income, unless an election has been made
to report market discount currently as it accrues.
PREMIUM. If a holder of a Certificate is treated as
acquiring the Mortgage Loans at a premium, that is, at a price in excess of
their principal amount, such holder may elect under Section 171 of the Code to
amortize using a constant yield method the portion of such premium allocable to
the Mortgage Loans that were 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 the
Mortgage Loans if an amortization election is not made should be allowed as a
deduction when a principal payment is made (or, for a holder using the accrual
method of accounting, when such payments of stated redemption price are due). A
significant portion of the Mortgage Loans were originated prior to September 28,
1985. Accordingly, such an election shall not be available for premium
attributable to such Mortgage Loans.
SALES OF CERTIFICATES
Except as described below, any gain or loss, recognized
on the sale or exchange of a Certificate, generally will be capital gain or
loss, and will be equal to the difference between the amount realized on the
sale of a Certificate and its adjusted basis. The adjusted basis of a
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller and
reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to the Certificate. The Code as of the
date of this Private Placement Memorandum provides for a top marginal tax rate
applicable to ordinary income of individuals of 39.6% while maintaining a
maximum marginal rate for the long-term gains of individuals of 28%. There is no
such rate differential for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss may be relevant for other
purposes.
Gain or loss from the sale of a 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 any 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 any
Certificate 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 Internal Revenue Service
(the "IRS"), at the time the taxpayer enters into the conversion transaction,
subject to appropriate reduction for prior inclusion
-37-
<PAGE>
of interest and other 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 limitation on 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
The Trustee will furnish to the holders of the
Certificates with each distribution a statement setting forth the amount of such
distribution allocable to principal on the Mortgage Loans and to interest
thereon at the Pass-Through Rate. In addition, the Trustee will furnish, within
a reasonable time after the end of each calendar year, to each person who was a
holder of a Certificate at any time during such year, information regarding the
amount of servicing compensation received by the Master Servicer and Trustee and
such other customary factual information as it deems necessary or desirable to
enable each such person to prepare its tax returns and will furnish comparable
information to the IRS as and when required by law to do so. There is no
assurance the IRS will agree with the Trustee's information reports of such
items of income and expense. Neither the Depositor nor its affiliates will have
any responsibility with respect to the foregoing.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments
of proceeds from the sale of a Certificate, 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
A holder of a Certificate 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 Certificate will not be subject to United States federal income
or withholding tax in respect of a distribution on the Certificate attributable
to Mortgage Loans originated after July 18, 1984, provided that such holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by such holder under penalties of
perjury, certifying that such holder is not a United States person and providing
the name and address of such holder). However, such a holder of a Certificate
will be subject to United States federal income or withholding tax in respect of
distributions of interest on the Certificate attributable to Mortgage Loans were
originated prior to July 18, 1984. A significant portion of the Mortgage Loans
were originated prior to that date and will be subject
-38-
<PAGE>
generally to United States withholding tax in the absence of an applicable tax
treaty exemption. Accordingly, an investment in Certificates may not be suitable
for certain foreign investors.
For these purposes, "United States person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate or trust whose income from sources
without the United States is includible in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. To the extent such 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.
To the extent that interest on the Certificates would be
exempt under Section 871(h)(1) of the Code from U.S. withholding tax, and a
Certificate is not held in connection with a holder's trade or business in the
United States, a Certificate will not be subject to U.S. estate taxes in the
estate of non-resident alien individual.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated ______________, 19__ the Underwriter has agreed to purchase and
the Company has agreed to sell to the Underwriter the Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the 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 Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Certificates, before deducting expenses payable by the
Company, will be _____% of the aggregate principal balance of the Certificates
plus accrued interest thereon from the Cut-off Date. The Underwriter may effect
such transactions by selling the Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Certificates, the Underwriter may be deemed to
have received compensation from the Company in the form of underwriting
compensation. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Certificates may be deemed to be
underwriters and any profit
-39-
<PAGE>
on the resale of the 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 will
indemnify the Underwriter, and under limited circumstances the Underwriter 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
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the 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 Certificates and the status of
the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Company is not aware of any source through which
price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed
upon for the Company by _____________________ and for the Underwriter by
_________________________.
RATING
It is a condition to the issuance of the Certificates that they be
rated not lower than "___" by _________________________ ___________.
The ratings of _______ on mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
on the underlying mortgage loans to which they are entitled. _______ ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. _______ ratings on
pass-through certificates do not represent any assessment of the Master
Servicer's [or the related Subservicer's] ability to purchase Converting
Mortgage Loans, or the Master Servicer's ability to purchase Converted Mortgage
Loans. In the event that neither the related Subservicer nor the Master Servicer
purchases a Converting or Converted Mortgage Loan, investors might suffer a
lower than anticipated yield. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
-40-
<PAGE>
The Company has not requested a rating on the Certificates by any
rating agency other than _______. However, there can be no assurance as to
whether any other rating agency will rate the 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
rating assigned to the Certificates by _______.
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 rating
initially assigned to the Certificates is subsequently lowered for any reason,
no person or entity is obligated to provide any additional support or credit
enhancement with respect to the Certificates.
LEGAL INVESTMENT
The Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in at least the second highest rating
category by one of the Rating Agencies, and, as such, are legal investments for
certain entities to the extent provided in SMMEA. SMMEA provides, however, that
states could override its provisions on legal investment and restrict or
condition investment in mortgage related securities by taking statutory action
on or prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
The Company makes no representations as to the proper
characterization of the Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase the Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the 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
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
-41-
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give
any information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
--------------
TABLE OF CONTENTS
PAGE
Prospectus Supplement
Summary.............................................. S-
Description of the Mortgage Pool..................... S-
Description of the Certificates...................... S-
Certain Yield and Prepayment
Considerations.................................. S-
Pooling and Servicing Agreement...................... S-
Certain Federal Income Tax
Consequences.................................... S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Rating............................................... S-
Legal Investment..................................... S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Mortgage Pools...................................
Servicing of Mortgage Loans..........................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Purchase Obligations.................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................
The Company..........................................
Southern Pacific Funding Corporation.................
The Pooling Agreement................................
Yield Considerations.................................
Maturity and Prepayment
Considerations..................................
Certain Legal Aspects of Mortgage
Loans ..........................................
Certain Federal Income Tax
Consequences....................................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Principal Definitions.......................
================================================================================
================================================================================
SOUTERH PACIFIC SECURED
ASSETS CORP.
$__________________
Mortgage Pass-Through
Certificates
Series 199_-____
-------------
PROSPECTUS SUPPLEMENT
-------------
-------------------------------------
____________, 19__
================================================================================
<PAGE>
VERSION 3
=========
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Subject to Completion
Preliminary Prospectus Supplement Dated September 21, 1998
Prospectus Supplement
(To Prospectus Dated ____________, 19__)
$________________
Southern Pacific Secured Assets Corp.
Company
Southern Pacific CMN Trust 19__-___
[Name of Master Servicer]
Master Servicer
Collateralized Mortgage Notes, Series 19__-___
The Southern Pacific CMN Trust 19__ (the "Issuer") will be formed
pursuant to a Trust Agreement to be dated as of _________________, 19__ between
Southern Pacific Secured Assets Corp. (the "Company") and _____________________,
the Owner Trustee. The Issuer will issue $__________ aggregate principal amount
of Collateralized Mortgage Notes, Series 19__- ____ (the "Notes"). The Notes
will be issued pursuant to an Indenture to be dated as of _________________,
19__, between the Issuer and ___________________, the Indenture Trustee. The
Issuer will also issue $___________ aggregate principal amount of the Issuer's
Trust Certificates, Series 19__-____ (the "Certificates"). The Notes and the
Certificates are collectively referred to herein as the "Securities". Only the
Notes are offered hereby.
The Notes will represent indebtedness of the related trust fund (the
"Trust Fund") created by the Trust Agreement. The Trust Fund consists of
adjustable-rate, conventional, residential, one- to four-family first lien
mortgage loans (the "Mortgage Loans"). In addition, the Notes will have the
benefit of an irrevocable and unconditional financial guaranty insurance policy
(the "Policy") issued by _______________ (the "Insurer") as described under "The
Policy" herein.
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully herein.
Payments of principal and interest on the Notes will be made on the
_______ day of each month or, if such day is not a business day, then on the
next business day, commencing on ____________, 19__ (each, a "Payment Date"). As
described herein, interest will accrue on the Notes at a floating rate (the
"Note Rate") equal to [LIBOR (as defined herein)] plus _____% per annum subject
to certain limitations as described herein. See "Description of the
Securities--Interest on the Notes" herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE S-__ HEREIN AND ON PAGE 11 IN THE ACCOMPANYING
PROSPECTUS.
S-1
<PAGE>
It is a condition of the issuance of the Notes that they be rated "___"
by ___________________ and "____" by ___________________.
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, LIQUIDATIONS AND REPURCHASES) ON
THE MORTGAGE LOANS. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND
"YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
There is currently no secondary market for the Notes.
____________________ (the "Underwriter") intends to make a secondary market in
the Notes, but is not obligated to do so. There can be no assurance that a
secondary market for the Notes will develop or, if it does develop, that it will
continue. The Notes will not be listed on any securities exchange.
THE NOTES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, OR ANY OF
THEIR AFFILIATES. NONE OF THE NOTES OR 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 Notes will be purchased from the Company by the Underwriter and
will be offered by the Underwriter 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 Notes are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $_______.
The Notes are offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
other conditions. The Underwriter reserves 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 Notes will be made on or about ____________, 19__ [in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein,] [at the office of __________________,
_______________, _________________] against payment therefor in immediately
available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
S-2
<PAGE>
THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE COMPANY'S
PROSPECTUS DATED ____________, 19__, 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 SECURITIES 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 SECURITIES, 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER- ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Issuer...........................The Notes will be issued by Southern Pacific
CMN Trust 19__-___, a Delaware business trust
established pursuant to the Trust Agreement,
dated as of ________ 1, 19__ between the
Company and the Owner Trustee.
The Notes........................$____________ Collateralized Mortgage Notes,
Series 19__-__. Only the Notes are offered
hereby. The Notes will be issued pursuant to an
Indenture, dated as of ________ 1, 19__ between
the Issuer and ___________________, as
Indenture Trustee.
Company..........................Southern Pacific Secured Assets Corp., (the
"Company"). See "The Company" in the
Prospectus.
Master Servicer..................[Name of Master Servicer] (the "Master
Servicer"). See "[Name of Master Servicer]" in
the Prospectus.
Owner Trustee...................._______________, ___________.
Indenture Trustee................_______________, ___________.
Delivery Date....................On or about ____________, 19__.
Payment Date.....................The [______] day of each month (or, if such day
is not a business day, the next business day),
beginning on ___________________, 199___,
(each, a "Payment Date").
[Denominations and
Registration.....................The Notes (the "Book-Entry Notes") will be
issued, maintained and transferred on the
book-entry records of DTC and its Participants
(as defined in the Prospectus). The Notes will
be offered in registered form, in minimum
denominations of $______ and integral multiples
of $_____ in excess thereof. The Book-Entry
Notes will be represented by one or more Notes
registered in the name of Cede & Co., as
nominee of DTC. No Beneficial Owner will be
entitled to receive a Note in fully registered,
certificated form (a "Definitive Note"),
S-4
<PAGE>
except under the limited circumstances
described herein. See "Description of the
Notes--Book Entry Notes" herein.]
The Mortgage Pool................The Mortgage Loans are secured by first liens
on one- to four- family residential real
properties (each, a "Mortgaged Property"). The
Mortgage Loans have individual principal
balances at origination of at least $______ but
not more than $_________ with an average
principal balance at origination of
approximately $_________. The Mortgage Loans
have terms to maturity of __ years from the
date of origination and a weighted average
remaining term to stated maturity of
approximately ____ years and __ months as of
the Cut-off Date. The Mortgage Rate on each
Mortgage Loan will adjust semi-annually on its
Adjustment Date (as defined herein), with
corresponding adjustments in the amount of
monthly payments, to equal the sum (rounded as
described herein) of the Index described below
and a fixed percentage set forth in the related
Mortgage Note (the "Note Margin"). However, (i)
on any Adjustment Date such Mortgage Rate may
not increase or decrease by more than 2% (the
"Periodic Rate Cap"), (ii) over the life of
such Mortgage Loan, such Mortgage Rate may not
exceed the related maximum Mortgage Rate (such
maximum Mortgage Rate is equal to the Mortgage
Rate at origination plus a lifetime rate cap
(the "Lifetime Rate Cap")), which maximum
Mortgage Rates will range from ______% to
______% and (iii) with respect to approximately
____% of the Mortgage Loans, by aggregate
principal balance as of the Cut- off Date, over
the life of such Mortgage Loan, such Mortgage
Rate may not be lower than the minimum Mortgage
Rate. The difference between the Mortgage Rate
on each Mortgage Loan at origination and the
minimum Mortgage Rate on such Mortgage Loan
will equal the lifetime rate floor (the
"Lifetime Rate Floor"). The minimum Mortgage
Rates will range from _____% to ______% per
annum. The Mortgage Loans will bear interest at
Mortgage Rates of at least _____% per annum but
not more than ______% per annum, as of the
Cut-off Date. For a further description of the
Mortgage Loans, see "Description of the
Mortgage Pool" herein.
The Index........................As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the related Mortgage Rate will
be a rate equal to the monthly weighted average
cost of funds for members of the Federal Home
Loan Bank of San Francisco as most recently
available 45 days prior
S-5
<PAGE>
to the Adjustment Date (the "Cost of Funds
Index" or "Index").
Interest Payments ...............Interest on the Notes will be paid monthly on
each Payment Date, commencing in 19__, at the
Note Interest Rate for ------ the related
Interest Period (as defined below). The Note
Interest Rate for an Interest Period will be
equal to LIBOR plus ___% as described herein
under "Description of the Notes--Interest on
the Notes." Interest on the Notes in respect of
any Payment Date will accrue from the preceding
Payment Date (or in the case of the first
Payment Date, from the date of initial issuance
of the Notes (the "Closing Date") through the
day preceding such Payment Date (each such
period, an "Interest Period")) on the basis of
the actual number of days in the Interest
Period and a 360-day year.
Principal Payments ..............On any Payment Date, to the extent of funds
available therefor, Noteholders will be
entitled to receive principal payments
generally equal to the amount, if any,
necessary to bring the Outstanding Reserve
Amount up to the Reserve Amount Target. In no
event will principal payments on the Notes on
any Payment Date exceed the Note Principal
Balance thereof on such date. On the Payment
Date in __________, principal will be due and
payable on the Notes in an amount equal to the
Note Principal Balance for such Payment Date.
The "Note Principal Balance" of the Notes on
any day is the initial balance thereof as of
the Closing Date reduced by all payments of
principal thereon as of such day.
P&I Collections..................All collections on the Mortgage Loans will be
allocated by the Master Servicer in accordance
with the terms of the Mortgage Loans between
amounts collected in respect of interest and
amounts collected in respect of principal. See
"Description of the Servicing Agreement--P&I
Collections" herein, which describes the
calculation of the Interest Collections and the
Principal Collections on the Mortgage Loans for
the Collection Period related to each Payment
Date.
With respect to any Payment Date, the portion
of Principal Collections and Interest
Collections that are distributable pursuant to
the Servicing Agreement (together, the "P&I
Collections") will equal (a) Interest
Collections for such
S-6
<PAGE>
Payment Date and (b) Principal Collections for
such Payment Date.
Outstanding Reserve
Amount...........................The distribution of the Additional Principal
Distribution Amount, if any, on the Mortgage
Loans will create the Outstanding Reserve
Amount. The Outstanding Reserve Amount, if any,
will be available to absorb any Liquidation
Loss Amounts that are allocated to the Mortgage
Loans and not covered by Principal Collections
and Interest Collections. Any Liquidation Loss
Amounts allocable to the Noteholders and not
covered by such overcollateralization will be
covered by draws on the Policy to the extent
provided herein. The "Outstanding Reserve
Amount" on any Payment Date is the amount, if
any, by which the Pool Balance as of the end of
the related Collection Period exceeds the Note
Principal Balance on such day (after giving
effect to all distributions on such Payment
Date).
As of the Closing Date, the Reserve Amount
Target is equal to ___% of the Cut-Off Date
Pool Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant
to the terms of the Pooling and Servicing
Agreement, with the consent of the Rating
Agencies and the Indenture Trustee. To the
extent the Reserve Amount Target is reduced on
any Payment Date, the amount of the Principal
Collections distributed on such Payment Date
will be reduced and on each subsequent Payment
Date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding
Reserve Amount equals the Reserve Amount
Target.
Insurer..........................______________. See "The Insurer" herein.
Policy...........................On the Closing Date, the Insurer will issue a
Policy in favor of the [Indenture Trustee on
behalf of the Issuer]. The Policy will
unconditionally and irrevocably guarantee
principal payments on the Notes plus accrued
and unpaid interest due on the Notes. The
Policy will not guarantee payments on the
Certificates. On each Payment Date, a draw will
be made on the Policy to cover (a) any
shortfall in amounts available to make payments
of interest on the outstanding Note Principal
Balance of the Notes and (b) the amount, if
any, [by which the
S-7
<PAGE>
Note Principal Balance of the Notes exceeds the
Pool Balance at the end of the related
Collection Period]. In addition, the Policy
will guarantee the payment of the outstanding
Note Principal Balance of each Note on the
Payment Date in _______ (after giving effect to
all other amounts distributable and allocable
to principal on such Payment Date). See "The
Policy" herein and "Description of Credit
Enhancement" in the Prospectus.
The Certificates.................$________ Trust Certificates, Series 19__-__.
The Certificates will be issued pursuant to the
Trust Agreement and will represent the
beneficial ownership interest in the Issuer.
The Certificates are not offered hereby.
Final Payment of Principal on
the Notes.......................The Notes will be payable in full on . In
addition, the Issuer will pay the Notes in full
upon the exercise by the [Master Servicer] of
its option to purchase all Mortgage Loans and
all property acquired in respect of such
Mortgage Loans. See "The
Agreements--Termination; Redemption of Notes"
in the Prospectus.
Federal Income Tax
Consequences....................In the opinion of Tax Counsel (as defined in
the Prospectus), for federal income tax
purposes, the Notes will be characterized as
indebtedness of the Issuer and the Issuer, as
created pursuant to the terms and conditions of
the Trust Agreement, will not be characterized
as an association (or publicly traded
partnership) taxable as a corporation or as a
taxable mortgage pool within the meaning of
section 7701(i) of the Code.
For further information regarding certain
federal income tax consequences of an
investment in the Notes see "Federal Income Tax
Consequences" herein and "Federal Income Tax
Consequences" and "State and Other Tax
Consequences" in the Prospectus.
Legal Investment.................So long as the Notes are rated in the top two
rating agencies, the Notes will constitute
"mortgage related securities" for purposes of
SMMEA. See "Legal Investment Considerations"
herein.
S-8
<PAGE>
Rating...........................It is a condition to the issuance of the Notes
that they be rated "____" by and "____" by
(each a "Rating --------- -------------
Agency"). 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.
See "Certain Yield and Prepayment
Considerations" and "Ratings" herein.
S-9
<PAGE>
[RISK FACTORS]
[Prospective Noteholders 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 Notes:]
[Appropriate Risk Factors as necessary. Possible Risk Factors based on present
disclosure include the following:
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately _____% of the Mortgage 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 (such Mortgage Loans, "Delinquent
Mortgage Loans") as of the Cut-off Date. Prospective investors in the Notes
should be aware, however, that only approximately _____% of the Mortgage Loans
(by aggregate principal balance as of the Cut-off Date), had a first Monthly
Payment due on or before ______ _, 1996, and therefore, the remaining Mortgage
Loans could not have been Delinquent Mortgage Loans as of the Cut-off Date.
Approximately _____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date), are secured by Mortgaged Properties
located in the State of California. Property values of residential real estate
in California have declined in recent years. If the California residential real
estate market should continue to experience an overall decline in property
values after the dates of origination of the Mortgage Loans, the rates of
delinquency, foreclosure, bankruptcy and loss on the Mortgage Loans may be
expected to increase, and may increase substantially, as compared to such rates
in a stable or improving real estate market.
In addition, ___% of the Mortgage Loans are secured by Mortgaged
Properties located in Orange County, California. On December 6, 1994, Orange
County filed for protection under Chapter 9 of the United States Bankruptcy
Code. If public services are curtailed as a result of Orange County's financial
difficulties, property values in the related market area may be adversely
affected.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, adjustable-rate, fully-amortizing,
first lien Mortgage Loans with terms to maturity of not more than ___ years from
the due date of the first monthly payment. On or before the Delivery Date, the
Company will acquire the Mortgage Loans to be included in the Mortgage Pool from
_______________ and ________________ (the "Sellers"). The Sellers will make
certain
S-10
<PAGE>
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
and 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 Noteholders. Neither
the Company nor any other entity or person will have any responsibility to
purchase or replace any Mortgage Loan if a Seller is obligated but fails to do
so. See "Description of the Mortgage Pool--Representations by Sellers" and
"Description of the Notes--Assignment of Trust Fund Assets" in the Prospectus
and "--The Seller" below. The Mortgage Loans will have been originated or
acquired by the [Sellers] in accordance with the underwriting criteria described
herein. See "--Underwriting" below. All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank of San Francisco
(the "FHLB of San Francisco") as published by the FHLB of San Francisco (the
"Cost of Funds Index" or "Index") and as most recently available as of the day
45 days prior to such Adjustment Date or, in the event that such Index is no
longer available, an index selected by the Master Servicer and reasonably
acceptable to the Trustee that is based on comparable information, and (b) the
related Note Margin, subject to the following limitations. The Mortgage Rate on
the Mortgage Loan on any Adjustment Date may not increase or decrease by more
than the Periodic Rate Cap applicable to such Mortgage Loan and, over the life
of such Mortgage Loan, generally may not exceed the Mortgage Rate at origination
plus the Lifetime Rate Cap, or be less than the Mortgage Rate at origination
minus any Lifetime Rate Floor, applicable to such Mortgage Loan. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization. Effective with the first payment due
date on a Mortgage Loan after an Adjustment Date therefor, the monthly principal
and interest payment will be adjusted to an amount that will fully amortize the
then outstanding principal balance of such Mortgage Loan at its stated maturity
and pay interest at the adjusted Mortgage Rate. Because the amortization
schedule of each Mortgage Loan will be recalculated semi-annually, any partial
prepayments thereof will not reduce the term to maturity of such Mortgage Loan.
An increase in the Mortgage Rate on a Mortgage Loan will result in a larger
monthly payment and in a larger percentage of such monthly payment being
allocated to interest and a smaller percentage being allocated to principal, and
conversely, a decrease in the Mortgage Rate on the Mortgage Loan will result in
a lower monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.
S-11
<PAGE>
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
The Wall Street Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
COST OF FUNDS INDEX
Month 1990 1991 1992 1993 1994 1995 1996 1997
===== ==== ==== ==== ==== ==== ==== ==== ====
January.................
February................
March...................
April...................
May.....................
June....................
July....................
August..................
September...............
October.................
November................
December................
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. Mortgage Loans that have the same
initial Mortgage Rate may not always bear interest at the same Mortgage Rate
because the Mortgage Loans may have different Adjustment Dates (and
S-12
<PAGE>
the Mortgage Rate therefore may reflect different Index values), different Note
Margins, different Lifetime Rate Caps and different Lifetime Rate Floors, if
any.
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans.........................
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (1):
Weighted Average.............................
Range........................................
Weighted Average Months to Next Adjustment Date after ____________, 19__
(2)......
=====
(1) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(2) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage Loans having such characteristics
relative to the aggregate principal balance of all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately ____ years and __
months. The weighted average
S-13
<PAGE>
Adjustment Date of the Mortgage Loans in the Mortgage Pool next
following the Cut-off Date is ____________, 19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to-Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loan- to-Value Ratio at origination of the
Mortgage Loans in the Mortgage Pool which were underwritten under such
reduced loan documentation program will be approximately ____% and no
more than approximately ____% of such Mortgage Loans will be secured by
Mortgaged Properties located in California. See "Servicing
Agreement--The Master Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
S-14
<PAGE>
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
<TABLE>
<CAPTION>
MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
=============== ============== ================= =============
<S> <C> <C> <C>
Total..................
</TABLE>
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- ----- ------- ---- -----
<S> <C> <C> <C> <C>
Total, Average or Weighted Average................. _______ $____________ ________% _______%
</TABLE>
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Notes on or before the time of issuance of such
Notes. If not included in the Prospectus Supplement, such information will be
included in the Form 8-K.]
UNDERWRITING
S-15
<PAGE>
[Underwriting standards as appropriate.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
[See Version 1 of Prospectus Supplement].
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
Notes, Mortgage Loans may be removed from the Mortgage Pool as a result of
incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. 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 Notes are issued
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of
the Notes and will be filed, together with the Servicing Agreement, the Trust
Agreement and the Indenture, with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Notes. 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.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage
Loans" in the Prospectus.
THE ISSUER
GENERAL
The Southern Pacific CMN Trust 19_-_, is a business trust formed
under the laws of the State of [Delaware] pursuant to the Trust Agreement dated
as of _____ 1, 19__ between the Company and ________________, as the Owner
Trustee for the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State of
[Delaware] relating to business trusts. After its formation, the Issuer will not
engage in any activity other than (i) acquiring the Mortgage Loans and the other
assets of the Issuer and proceeds therefrom and pledging them to the Indenture
Trustee, (ii) issuing the Notes and the Certificates, (iii) making payments on
the Notes and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The assets of the Issuer will consist of the Mortgage Loans and
certain related assets.
S-16
<PAGE>
The Issuer's principal offices are in ___________, Delaware, in
care of ________________, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
_______________ is the Owner Trustee under the Trust Agreement.
__________________ is a [Delaware] banking corporation and its principal offices
are located at _____________________.
Neither the Owner Trustee nor any director, officer or employee of
the Owner Trustee will be under any liability to the Issuer or the Noteholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INSURER
[Insert Description of Insurer as Appropriate.]
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of
________, between the Issuer and _________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
____________, between the Company and _____________, as Owner Trustee. The
following summaries describe certain provisions of the Securities, the Indenture
and the Trust Agreement. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the applicable agreement. Only the Notes are offered hereby.
The Notes will be secured by the Trust Fund pledged by the Issuer
to the Indenture Trustee pursuant to the Indenture which will consist of: (i)
the Mortgage Loans; (ii) collections in respect of principal of the Mortgage
Loans received after the applicable Cut-Off Date and collections in respect of
interest on the Mortgage Loans from the Cut-Off Date relating to the Mortgage
Loan; (iii) the amounts on deposit in the Custodial Account allocated to the
Mortgage Loans and the Payment Account (excluding net earnings thereon); (iv)
the Policy; (v) certain hazard insurance policies maintained by the Mortgagors
or by or on behalf of the Master Servicer
S-17
<PAGE>
or related subservicer in respect of the Mortgage Loans and (vi) an assignment
of the Company's rights under the Purchase Agreement and the Servicing
Agreement.
The Notes will be issued in denominations of $1,000 and integral
multiples in excess thereof. See "--Book-Entry Securities" below.
BOOK-ENTRY SECURITIES
General. Beneficial Owners (as defined in the Prospectus) 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 Book-Entry Securities may do so only through Participants and
Intermediaries. In addition, Beneficial Owners will receive all payments of
principal of and interest on the related Book-Entry Securities 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 Securities are issued for the related Book-Entry Securities, it
is anticipated that the only registered Noteholder of such Book-Entry Securities
will be Cede, as nominee of DTC. Beneficial Owners will not be recognized by the
Indenture Trustee or the Master Servicer as Noteholders, as such term is used in
the Indenture, and Beneficial Owners will be permitted to receive information
furnished to Noteholders and to exercise the rights of Noteholders 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 Book-Entry Securities among Participants and to receive and
transmit payments of principal of, and interest on, such Book-Entry Securities.
Participants and Intermediaries with which Beneficial Owners have accounts with
respect to such Book-Entry Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
physical certificates evidencing their interests in the Book-Entry Securities,
the Rules provide a mechanism by which Beneficial Owners, through their
Participants and Intermediaries, will receive payments and will be able to
transfer their interests in the Book-Entry Securities.
None of the Company, the Master Servicer, the Insurer or the
Indenture Trustee will have any liability for any actions taken by DTC or its
nominee, including, without limitation, actions for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Book-Entry Securities held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Definitive Securities. Definitive Securities 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 Securities--Form of Securities."
S-18
<PAGE>
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," the
Indenture Trustee is required to notify, through DTC, Participants who have
ownership of Book-Entry Securities as indicated on the records of DTC of the
availability of Definitive Securities for their Book-Entry Securities. Upon
surrender by DTC of the definitive certificates representing the Book-Entry
Securities and upon receipt of instructions from DTC for re-registration, the
Indenture Trustee will reissue the Book-Entry Securities as Definitive
Securities issued in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Securities as Noteholders under the Indenture.
For additional information regarding DTC and the Book-Entry
Securities, see "Description of the Notes--Form of Notes" in the Prospectus.]
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the _____ day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in __________. Payments
on the Notes will be made to the persons in whose names such Notes are
registered at the close of business on the day prior to each Payment Date or, if
the Notes are no longer Book-Entry Securities, on the Record Date. See
"Description of the Notes--Payments" in the Prospectus. Payments will be made by
check or money order mailed (or upon the request of a Holder owning Notes having
denominations aggregating at least $_________, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Securities, will be DTC or its nominee) as it appears on the Security Register
in amounts calculated as described herein on the Determination Date. However,
the final payment in respect of the Notes will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A "Business Day" is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the State of ___________ are required or authorized by law to be
closed.
INTEREST ON THE NOTES
Interest payments will be made on the Notes on each Payment Date
at the Note Rate for the related Interest Period. The "Note Rate" for an
Interest Period will generally equal the sum of [(a) LIBOR determined as
specified herein, as of the second LIBOR Business Day prior to the first day of
such Interest Period (or as of two LIBOR Business Days prior to the Closing
Date, in the case of the first Interest Period)] plus (b) ___% per annum.
Notwithstanding the foregoing, in no event will the Note Rate on any Payment
Date exceed a rate equal to the weighted average of the Loan Rates (net of the
applicable Servicing Fee Rate) (adjusted to an effective rate reflecting accrued
interest calculated on the basis of the actual number of days in the Collection
Period commencing in the month in which such Interest Period commences and a
year assumed to consist of 360 days).
S-19
<PAGE>
Interest on the Notes in respect of any Payment Date will accrue
on the applicable Note Principal Balance from the preceding Payment Date (or in
the case of the first Payment Date, from the Closing Date) through the day
preceding such Payment Date (each such period, an "Interest Period") on the
basis of the actual number of days in the Interest Period and a 360-day year.
Interest payments on the Notes will be funded from P&I Collections [and with
respect to the Notes, if necessary, from draws on the Policy.
[On each Payment Date, LIBOR shall be established by the Indenture
Trustee and as to any Interest Period, LIBOR 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 the second LIBOR Business Day prior to
the first day of such Interest Period. "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 LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Master Servicer), 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 _________) as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Note Principal Balance then outstanding. The
Indenture Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee after consultation with the
Master Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the Note Principal Balance then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Payment Date.
"LIBOR Business Day" means any day other than (i) a Saturday or a Sunday or (ii)
a day on which banking institutions in the State of [New York] or in the city of
London, England are required or authorized by law to be closed.]
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Payment Date in _________,
principal payments except as provided below will be due and payable on the Notes
in an amount equal to the Principal Collection Distribution Amount (as defined
below) for such Payment Date, together with any Liquidation Loss Amounts. On the
Payment Date in ______, principal will be due and payable on the Notes in
amounts equal to the Note Principal Balance on such Payment Date. In no event
will principal payments on the Notes on any Payment Date exceed the Note
Principal Balance thereof on such date.
S-20
<PAGE>
ALLOCATION OF P&I COLLECTIONS
The Master Servicer on behalf of the Issuer will establish an
account (the "Distribution Account") into which the Master Servicer will deposit
P&I Collections for each Payment Date on the Business Day prior thereto. The
Distribution Account will be an Eligible Account. Amounts on deposit in the
Distribution Account will be invested in Eligible Investments maturing on or
before the Business Day prior to the related Payment Date.
On each Payment Date, P&I Collections will be allocated from the
Distribution Account in the following order of priority:
(i) to the Notes, the sum of the following:
(a) as payment for the accrued interest due and
any overdue accrued interest at the Note Rate (as defined herein)
on the Note Principal Balance (as defined herein) of the Notes;
(b) an amount equal to the Principal Collection
Distribution Amount, applied to reduce the Note Principal Balance
of the Notes; and
(c) an additional amount to be applied to reduce
the Note Principal Balance (each such amount, a "Additional
Principal Distribution Amount"), to the extent necessary to bring
the Outstanding Reserve Amount up to the Reserve Amount Target;
and
(ii) to the Insurer, the aggregate of all payments, if any,
made by the Insurer under the Policy [and any other amounts].
(iii) as payment for the premium for the Policy;
(iv) to reimburse prior draws made on the Policy (with
interest thereon);
(v) any other amounts owed to the Insurer pursuant to the
Insurance Agreement; and
(vi) the remaining amount, if any, of the P&I Collections
shall be allocated to the Certificates.
For any Payment Date, the "Principal Collection Distribution
Amount" will equal Principal Collections for such Payment Date.
"Liquidation Loss Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof at the end of the
related Collection Period in which such
S-21
<PAGE>
Mortgage Loan became a Liquidated Mortgage Loan, after giving effect to the Net
Liquidation Proceeds allocable to such Principal Balance in connection
therewith.
A "Liquidated Mortgage Loan" means, as to any Payment Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Servicing Agreement, as of the end of
the preceding Collection Period that all liquidation proceeds which it expects
to recover with respect to the disposition of the related
Mortgaged Property have been recovered.
As of the Closing Date, the Reserve Amount Target is equal to at
least ___% of the Cut-Off Date Pool Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant to the terms of the Pooling and
Servicing Agreement, with the consent of the Rating Agencies and the Indenture
Trustee. To the extent the Reserve Amount Target is reduced on any Payment Date,
the amount of the Principal Collections distributed pursuant to clause (ii)(b)
will be reduced on such Payment Date and on each subsequent Payment Date to the
extent the remaining Outstanding Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding Reserve Amount equals the Reserve
Amount Target.
The Indenture Trustee will establish the Payment Account into
which the Master Servicer will deposit the portion of the P&I Collections
allocable to the Mortgage Loan for each Payment Date on the Business Day prior
thereto. The Payment Account will be an Eligible Account. Amounts on deposit in
the Payment Account will be invested in Eligible Investments maturing on or
before the Business Day prior to the related Payment Date.
The "Note Principal Balance" of the Notes on any day is the
initial principal balance thereof as of the Closing Date, reduced by all
payments of principal thereon as of such day.
Except as provided below, payments pursuant to clause (i) will be
allocated to the Notes based on the amount of interest such Note is entitled to
receive pursuant to such clause. Except as provided below, payments pursuant to
clauses (ii), (iii) and (vi) will constitute payments
of principal.
An "Amortization Event" will be deemed to occur upon (i) the
occurrence of certain events relating to a violation of the Seller's obligations
under the Mortgage Loan Purchase Agreement, (ii) the occurrence of certain
events of bankruptcy, insolvency or receivership relating to the Seller or the
Master Servicer, (iii) the Issuer becomes subject to regulation as an investment
company within the meaning of the Investment Company Act of 1940, as amended, or
(iv) the aggregate of all draws under the Policy exceeds __________;
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller, the conservator, receiver or
trustee-in-bankruptcy may have the power to prevent the commencement of the
Amortization Period.
OUTSTANDING RESERVE AMOUNT
S-22
<PAGE>
The distribution of the Additional Principal Distribution Amount,
if any, to the Noteholders, will create the Outstanding Reserve Amount. The
Outstanding Reserve Amount, if any, will be available to absorb any Liquidation
Loss Amounts that are allocated to the Mortgage Loans and not covered by
Principal Collections and Interest Collections. Any Liquidation Loss Amounts
allocable to the Noteholders and not covered by such overcollateralization will
be covered by draws on the Policy to the extent provided herein. The
"Outstanding Reserve Amount" on any Payment Date is the amount, if any, by which
the Pool Balance as of the end of the related Collection Period exceed the Note
Principal Balance on such day (after giving effect to all amounts payable and
allocable to principal on the Notes that are applied to reduce the Note
Principal Balance on such Payment Date).
To the extent that such overcollateralization is insufficient or
not available to absorb Liquidation Loss Amounts, and payments are not made
under the Policy, a Noteholder may incur
a loss.
THE PAYING AGENT
The Paying Agent shall initially be the [Indenture Trustee],
together with any successor thereto. The Paying Agent shall have the revocable
power to withdraw funds from the Payment Account for the purpose of making
payments to the Securityholders.
MATURITY
The Notes will be payable in full on ___________. In addition, the
Issuer will pay the Notes in full upon the exercise by the Master Servicer of
its option to purchase the assets of the Issuer after the Pool Balance is
reduced to an amount less than or equal to $________ (___% of the initial Pool
Balance). The purchase price will be equal to the sum of the outstanding Pool
Balance and accrued and unpaid interest thereon at the weighted average of the
Loan Rates through the day preceding the Payment Date on which the Notes are
paid in full together with all amounts due and owing to the Insurer.
DESCRIPTION OF THE POLICY
On the Closing Date, the Insurer will issue the Policy in favor of
the [Owner Trustee on behalf of the Issuer] pursuant to an insurance agreement
(the "Insurance Agreement") between the Insurer, the Master Servicer and the
Trustee. The Policy will unconditionally and irrevocably guarantee principal
payments on the Notes plus accrued and unpaid interest due on the Notes. On each
Payment Date, a draw will be made on the Policy equal to the sum of (a) the
amount by which the sum of interest accrued at (i) the Note Rate on the
outstanding Note Principal Balance of the Notes and (b) the amount (the
"Guaranteed Principal Payment Amount"), if any, [by which the Note Principal
Balance of the Notes exceeds the sum of the Pool Balance at the end of the
related Collection Period (after giving effect to all amounts paid and allocable
to principal on the Notes that are applied to reduce the Note Principal Balances
on such Payment Date)]. Pursuant
S-23
<PAGE>
to the terms of [the Indenture], draws under the Policy in respect of the
Guaranteed Principal Payment Amount will be paid on the Notes by the Indenture
Trustee, as principal pro rata, based on the outstanding Note Principal Balances
thereof. In addition, the Policy will guarantee the payment of the outstanding
Note Principal Balance of each Note on the Payment Date in _____________ (after
giving effect to all other amounts paid and allocable to principal on such
Payment Date). In the absence of payments under the Policy, Noteholders will
directly bear the credit and other risks associated with their investment to the
extent such risks are not covered by overcollateralization. The Policy does not
guarantee any payments to the Certificates.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity of the Notes will depend on the price paid
by the holder for such Note, the Note Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on
the Mortgage Loans and the allocation thereof.
In general, if a Note is purchased at a premium over its face
amount and payments of principal on such Note 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 Note
is purchased at a discount from its face amount and payments of principal on
such Note 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 rate and timing 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 Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by overcollateralization or the Policy,
losses resulting from default by Mortgagors may be allocated to the Notes. See
"Risk Factors--Limitations, Reduction and Substitution of Credit Enhancement" in
the Prospectus. Even where the Policy covers all losses incurred on the Mortgage
Loans, the effect of losses may be to increase prepayment experience on the
Mortgage Loans, thus reducing average weighted life and affecting yield to
maturity.
[With respect to ___ Mortgage Loans representing ___% of the
Cut-off Date Pool Balance, the Mortgage Rate at origination is below the rate
that would result from the sum of the then-applicable Index and Gross Margin.
Under the applicable underwriting standards, Mortgagors under such Mortgage
Loans are generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Mortgage
Loan may thus be dependent on the ability of the mortgagor to make larger
interest payments following the adjustment of the Mortgage Rate.]
With respect to the Mortgage Loans required minimum monthly
payments are equal to [the amount of interest currently accruing thereon,] and
therefore are not expected to
S-24
<PAGE>
significantly amortize the outstanding principal amounts of the Mortgage Loans
prior to maturity. As a result, a borrower will generally be required to pay a
substantial principal amount at the maturity of a Mortgage Loan. Such Mortgage
Loans pose a greater risk of default than fully-amortizing mortgage loans,
because the Mortgagor's ability to make such a substantial payment at maturity
will generally depend on the Mortgagor's ability to obtain refinancing of the
Mortgage Loans or to sell the Mortgaged Property prior to the maturity of the
Mortgage Loan. See "Yield and Prepayment Considerations" in the Prospectus and
"Risk Factors" herein.
There can be no assurance as to the rate of principal payments on
the Mortgage Loans. The rate of principal payments may fluctuate substantially
from time to time.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Issuer by the Company
were or will be purchased by the Company from [Name of Master Servicer] (the
"Seller") pursuant to the Purchase Agreement. Under the Purchase Agreement, the
Seller has agreed to transfer to the Company the Initial Mortgage Loans.
Pursuant to an assignment by the Company executed on the Closing Date, upon such
transfer to the Company, the Initial Mortgage Loans will be transferred by the
Company to the Issuer, as well as the Company's rights in, to and under the
Purchase Agreement, which will include the right to purchase the Subsequent
Mortgage Loans. The following summary describes certain terms of the form of the
Purchase Agreement and is qualified in its entirety by reference to the form of
Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and
assign to the Company all of its right, title and interest in and to the
Mortgage Loans, the related mortgage note, mortgages and other related documents
(collectively, the "Related Documents"). The purchase price of the Mortgage
Loans is a specified percentage of the face amount thereof as of the time of
transfer and is payable by the Company, as provided in the Purchase Agreement.
The Purchase Agreement will require that, within the time period
specified therein, the Seller, acting at the Company's request, deliver to
____________________ (the "Custodian") (as the Issuer's agent for such purpose)
the Mortgage Loans and the Related Documents. In lieu of delivery of original
mortgages, the Seller may deliver true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded. In addition, under the terms of the Purchase
Agreement, the Seller will be required to record assignments of mortgages
relating to such Mortgage Loans.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Company that, among
other things, as of _________________, it is duly organized and in good standing
and that it has the authority to consummate the transactions contemplated by the
Purchase Agreement.
S-25
<PAGE>
The Seller will also represent and warrant to the Company, that,
among other things, (a) the information with respect to the Initial Mortgage
Loans set forth in the schedule attached to the Purchase Agreement is true and
correct in all material respects and (b) immediately prior to the sale of the
Initial Mortgage Loans to the Company, the Seller was the sole owner and holder
of the Initial Mortgage Loans free and clear of any and all liens and security
interests. The Seller will also represent and warrant to the Company, that,
among other things, as of ______________, (a) the Purchase Agreement constitutes
a legal, valid and binding obligation of the Seller and (b) the Purchase
Agreement constitutes a valid transfer and assignment to the Company of all
right, title and interest of the Seller in and to the Initial Mortgage Loans and
the proceeds thereof. Such representations and warranties will also be made by
the Seller with respect to the Subsequent Mortgage Loans as of the date of
transfer to the Issuer. The benefit of the representations and warranties made
to the Company by the Seller in the Purchase Agreement will be assigned by the
Company to the Issuer and by the Issuer to the Indenture Trustee in the
Indenture.
Within ____ days of the Closing Date, the Custodian will review or
cause to be reviewed the Mortgage Loans and the Related Documents and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within ______ days following notification
thereof to the Seller and the Issuer by the Custodian, the Seller will be
obligated under the Purchase Agreement to deposit the Transfer Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan. Any such purchase or substitution will result in the
removal of such Defective Loan from the Trust Fund and the lien of the
Indenture. The obligation of the Seller to remove a Defective Loan from the
Trust Fund is the sole remedy regarding any defects in the Mortgage Loans and
Related Documents available to the Indenture Trustee or the Noteholders against
the Seller.
With respect to any Mortgage Loan, the "Transfer Price" is equal
to the Principal Balance of such Mortgage Loan at the time of any removal
described above plus accrued and unpaid interest thereon to the date of removal.
In connection with the substitution of an Eligible Substitute Loan, the Seller
will be required to deposit in the Custodial Account an amount (the
"Substitution Adjustment Amount") equal to the excess of the Principal Balance
of the related Defective Loan over the Principal Balance of such Eligible
Substitute Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by
the Seller for a Defective Loan which must, on the date of such substitution,
(i) have an outstanding Principal Balance (or in the case of a substitution of
more than one Mortgage Loan for a Defective Loan, an aggregate Principal
Balance), not in excess of the Principal Balance relating to such Defective
Loan; (ii) have a Loan Rate, Net Loan Rate and Gross Margin no lower than and
not more than 1% in excess of the Loan Rate, Net Loan Rate and Gross Margin,
respectively, of such Defective Loan; (iii) have a Combined Loan-to-Value Ratio
at the time of substitution no higher than that of the Defective Loan at the
time of substitution; (iv) have a remaining term to maturity not more than one
year earlier and not later than the remaining term to maturity of the Defective
Loan; (v) comply with each representation and warranty as to the Mortgage Loans
set forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
S-26
<PAGE>
In addition the Seller will be obligated to deposit the Transfer
Price or substitute an Eligible Substitute Loan with respect to a Mortgage Loan
as to which there is a breach of a representation or warranty in the Purchase
Agreement.
Mortgage Loans required to be removed from the Trust Fund as
described in the preceding paragraphs are referred to as "Defective Loans."
ASSIGNMENT TO THE ISSUER
The Master Servicer expressly acknowledges and consents to the
Company's transfer of its rights relating to the Mortgage Loans and its
obligation to pay for the Subsequent Mortgage Loans under the Purchase Agreement
to the Issuer, the Issuer's pledge of its interest in the Purchase Agreement to
the Indenture Trustee and the enforcement by the Indenture Trustee of any such
right or remedy against the Master Servicer.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of ________ 1, 19__ between the Company and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular sections or defined terms of the Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
P&I COLLECTIONS
The Master Servicer shall establish and maintain an account (the
"Custodial Account") in which the Master Servicer shall deposit or cause to be
deposited any amounts representing payments on and any collections received in
respect of the Mortgage Loans received by it subsequent to the Cut-Off Date. The
Custodial Account shall be an Eligible Account. On the _____ day of each month
or if such day is not a Business Day, the next succeeding Business Day (the
"Determination Date"), the Master Servicer will notify the Indenture Trustee of
the amount of P&I Collections to be included in funds available distribution to
the Mortgage Loan for the related Payment Date.
"Eligible Investments" are specified in the Servicing Agreement
and are limited to investments which meet the criteria of the Rating Agencies
from time to time as being consistent
with their then current ratings of the Notes.
On the Business Day prior to each Payment Date, the Master
Servicer will make the following withdrawals from the Custodial Account and
deposit such amounts as follows:
(i) to the Distribution Account, an amount equal to the P&I
Collections for such Payment Date; and
S-27
<PAGE>
(ii) to pay to itself various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I Collections" will equal the sum of
(a) Interest Collections for such Payment Date and (b) Principal Collections for
such date.
All collections on the Mortgage Loans will generally be allocated
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "Interest Collections" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest, reduced by the Servicing Fees for such Collection Period and (ii) the
interest portion of the Transfer Price for any Defective Loans. As to any
Payment Date, "Principal Collections" will be equal to the sum of (i) the amount
collected during the related Collection Period, including Net Liquidation
Proceeds (as defined herein) allocated to principal and (ii) the principal
portion of the Transfer Price for any Defective Loans and any Substitution
Adjustment Amounts.
As to any Payment Date other than the first Payment Date, the
"Collection Period" is the calendar month preceding the month of such Payment
Date and in the case of the first Payment Date the period from the Cut-Off Date
to ___________.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of such amount that exceeds the Principal Balance of the Mortgage Loan
at the end of the Collection Period immediately preceding the Collection Period
in which such Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-Off Date Principal Balance thereof, minus all
collections credited against the Principal Balance of such Mortgage Loan prior
to such day. The Principal Balance of a Liquidated Mortgage Loan after final
recovery of related Liquidation Proceeds shall be zero.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the
Servicing Agreement, follow such collection procedures as it follows from time
to time with respect to the mortgage loans in its servicing portfolio comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Mortgage
Loans.
S-28
<PAGE>
With respect to the Mortgage Loans, the Master Servicer may
arrange with a borrower a schedule for the payment of interest due and unpaid
for a period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to mortgage loans.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably
convert to ownership Mortgaged Properties securing such of the Mortgage Loans as
come into default when in accordance with applicable servicing procedures under
the Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Master Servicer will follow such practices as it deems necessary
or advisable and as are in keeping with its general subordinate mortgage
servicing activities, provided the Master Servicer will not be required to
expend its own funds in connection with foreclosure or other conversion,
correction of default on a related senior mortgage loan or restoration of any
property unless, in its sole judgment, such foreclosure, correction or
restoration will increase Net Liquidation Proceeds. The Master Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Noteholders.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides for delivery on or before March
31 in each year, beginning in March 31, 19__, to the Indenture Trustee of an
annual statement signed by an officer of the Master Servicer to the effect that
the Master Servicer has fulfilled its material obligations under the Servicing
Agreement throughout the preceding calendar year, except as specified in such
statement.
On or before March 31 of each year, beginning March 31, 19__, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer) to the Indenture Trustee to the effect that such firm has
examined certain documents and the records relating to servicing of the Mortgage
Loans under the Servicing Agreement for the preceding calendar year and that, on
the basis of such examination, such firm believes that such servicing was
conducted in compliance with the Servicing Agreement except for (a) such
exceptions as such firm believes to be immaterial and (b) such other exceptions
as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Issuer and the Indenture Trustee
S-29
<PAGE>
in writing and such proposed successor servicer is reasonably acceptable to the
Issuer and the Indenture Trustee; (b) the Rating Agencies have confirmed to the
Issuer and the Indenture Trustee that the appointment of such proposed successor
servicer as the Master Servicer will not result in the reduction or withdrawal
of the then current rating of the Notes and (c) such proposed successor servicer
is reasonably acceptable to the Insurer. No such resignation will become
effective until the Indenture Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Servicing Agreement.
The Master Servicer may perform any of its duties and obligations
under the Servicing Agreement through one or more subservicers or delegates,
which may be affiliates of the Master Servicer. Notwithstanding any such
arrangement, the Master Servicer will remain liable and obligated to the Issuer
for the Master Servicer's duties and obligations under the Servicing Agreement,
without any diminution of such duties and obligations and as if the Master
Servicer itself were performing such duties and obligations.
The Servicing Agreement provides that the Master Servicer will
indemnify the Owner Trustee and the Indenture Trustee, as the case may be, from
and against any loss, liability or expense, imposed by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Servicing Agreement or by reason of its reckless disregard of its
obligations and duties under the Servicing Agreement. The Servicing Agreement
provides that neither the Master Servicer nor its directors, officers, employees
or agents will be under any other liability to the Owner Trustee, the Indenture
Trustee, or any other person for any action taken or for refraining from taking
any action pursuant to the Servicing Agreement. The Master Servicer and any
director or officer or employee or agent of the Master Servicer shall be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Servicing
Agreement or the Securities, other than any loss, liability or expense related
to any specific Mortgage Loan or Mortgage Loans (except as any such loss,
liability or expense shall be otherwise reimbursable pursuant to the Servicing
Agreement) and any loss, liability or expense incurred by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder or by reason of its reckless disregard of its obligations and duties
thereunder. In addition, the Servicing Agreement provides that the Master
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its servicing responsibilities under the
Servicing Agreement and which in its opinion may expose it to any expense or
liability. The Master Servicer may, in its sole discretion, undertake any such
legal action which it may deem necessary or desirable with respect to the
Servicing Agreement and the rights and duties of the parties thereto.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Servicing
Agreement to the contrary notwithstanding.
S-30
<PAGE>
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure
by the Master Servicer to (a) deposit in the Custodial Account or Payment
Account any deposit required to be made under the Servicing Agreement or (b) to
pay when due any amount payable by it under the terms of the Insurance
Agreement, which failure continues unremedied for three Business Days after the
giving of written notice of such failure to the Master Servicer by the Issuer or
Indenture Trustee, or to the Master Servicer, the Issuer and the Indenture
Trustee by the Insurer; (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 or Insurance Agreement which, in each case, materially
and adversely affects the interests of the Noteholders or the Insurer and
continues unremedied for ____ days or ____ days, respectively, after the giving
of written notice of such failure to the Master Servicer by the Issuer or the
Indenture Trustee, or to the Master Servicer, the Issuer and the Indenture
Trustee by the Insurer; (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings relating to
the Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations; or (iv) any
merger, consolidation, or combination with another entity and the surviving
entity thereof or corporate successor is not rated at least investment grade by
the Rating Agencies. Under the above circumstances, the Indenture Trustee with
the consent of the Insurer or the Insurer may deliver written notice to the
Master Servicer terminating all the rights and obligations of the Master
Servicer under the Servicing Agreement. Under certain other circumstances, the
Insurer with the consent of 51% of the outstanding principal amount of the Notes
and the Certificates may terminate all the rights and obligations of the Master
Servicer under the Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of
performance referred to under clause (i) above for the applicable periods
referred to therein or referred to under clause (ii) above for the applicable
periods referred to therein, shall not constitute an Event of Servicing
Termination if such delay or failure could not be prevented by the exercise of
reasonable diligence by the Master Servicer and such delay or failure was caused
by an act of God or other similar occurrence. Upon the occurrence of any such
event the Master Servicer shall not be relieved from using reasonable efforts to
perform its obligations in a timely manner in accordance with the terms of the
Servicing Agreement and the Master Servicer shall provide the Issuer, the
Insurer and the Indenture Trustee prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied,
the Indenture Trustee with the consent of the Insurer or the Insurer may
terminate all of the rights and obligations of the Master Servicer under the
Servicing Agreement with respect to the Mortgage Loans, whereupon the Indenture
Trustee will succeed to all the responsibilities, duties and liabilities of the
Master Servicer under the Servicing Agreement and will be entitled to similar
S-31
<PAGE>
compensation arrangements. In the event that the Indenture Trustee would be
obligated to succeed the Master Servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, an established housing and home finance institution or other
mortgage loan or mortgage loan servicer with all licenses and permits required
to perform its obligations under the Servicing Agreement and having a net worth
of at least $25,000,000 and acceptable to the Insurer to act as successor to the
Master Servicer under the Servicing Agreement. Pending such appointment, the
Indenture Trustee will be obligated to act in such capacity unless prohibited by
law. Such successor will be entitled to receive the same compensation that the
Master Servicer would otherwise have received (or such lesser compensation as
the Issuer and such successor may agree). A receiver or conservator for the
Master Servicer may be empowered to prevent the termination and replacement of
the Master Servicer where the only Event of Servicing Termination that has
occurred is an Insolvency Event.
AMENDMENT
The Servicing Agreement may be amended from time to time by the
Master Servicer, the Issuer and the Indenture Trustee, [with the consent of the
Insurer,] provided that the Rating Agencies confirm in writing that such
amendment will not result in a downgrading or a withdrawal
of the rating then assigned to the Notes.
DESCRIPTION OF THE INDENTURE
The following summary describes certain terms of the Indenture.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Indenture. Whenever
particular sections or defined terms of the Indenture are referred to, such
sections or defined terms are thereby incorporated herein by reference.
THE TRUST FUND
Simultaneously with the issuance of the Notes, the Issuer will
pledge the Trust Fund to the Indenture Trustee as collateral for the Notes.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Notes, at its
address listed on the Security Register maintained with the Indenture Trustee a
report setting forth certain amounts
relating to the Notes for each Payment Date, among other things:
(i) the amount of principal, if any, payable on such
Payment Date to Noteholders separately stating the portion thereof in respect of
Liquidation Loss Amounts and Additional Principal Distribution Amount and
stating the amount of any remaining Liquidation Loss Amounts;
S-32
<PAGE>
(ii) the amount of interest payable on such Payment Date to
Noteholders separately stating the portion thereof in respect of overdue accrued
interest and stating the amount of remaining overdue accrued interest;
(iii) the Note Principal Balance of the Notes after giving
effect to the payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Mortgage Loans
as of last day of the related Collection Period;
[(vi) the amount paid, if any, under the Policy separately
stating the portion thereof included in (i) and (ii) above; and]
(vii) the Outstanding Reserve Amount after giving effect to
the payment of principal on the Notes on such Payment Date.
In the case of information furnished pursuant to clauses (i) and
(ii) above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate
with or merge into any other entity, unless (i) the entity formed by or
surviving such consolidation or merger is organized under the laws of the United
States, any state or the District of Columbia, (ii) such entity expressly
assumes the Issuer's obligation to make due and punctual payments upon the Notes
and the performance or observance of any agreement and covenant of the Issuer
under the Indenture, (iii) no Event of Default shall have occurred and be
continuing immediately after such merger or consolidation, (iv) the Issuer has
been advised that the ratings of the Notes then in effect would not be reduced
or withdrawn by any Rating Agency as a result of such merger or consolidation,
(v) any action that is necessary to maintain the lien and security interest
created by the Indenture is taken and (vi) the Issuer has received an Opinion of
Counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Issuer or to any Noteholder or Certificateholder.
The Issuer will not, among other things, (i) except as expressly permitted by
the Indenture, sell, transfer, exchange or otherwise dispose of any of the
assets of the Issuer, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Issuer, (iii) permit the validity or effectiveness of the
Indenture to be impaired or permit any person to be released from any covenants
or obligations with respect to the Notes under the Indenture except as may be
expressly permitted thereby or (iv) permit any lien, charge excise, claim,
security interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the Issuer or any part thereof,
or any interest therein or the
S-33
<PAGE>
proceeds thereof. The Issuer may not engage in any activity other than as
specified under "The Issuer" herein.
MODIFICATION OF INDENTURE
With the consent of both the holders of a majority of the
outstanding Notes and the Insurer, the Issuer and the Indenture Trustee may
execute a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the Indenture, or modify (except as provided below)
in any manner the rights of the Noteholders. Without the consent of the holder
of each outstanding Note affected thereby, however, no supplemental indenture
will: (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof, the interest rate specified
thereon or the redemption price with respect thereto or change any place of
payment where or the coin or currency in which any Note or any interest thereon
is payable; (ii) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes, the consent of the
holders of which is required for any supplemental indenture or the consent of
the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Issuer,
the Company or an affiliate of any of them; (v) decrease the percentage of the
aggregate principal amount of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements; (vi) modify any of the provisions of the Indenture in such manner as
to affect the calculation of the amount of any payment of interest of principal
due on any Note (including the calculation of any of the individual components
of such calculation); or (vii) permit the creation of any lien ranking prior to
or, except as otherwise contemplated by the Indenture, on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or, except
as otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into
supplemental indentures, with the consent of the Insurer and without obtaining
the consent of the Noteholders, for the purpose of, among other things, to cure
any ambiguity or to correct or supplement any provision in the Indenture that
may be inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director,
officer or employee of the Issuer or the Indenture Trustee will be under any
liability to the Issuer or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Indenture
or for errors in judgment; provided, however, that none of the Indenture
Trustee, the Issuer and any director, officer or employee thereof will be
protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the
S-34
<PAGE>
performance of duties or by reason of reckless disregard of obligations and
duties under the Indenture. Subject to certain limitations set forth in the
Indenture, the Indenture Trustee and any director, officer, employee or agent of
the Indenture Trustee shall be indemnified by the Issuer and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the Indenture other than any loss, liability or expense
incurred by reason of willful malfeasance, bad faith or negligence in the
performance of its duties under such Indenture or by reason of reckless
disregard of its obligations and duties under the Indenture. All persons into
which the Indenture Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the successor
of the Indenture Trustee under each Indenture.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes [will][will not] be
treated as having been issued with "original issue discount" (as defined in the
Prospectus). See "Federal Income Tax Consequences" in the Prospectus. 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 [ ]% [ ]. No representation is made that the Mortgage Loans
will prepay at that rate or any other rate.
The Notes will not be treated as "qualifying real property loans"
under Section 593 (d) of the Code, assets described in Section 7701(a)(19)(C) of
the Code and "real estate assets" under Section 856(c)(5)(A) of the Code. In
addition, interest on the Notes will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Notes will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to
acquire or hold the Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code to the proposed investment. See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT
The Notes will constitute "mortgage related securities" for
purposes of SMMEA so long as they are rated in the highest two rating categories
by a Rating Agency. See "Legal Investment" in the Prospectus.
S-35
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from
the Company, the Notes.
The Notes will be purchased from the Company by the Underwriter
and will be offered by the Underwriter 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 Notes are
expected to be approximately $___________, before the deduction of expenses
payable by the Company estimated to be approximately $_______. The Underwriter
may effect such transactions by selling the Notes to or through dealers, and
such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the sale of
the Notes, the Underwriter may be deemed to have received compensation from the
Company in the form of underwriting compensation. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Notes
may be deemed to be underwriters and any profit on the resale of the Notes
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Company has been advised by the Underwriter that it presently
intends to make a market in the Notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for
the Notes will develop.
The Underwriting Agreement provides that the Company will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, or contribute payments the Underwriter may be
required to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed
upon for the Company by [Thacher Proffitt & Wood], New York, New York and for
the Underwriter by ________________, New York, New York.
RATINGS
It is a condition to issuance that the Notes be rated "___" by
_______________ and "___" by ___________________. The Company has not requested
a rating on the Notes by any rating agency other than _______________ and
_______________. However, there can be no assurance as to whether any other
rating agency will rate the Notes, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Notes by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Notes by
___________ and ___________________________. A securities rating addresses the
likelihood of the receipt by holders of Notes of distributions on the Mortgage
Loans. The rating takes into consideration
S-36
<PAGE>
the structural, legal and tax aspects associated with the Notes. The ratings on
the Notes do not, however, constitute statements regarding the possibility that
Holders might realize a lower than anticipated yield. A securities 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 securities
rating should be evaluated independently of similar ratings on different
securities.
S-37
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give
any information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
-----------
TABLE OF CONTENTS
[To be updated] PAGE
Prospectus Supplement
Summary.............................................. S-
Risk Factors......................................... S-
Description of the Mortgage Pool..................... S-
Servicing of the Mortgage Loans...................... S-
The Issuer........................................... S-
The Owner Trustee.................................... S-
Description of the Securities........................ S-
Description of the Purchase
Agreement....................................... S-
Assignment to the Issuer............................. S-
Description of the Servicing
Agreement....................................... S-
Description of the Indenture......................... S-
Federal Income Tax Consequences...................... S-
ERISA Considerations................................. S-
Legal Investment..................................... S-
Method of Distribution............................... S-
Legal Matters........................................ S-
Ratings.............................................. S-
Prospectus
Summary of Prospectus ...............................
Risk Factors.........................................
The Mortgage Pools...................................
Servicing of Mortgage Loans..........................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Purchase Obligations.................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder.......................
The Company..........................................
Southern Pacific Funding Corporation.................
The Agreements.......................................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage Loans..............
Federal Income Tax Consequences......................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters ............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Principal Definitions.......................
================================================================================
SOUTHERN PACIFIC SECURED ASSETS CORP.
SOUTHERN PACIFIC CMN TRUST
19-__-____
$__________________
Collateralized
Mortgage Notes
Series 199_-____
-------------
PROSPECTUS SUPPLEMENT
-------------
-----------------------------
_______, 19__
[UNDERWRITER]
================================================================================
<PAGE>
VERSION 4
=========
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Subject to Completion
Preliminary Prospectus Supplement Dated September 21, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER __, 1998)
$_____________ (APPROXIMATE)
SOUTHERN PACIFIC SECURED ASSETS CORP., COMPANY
SOUTHERN PACIFIC FUNDING CORPORATION, SELLER AND MASTER SERVICER
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES
1998-3
$ ___________(1) _____ Class A-1 Certificates
$ ___________(1) _____% Class A-2 Certificates
$ ___________(1) _____% Class A-3 Certificates
$ ___________(1) _____% Class A-4 Certificates
$ ___________(1) ______% Class A-5 Certificates
$ ___________(1) ______%(2) Class A-6 Certificates
$ ___________(1) ______%(2) Class A-7 Certificates
$ ___________(1) ______%(2) Class A-8 Certificates
$ 0 Variable Rate(3) Class A-9 Certificates
(1) Subject to a permitted variance of plus or minus 1%, as described herein.
(2) Subject to the Maximum Group II Rate as described herein for the first 36
Distribution Dates.
(3) Based on the Notional Amounts as described herein.
------------------------
The Series 1998-3 Mortgage Loan Asset-Backed Pass-Through Certificates
(the "Certificates") will include the following nine senior classes (the "Class
A Certificates"): (i) Class A-1 Certificates; (ii) Class A-2 Certificates (the
"Group I Lockout Certificates"); (iii) Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7
Certificates; (iv) Class A-8 Certificates (the "Group II Lockout Certificates");
and (v) Class A-9 Certificates (the "Fixed Strip Certificates").
The Company has caused MBIA Insurance Corporation (the "Certificate
Insurer") to issue two certificate guaranty insurance policies (the "Certificate
Insurance Policies") for the benefit of the Class A Certificateholders pursuant
to which it will guarantee certain payments to the Class A Certificateholders as
described herein.
(CONTINUED ON FOLLOWING PAGE)
[MBIA LOGO]
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE
CERTIFICATE INSURANCE POLICIES ARE THE SOLE SOURCE OF PAYMENTS ON THE
CLASS A CERTIFICATES. THE CLASS A CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE COMPANY, THE 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.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
There is currently no secondary market for the Class A Certificates.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a secondary
market in the Class A Certificates, other than the Fixed Strip Certificates,
(the "Underwritten Certificates"), but is not obligated to do so. There can be
no assurance that a secondary market for the Underwritten 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 Underwritten Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The net proceeds to the Company from the sale of
the Underwritten Certificates, before deducting expenses payable by the Company,
will be equal to approximately _______% of the aggregate initial principal
balance of the Underwritten Certificates, plus accrued interest on the
Underwritten Certificates (other than the Class A-1 Certificates) from September
1, 1998.
The Underwritten Certificates are offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the
<PAGE>
Underwriter and subject to certain other conditions. The Underwriter reserves
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 Underwritten 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 __, 1998, against payment therefor in
immediately available funds. The Underwritten Certificates will be offered in
the United States of America and Europe.
The Fixed Strip Certificates may be offered by the Company from time to
time to the public, directly or through an underwriter or agent, in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Company from any sale of the Fixed Strip Certificates will
be equal to the purchase price paid by the purchaser thereof, net of any
expenses payable by the Company and any compensation payable to any such
underwriter or agent.
------------------------
GREENWICH CAPITAL MARKETS
September __, 1998
S-2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
In addition to the Class A Certificates, the Series 1998-3 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 four
components (each, a "Component"), the Class A-9 Components A, B and C
(collectively, the "Group I Fixed Strip Components") and the Class A-9 Component
D (the "Group II Fixed Strip Component"). The Class A-1 Certificates, Group I
Lockout Certificates and Group I Fixed Strip Components are also referred to
herein as the "Group I Class A Certificates." The Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7 and Group II Lockout Certificates and the Group II
Fixed Strip Component are also referred to herein as the "Group II Class A
Certificates." Only the Class A Certificates are offered hereby.
The Certificates will evidence beneficial ownership interests in two
loan groups (each, a "Loan Group"), each constituting a separate sub-trust,
collectively comprising a trust fund (the "Trust Fund") consisting primarily of
certain mortgage loans (the "Mortgage Loans"). The Mortgage Loans will 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" and "Group II Loans." The Group I
Loans are or will be conventional, adjustable-rate, primarily one- to
four-family, first lien mortgage loans. The Group II Loans are or will be
conventional, fixed-rate, primarily one- to four-family, first lien mortgage
loans.
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"), "AAA" by 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. 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 1998 (each, a "Distribution Date"). Distributions in
respect of interest and principal of the Class A Certificates will be made as
described herein under "Description of the Certificates."
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 __, 1998, 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>
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 1998-3.
Company.............................Southern Pacific Secured Assets Corp. (the
"Company"), an affiliate of SPFC. See "The
Company" in the Prospectus.
Master Servicer and Seller..........Southern Pacific Funding Corporation
("SPFC," the "Master Servicer" or the
"Seller").
Trustee.............................Norwest Bank Minnesota, National
Association, a national banking association
(the "Trustee").
Cut-off Date........................With respect to the Initial Group I Loans
and Initial Group II Loans (each as defined
herein), August 31, 1998. With respect to
the Additional Group I Loans and the
Additional Group II Loans (each as defined
herein), the later of (i) the Cut-off Date
and (ii) the date of origination of such
Mortgage Loan.
Delivery Date.......................On or about September __, 1998.
Certificate Registration............The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of The Depository Trust Company
("DTC") and its Participants (as defined in
the Prospectus). The Class A Certificates
will be 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. Beneficial
Owners may elect to hold their interests in
the Class A Certificates through DTC in the
United States, or Cedel or Euroclear in
Europe. For further registration information
and denomination amounts see "Description of
the Certificates" herein and Annex I hereto.
The Mortgage Pool...................The Mortgage Pool will consist of two groups
(each a "Loan Group") of mortgage loans (the
"Mortgage Loans"), each constituting a
separate sub-trust collectively comprising a
trust fund (the "Trust Fund"). The separate
Loan Groups are referred to herein as the
"Group I Loans" and "Group II Loans." The
Group I Loans are or will be conventional,
adjustable-rate, primarily one- to
four-family mortgage loans.
S-4
<PAGE>
The Group II Loans are or will be
conventional, fixed-rate, primarily one- to
four-family mortgage loans.
The statistical information presented in
this Prospectus Supplement describes a
sampling of mortgage loans in the Trust Fund
(with respect to Loan Group I and Loan Group
II, the "Initial Group I Loans" and the
"Initial Group II Loans," respectively) and
does not include information regarding the
additional mortgage loans which will be
included in Loan Group I and Loan Group II
on the Delivery Date (the "Additional Group
I Loans" and "Additional Group II Loans,"
respectively). The Initial Group I Loans and
Additional Group I Loans will constitute
approximately _____% and _____%,
respectively, of the aggregate of the
Principal Balance of the Group I Loans as of
the Cut-off Date. The Initial Group II Loans
and Additional Group II Loans will
constitute approximately _____% and _____%,
respectively, of the aggregate of the
Principal Balance of the Group II Loans as
of the Cut-off Date. While the statistical
distribution of the final characteristics of
the Group I Loans and Group II Loans
transferred to the Trust Fund on the
Delivery Date will vary from the statistical
information presented in this Prospectus
Supplement, the characteristics of the
Mortgage Loans as of the Cut-off Date will
not vary materially from the information
presented herein with respect to the Initial
Group I Loans and Initial Group II Loans.
The Mortgage Loans were underwritten by SPFC
or its subsidiaries, BOMAC Capital Mortgage
Inc. ("BOMAC"), MorCap, Inc. ("MorCap"),
Liberty Lending Corp. ("Liberty"), by the
Strategic Partners (as defined herein) or
other bulk mortgage loan sellers, in
accordance with the standards described in
"Description of the Mortgage
Pool--Underwriting Standards" and Appendix A
to this Prospectus Supplement. See also
"Risk Factors--Underwriting Standards" in
this Prospectus Supplement.
GROUP I LOANS. The Initial Group I Loans (as
defined herein) have an aggregate principal
balance as of the Cut-off Date of
approximately $____________. The Group I
Loans are or will be secured by first liens
on fee simple interests in primarily one- to
four-family residential real properties
(each, a "Mortgaged Property").
The Initial Group I Loans had approximate
individual principal balances at origination
of at least $________ but not more than
$________ with an average principal balance
at origination of approximately $________.
Approximately _____% and _____% of the
Initial Group I Loans have terms to maturity
from the date of origination or modification
of 15 years and 30 years, respectively. The
Initial Group I Loans
S-5
<PAGE>
have a weighted average remaining term to
stated maturity of approximately ____ months
as of the Cut-off Date. Approximately ____%
of the Initial Group I Loans (by aggregate
principal balance as of the Cut-off Date)
are refinance mortgage loans.
The Mortgage Rate (as defined herein) on
each Group I Loan will be subject to
adjustment, commencing (i) with respect to
approximately _____% and _____% of the
Initial Group I Loans approximately six
months or one year after the date of
origination, respectively, (ii) with respect
to approximately _____% of the Initial Group
I Loans approximately two years after
origination (each such Group I Loan, a "2/28
Loan") and (iii) with respect to
approximately 0.12% of the Initial Group I
Loans, approximately three years after
origination (each such Group I Loan, a "3/27
Loan"), on the date (the "Adjustment Date")
specified in the related Mortgage Note to a
rate equal to the sum (rounded as described
herein) of the related Index as described
below and the related Gross Margin (as
defined herein) set forth in the related
Mortgage Note, subject to the limitations
described herein. The amount of the monthly
payment on each Group I Loan will be
adjusted semi-annually (after an initial
period of two years or three years, with
respect to the 2/28 Loans and 3/27 Loans,
respectively) or annually on the first day
of the month following the month in which
the Adjustment Date occurs to the amount
necessary to pay interest at the then
applicable Mortgage Rate and to fully
amortize the outstanding principal balance
of such Mortgage Loan over its remaining
term to stated maturity. As of the Cut-off
Date, the Initial Group I Loans will bear
interest at Mortgage Rates of at least ____%
per annum but no more than _____% per annum,
with a weighted average Mortgage Rate of
approximately ____% per annum. The Group I
Loans will have different Adjustment Dates,
Gross Margins, Periodic Rate Caps, Lifetime
Rate Caps and Lifetime Rate Floors, each as
described herein.
GROUP II LOANS. The Initial Group II Loans
(as defined herein) have an aggregate
principal balance as of the Cut-off Date of
approximately $__________. The Group II
Loans are or will be secured by first liens
on fee simple interests in primarily one- to
four-family Mortgaged Properties.
The Initial Group II Loans had approximate
individual principal balances at origination
of at least $_________ but not more than
$________ with an average principal balance
at origination of approximately $________.
Approximately _____% of the Initial Group II
Loans have terms to maturity from the date
of origination or modification of 20 to 30
years and approximately ____% of the Initial
Group II Loans
S-6
<PAGE>
have terms to maturity from the date of
origination or modification of 15 years or
less. The Initial Group II Loans have a
weighted average remaining term to stated
maturity of approximately _____ months as of
the Cut-off Date. Approximately _______% of
the Initial Group II Loans (by aggregate
principal balance as of the Cut-off Date)
are refinance mortgage loans.
Approximately _____% of the Initial Group II
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 on each Group II Loan is
fixed. As of the Cut-off Date, the Initial
Group II Loans will bear interest at
Mortgage Rates of at least _____% per annum
but no more than _____% per annum, with a
weighted average Mortgage Rate of
approximately _____% per annum.
DELINQUENCIES. Approximately ____% and
_____% of the Initial Group I Loans and
Initial Group II Loans, respectively, were
thirty or more but less than sixty days
delinquent in their Monthly Payments as of
the Cut-off Date. None of the Initial Group
I Loans or the Initial Group II Loans (by
aggregate principal balance as of the
Cut-off Date) were sixty days or more but
less than ninety days delinquent in their
Monthly Payments as of the Cut-off Date.
Prospective investors in the Class A
Certificates should be aware, however, that
approximately ____% and _____% of the
Initial Group I Loans and Initial Group II
Loans, respectively (by aggregate principal
balance as of the Cut-off Date) had a first
Monthly Payment due after May 1, 1998, and
therefore, such Initial Group I Loans and
Initial Group II Loans could not have been
thirty or more days delinquent as of the
Cut-off Date.
The Index...........................The Index applicable with respect to the
Group I Loans will be based upon either (i)
the average of the interbank offered rates
for six-month United States dollar deposits
in the London market ("Six-Month LIBOR") or
(ii) the average of the interbank offered
rates for one-year United States dollar
deposits in the London market ("One-Year
LIBOR") as published in THE WALL STREET
JOURNAL, in each case, 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.
The Class A Certificates............The Class A Certificates will each evidence
a beneficial ownership interest in one of
two sub-trusts collectively comprising the
Trust Fund which consists primarily of the
S-7
<PAGE>
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:
S-8
<PAGE>
Class A-1 Certificates $
Class A-2 Certificates $
Class A-3 Certificates $
Class A-4 Certificates $
Class A-5 Certificates $
Class A-6 Certificates $
Class A-7 Certificates $
Class A-8 Certificates $
The Fixed Strip Certificates will be divided
into four components (each, a "Component"),
the Class A-9 Component A, B and C
(collectively, the "Group I Fixed Strip
Components") and the Class A-9 Component D
(the "Group II Fixed Strip Component"). The
Components of the Fixed Strip Certificates
are not separately transferable.
Each Group I Fixed Strip Component will have
a Notional Amount of $___________ as of the
Delivery Date. The Group II Fixed Strip
Component will have a Notional Amount of
$__________ as of the Delivery Date.
However, the Certificate Principal Balance
of any Class of Certificates or the Notional
Amount of any Component may be increased or
decreased by up to 1% on the Delivery Date,
depending upon the Group I Loans and Group
II Loans actually delivered by the Seller to
the Depositor on the Delivery Date as
described herein.
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 1998, 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
____% per annum, or (b) with respect to any
Distribution Date thereafter, One-Month
LIBOR plus ____% per annum 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 a rate equal to (i) a fraction
equal to 30 divided by the number of days in
the immediately preceding Accrual Period
multiplied by (a) the weighted average of
the Mortgage Rates of the Group I Loans,
minus (b) the sum of the Servicing Fee Rate
(as
S-9
<PAGE>
defined herein) and the rates per annum at
which the Trustee's Fee and Premium Amount
(each as defined herein) accrue, and minus
(c) the Group I Fixed Strip Effective Rate
(as defined herein) times a fraction equal
to (x) the aggregate Certificate Principal
Balance of the Group I Lockout Certificates
divided by (y) the aggregate principal
balance of the Group I Loans as of the end
of the second preceding Due Period (or, in
the case of the first Distribution Date, as
of the Closing Date), minus (ii) commencing
on the thirteenth Distribution Date, 0.50%
per annum.
The "Class A-1 Formula Pass-Through Rate"
for a Distribution Date is the lesser of (x)
the rate determined by clause (i) of the
definition of 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
times a fraction equal to 30 divided by the
number of days in the immediately preceding
Accrual Period. The "Net Lifetime Rate Cap"
on each Group I Loan is equal to the (i)
related Lifetime Rate Cap (as defined
herein) minus the Servicing Fee Rate and the
rates per annum at which the Trustee's Fee
and the Premium Amount accrue and (ii) on or
after the 13th Distribution Date, minus an
additional 0.50% per annum.
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 and the
Cross-Collateralized Basis Risk Shortfall
(as defined herein), 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 Basis Risk
Shortfall"). The Certificate Insurance
Policies do not cover the Group I Basis Risk
Shortfall, nor do the ratings assigned to
the Class A-1 Certificates address the
payment of the Group I Basis Risk Shortfall.
The Pass-Through Rate with respect to the
Group I Lockout, Class A-3, Class A-4 and
Class A-5 Certificates is equal to the fixed
rate set forth on the cover hereof. The
Pass- Through Rate on the Class A-6
Certificates and the Class A- 7 Certificates
and Group II Lockout Certificates is equal
to the lesser of (i) the applicable fixed
rate set forth on the cover hereof and (ii)
the Maximum Group II Rate (as defined
herein) for the first 36 Distribution Dates.
S-10
<PAGE>
Additionally, with respect to any
Distribution Date and the Class A-7
Certificates, after 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, the Pass-Through Rate
shall be increased by ___%.
See "Description of the Certificates--Class
A Interest Distribution Amounts" herein.
The Pass-Through Rate for the Class A-9
Component A will be equal to ___% for the
first 20 Distribution Dates, and 0.00%
thereafter. The Pass-Through Rate for the
Class A-9 Component B will be equal to 1.00%
for the first 12 Distribution Dates, and
0.00% thereafter. The Pass-Through Rate for
the Class A-9 Component C will be equal to
1.00% for the first 6 Distribution Dates,
and 0.00% thereafter. The Pass-Through Rate
for the Class A-9 Component D will be equal
to (a) the weighted average of the Mortgage
Rates of the Group II Loans, minus (b) the
sum of the Servicing Fee Rate (as defined
herein) and the rates per annum at which the
Trustee's Fee and Premium Amount (each as
defined herein) accrue 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 Amounts" 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 and
subject to reduction 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 and (ii) the Group I Class
A Carry-Forward Amount or Group II
Carry-Forward Amount (each as defined
herein), as applicable, allocable to
interest. The aggregate amount of interest
allocable to the Group I and Group II Class
A Certificates (the related "Class A
Interest Distribution Amount") will be
allocable first to the Group I Fixed Strip
Components or Group II Fixed Strip
Component, as applicable, and then to the
related Class A Certificates (other than the
Fixed Strip Certificates) on a pro rata
basis. For each Distribution Date, with
respect to the
S-11
<PAGE>
Class A-1 Certificates, the "Accrual Period"
is the period commencing on the Distribution
Date immediately preceding the month on
which such Distribution Date occurs and
ending on the calendar day immediately
preceding such Distribution Date, except
with respect to the first Distribution Date,
which has an accrual period from the Closing
Date to the calendar day immediately
preceding such Distribution Date. With
respect to the Group I Lockout Certificates,
Fixed Strip Certificates and the Group II
Class A Certificates, the "Accrual Period"
is the previous calendar month. The Class A
Interest Distribution Amount with respect
the Class A Certificates is calculated on
the basis of a 360-day year consisting of
twelve 30-day months (or, with respect to
the Class A-1 Certificates, the actual
number of days elapsed during the related
Accrual Period). See "Description of the
Certificates--Priority of Payment" and
"--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 Certificate Principal
Balance of the Group I Lockout Certificates
immediately prior to such date. The Notional
Amount of the Group II Fixed Strip Component
as of any Distribution Date is equal to the
Certificate Principal Balance of the Group
II Lockout Certificates immediately prior to
such date.
Principal Distributions.............Holders of the Group I and Group II 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 and Group II 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 or Group II Class A
Carry-Forward Amount, as applicable, which
relates to a shortfall in a distribution of
a related Subordination Deficit, (ii) all
scheduled installments of principal in
respect of the Mortgage Loans in the related
Loan Group received or advanced during the
related Due Period (as defined herein),
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
S-12
<PAGE>
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.
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 Group) 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
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."
S-13
<PAGE>
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 Insurance Policies......Each of the Class A Certificates will be
entitled to the benefit of one of two
certificate guaranty insurance policies (the
"Certificate Insurance Policies") to be
issued by MBIA Insurance Corporation (the
"Certificate Insurer"), which will insure
the payment of (i) on each Distribution
Date, an amount equal to (a) the related
Class A Interest Distribution Amount (as
defined herein) minus the related Available
Funds (as defined herein) (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 Basis Risk Shortfall. See
"Description of the Certificates."
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, (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") or (v) a Group I Basis Risk
Shortfall exists (a "Cross-Collateralized
Basis Risk Shortfall"), the Certificate
Insurer, the Group I Class A Certificates or
Group II 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, a Cross- Collateralized Basis
Risk Shortfall or as reimbursement of the
Reimbursement Amount, as the case may be,
out of funds then on deposit in the
Certificate Account for the other Loan Group
that are otherwise payable on such
Distribution Date to the Class R-II
Certificates.
S-14
<PAGE>
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
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 SPFC 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 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 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 Class A
Certificates results in the allocation of
prepayments among certain classes as
follows:
SEQUENTIALLY PAYING CLASSES: The Group II
Class A Certificates (other than the Group
II Fixed Strip Component) are subject to
various priorities for payment of principal
as described herein. Distributions of
principal on classes having
S-15
<PAGE>
an earlier priority of payment will be
affected by the rates of prepayment of the
Group II 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.
GROUP I LOCKOUT CERTIFICATES: As described
herein, during certain periods all or a
disproportionately large or small percentage
of principal payments on the Group I Loans
will be allocated to the Class A-1
Certificates. Unless the Certificate
Principal Balance of the Class A-1
Certificates has been reduced to zero, the
Group I Lockout Certificates will not be
entitled to receive distributions of
principal payments prior to the Distribution
Date in October 2000. On and after the
Distribution Date in October 2000, the Group
I Lockout Certificates will receive a
disproportionately large percentage of
principal payments. The Group I Lockout
Certificates will generally receive the
Group I Lockout Distribution Percentage of
principal payments on the Group I Loans. The
"Group I Lockout Distribution Percentage"
for any Distribution Date occurring on or
after October 2000 will be 95%.
Notwithstanding the foregoing, if the
Certificate Principal Balance of the Class
A-1 Certificates has been reduced to zero,
the Group I Lockout Distribution Percentage
will be equal to 100%.
GROUP II LOCKOUT CERTIFICATES: As described
herein, during certain periods all or a
disproportionately large or small percentage
of principal payments on the Group II Loans
will be allocated among the Group II Class A
Certificates other than the Group II Lockout
Certificates. Unless the Certificate
Principal Balance of the Group II Class A
Certificates (other than the Group II
Lockout Certificates) have been reduced to
zero, the Group II Lockout Certificates are
not expected to receive distributions of
principal payments prior to the Distribution
Date in October 2001. The Group II Lockout
Certificates will generally receive the
Group II Lockout Distribution Percentage of
principal payments on the Group II Loans.
The "Group II 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 Group II 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 Group II
Lockout Certificate Percentage for such
Distribution Date; for any Distribution Date
during the seventh year after the Delivery
Date, 100% of the Group II Lockout
Certificate Percentage for such Distribution
Date,
S-16
<PAGE>
and for any Distribution Date thereafter,
the lesser of (x) 100% and (y) 300% of the
Group II Lockout Certificate Percentage.
Notwithstanding the foregoing, if the
Certificate Principal Balances of the Group
II Class A Certificates (other than the
Group II Lockout Certificates) have been
reduced to zero, the Group II 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 were
structured assuming, among other things, a
prepayment rate equal to 140% of the
Prepayment Assumption (as defined herein)
and corresponding weighted average lives as
described herein. The Group II Class A
Certificates were structured assuming, among
other things, a prepayment rate equal to
120% of the Prepayment Assumption 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.
S-17
<PAGE>
The multiple class structure of the Class A
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:
GROUP I LOCKOUT CERTIFICATES: Investors in
the Group I Lockout Certificates should be
aware that because the Group I Lockout
Certificates are not expected to receive
principal payments from the Group I Loans
prior to the Distribution Date occurring in
October 2000 and will receive a
disproportionately large portion of
principal payments thereafter, the weighted
average lives of the Group I Lockout
Certificates will be longer or shorter than
would otherwise be the case, and the effect
on the market value of the Group I Lockout
Certificates of changes in market interest
rates or market yields for similar
securities may be greater or lesser than for
the Class A-1 Certificates.
GROUP II LOCKOUT CERTIFICATES: Investors in
the Group II Lockout Certificates should be
aware that because the Group II Lockout
Certificates are not expected to receive
principal payments from the Group II Loans
prior to the Distribution Date occurring in
October 2001 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, Class A-5, Class A-6 and
Class A-7 Certificates have been reduced to
zero), the weighted average life of the
Group II Lockout Certificates will be longer
or shorter than would otherwise be the case,
and the effect on the market value of the
Group II Lockout Certificates of changes in
market interest rates or market yields for
similar securities may be greater or lesser
than other classes of Group II Class A
Certificates entitled to such distributions.
FIXED STRIP CERTIFICATES: Investors in the
Fixed Strip Certificates should fully
consider that an extremely rapid rate of
principal prepayments on the Mortgage Loans
could result in the failure of such
investors to recover their initial
investments.
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
S-18
<PAGE>
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
140% of the Prepayment Assumption with
respect to the Group I Class A Certificates
and 120% of the Prepayment Assumption, with
respect to the Group II 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.
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 an
individual exemption, Prohibited Transaction
Exemption ("PTE") __-__ to the Underwriter
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 Underwriter, such as the
Class A Certificates, and the servicing and
operation of asset pools such as the Trust
Fund, provided that certain conditions are
S-19
<PAGE>
satisfied. See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment....................The Class A Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as they
are rated in at least the second highest
rating category by one or more nationally
recognized statistical rating agencies.
Institutions whose investment activities are
subject to legal investment laws and
regulations, regulatory capital requirements
or review by regulatory authorities may be
subject to restrictions on investment in 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"), "AAA" by
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
Basis Risk Shortfalls. See "Certain Yield
and Prepayment Considerations" and "Ratings"
herein and "Yield Considerations" and
"Rating" in the Prospectus.
S-20
<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 _____% and _____% of the Initial Group I Loans and
Initial Group II Loans (each by principal balance as of the Cut-off Date),
respectively, were originated and underwritten or acquired and reunderwritten by
the Seller or its subsidiaries. Approximately _____% and _____% of the Initial
Group I Loans and Initial Group II Loans (each by principal balance as of the
Cut-off Date), respectively, were underwritten by BOMAC Capital Mortgage Inc.
("BOMAC"). Approximately _____% and _____% of the Initial Group I Loans and
Initial Group II Loans (each by principal balance as of the Cut-off Date),
respectively, were underwritten by MorCap, Inc. ("MorCap"). Approximately _____%
and _____% of the Initial Group I Loans and Initial Group II Loans (each by
principal balance as of the Cut-off Date) respectively, were underwritten by
Liberty Lending Corp. ("Liberty"), and approximately _____% and _____% of the
Initial Group I Loans and Initial Group II Loans (each by principal balance as
of the Cut-off Date), respectively, were underwritten by American Funding Group
Inc., Capital Alliance Group, Liberty Lending Corp. and Sierra Capital
Acceptance, which are affiliated with the Company (collectively, the "Strategic
Partners"; and collectively with the Seller, BOMAC and MorCap, the
"Originators"), or other bulk mortgage loan sellers. All Mortgage Loans
purchased in bulk were reunderwritten by the Seller. The Mortgage Loans
originated by the Seller, BOMAC and MorCap were underwritten or reunderwritten
in accordance with the underwriting standards described in "Description of the
Mortgage Pool--Underwriting" below and in Appendix A to this Prospectus
Supplement, and the Mortgage Loans originated by the Strategic Partners were
originated pursuant to similar guidelines, but were not so reunderwritten (and
therefore may perform differently). The Mortgage Loans were underwritten in
accordance with underwriting standards which are less stringent than guidelines
for "A" quality borrowers. Such mortgagors may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy the guidelines for "A" quality borrowers. Accordingly, the
Mortgage Loans 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 "A" quality underwriting guidelines.
Under the Originators' 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 underwriting
guidelines for "A" quality borrowers. No assurance can be given that the values
of the Mortgaged Properties in the related Loan Group have remained or will
remain at the levels in effect on the dates of origination of the related
Mortgage Loans. If the values of the Mortgaged Properties securing the Group I
Loans and Group II Loans decline after the dates of origination of the related
Mortgage Loans, then the rates of delinquencies, foreclosures and losses on the
Group I Loans and Group II Loans may increase and such increase may be
substantial.
The mortgage loan programs of SPFC, BOMAC and MorCap described in
"Description of the Mortgage Pool--Underwriting" in this Prospectus Supplement
and in Appendix A to this Prospectus Supplement and the mortgage loan programs
of the Strategic Partners were recently implemented and have produced a
relatively low total volume of mortgage loans. Because all of the Mortgage Loans
being sold to the Trust Fund were underwritten in accordance with these
programs, each of the Originators has limited historical delinquency,
foreclosure or loss experience with respect to its own loan programs that may be
referenced for purposes of estimating the future delinquency, foreclosure or
loss experience on mortgage loans similar to those originated by it included in
Loan Group I or Loan Group II. See "Description of the Mortgage
Pool--Delinquency and Foreclosure Experience of the Seller" herein.
S-21
<PAGE>
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately _____% and _____% of the Initial Group I Loans and
Initial Group II Loans, respectively, were thirty or more days delinquent in
their Monthly Payments as of the Cut-off Date. None of the Initial Group I Loans
or the Initial Group II Loans were sixty days or more but less than ninety days
delinquent in their Monthly Payments as of the Cut-off Date. Prospective
investors in the Class A Certificates should be aware, however, that
approximately _____% and _____% of the Initial Group I Loans and Initial Group
II Loans, respectively (by aggregate principal balance as of the Cut-off Date)
had a first Monthly Payment due after August 1, 1998, and therefore, such
Initial Group I Loans and Initial Group II Loans could not have been thirty or
more days delinquent as of the Cut-off Date.
Approximately _____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) will have Loan-to-Value Ratios in
excess of 80.00% but will not be covered by a primary mortgage insurance policy.
Such Mortgage Loans may be affected to a greater extent than the other Mortgage
Loans in the Mortgage Pool by any decline in the value of the related Mortgaged
Property. No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, 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. Any decrease in the
value of the Mortgaged Properties underlying such Mortgage Loans may result in
the allocation of losses to the Certificates to the extent not covered by the
related Certificate Insurance Policy, cross-collateralization or
overcollateralization. See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder" in the Prospectus.
Approximately _____% of the Initial Group II 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 II is greater than that associated with fully-amortizing loans.
LIMITED SERVICING EXPERIENCE OF THE MASTER SERVICER
The servicing of mortgage loans of the type included in the Trust Fund
requires special skill and diligence. Investors should note that the Master
Servicer has limited experience in servicing the types of mortgage loans
included in the Trust Fund. Accordingly, there may be a greater risk of
delinquencies on the Mortgage Loans and, to the extent such delinquencies result
in losses, a greater risk of increased losses, than for a servicer with more
experience servicing the types of mortgage loans included in the Trust Fund.
Such losses will be allocated to the Class A Certificates to the extent they are
not covered by the Certificate Insurance Policies, cross-collateralization or by
overcollateralization. In addition, until recently mortgage loans originated or
acquired by the Seller (not including the Mortgage Loans) were serviced by
Advanta Mortgage Corp. USA. Such servicing has been transferred to the Master
Servicer. The Seller expects that a higher than anticipated rate of
delinquencies for a period of time may be experienced on the Seller's overall
mortgage loan portfolio due to the implementation of such transfer. Furthermore,
the Master Servicer recently removed the administrative manager of its servicing
operation and is currently seeking to expand its capabilities in the special
servicing of delinquent and foreclosed mortgage loans.
In addition, due to the Master Servicer's limited experience in
servicing the types of mortgage loans included in the Trust Fund, there is no
loss, delinquency or foreclosure information that may be referenced for purposes
of estimating the future delinquency, foreclosure or loss experience on mortgage
loans serviced by the Master Servicer which are similar to those mortgage loans
included in the Trust Fund. See "Pooling and Servicing Agreement-- The Master
Servicer" herein.
S-22
<PAGE>
RISK OF MORTGAGE LOAN RATES REDUCING PASS-THROUGH RATES
ON THE CLASS A-1 CERTIFICATES
The Pass-Through Rate on the Class A-1 Certificates is generally
expected to be based upon clause (i) of the definition thereof, which is
primarily based upon the value of One-Month LIBOR (as defined herein) as
adjusted every month. However, the Mortgage Rates on the Group I Loans adjust
semi-annually or annually based upon Six-Month LIBOR or One-Year LIBOR as
described under "Description of the Mortgage Pool--Mortgage Rate Adjustment"
herein. Furthermore, clause (ii) of the definition of the Pass-Through Rate on
the Class A-1 Certificates limits the Pass-Through Rate on the Class A-1
Certificates to the Group I Class A Available Funds Pass-Through Rate, which is
generally based upon the Mortgage Rates on the Group I Loans, which are subject
to Six-Month LIBOR or One-Year LIBOR. As a result, the interest paid to the
Class A-1 Certificates may be less than would be determined using clause (i) of
the related definition of Pass-Through Rate. In particular, because the Mortgage
Rates on the Group I Loans adjust less frequently, the Pass-Through Rate on the
Class A-1 Certificates may be determined by the Group I Class A Available Funds
Pass-Through Rate for extended periods in a rising interest rate environment. In
addition, with respect to the Class A-1 Certificates, One-Month LIBOR, Six-Month
LIBOR and One-Year 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 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 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 _____%
and ____% of the Initial Group I Loans, respectively (by aggregate outstanding
principal balance as of the Cut-off Date), will not have a first Adjustment Date
until two years or three years, respectively, from the origination of each such
2/28 Loan and 3/27 Loan.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations,
SPFC is faced with the task of completing its compliance goals in connection
with the year 2000 issue during the next year and a half. The year 2000 issue is
the result of prior computer programs being written using two digits, rather
than four digits, to define the applicable year. Any of SPFC's computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Any such occurrence could result in a major
computer system failure or miscalculations. SPFC is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant.
However, in the event that SPFC or any of SPFC's suppliers, customers,
brokers or agents do not successfully and timely achieve year 2000 compliance,
the performance of SPFC's obligations as Master Servicer under the Pooling and
Servicing Agreement or as Seller under the Mortgage Loan Purchase Agreement
could be materially adversely affected.
THE ADDITIONAL LOANS
The Additional Group I Loans and Additional Group II Loans may have
characteristics different from those of the related Initial Mortgage Loans.
However, the information set forth herein relating to the Initial Mortgage Loans
will be substantially representative of the characteristics of the Mortgage Pool
as it will be constituted after the Additional Group I and Additional Group II
Loans are added to the Mortgage Pool. Although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
Mortgage Pool may vary from the disclosure contained in this Prospectus
Supplement following the addition of the Additional Group I Loans and Additional
Group II Loans, such variance will not be material.
S-23
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the Group I Loans and Group II Loans describes a sampling of mortgage
loans in Loan Group I and Loan Group II (with respect to Loan Group I and Loan
Group II, the "Initial Group I Loans" and "Initial Group II Loans,"
respectively) and does not include additional mortgage loans which will be
included in Loan Group I on the Delivery Date (the "Additional Group I Loans")
and additional mortgage loans which will be included in Loan Group II on the
Delivery Date (the "Additional Group II Loans"). The Initial Group I Loans and
Additional Group I Loans will constitute approximately _____% and _____%,
respectively, of the aggregate of the Principal Balance of the Group I Loans as
of the Cut-off Date. The Initial Group II Loans and Additional Group II Loans
will constitute approximately _____% and _____%, respectively, of the aggregate
of the Principal Balance of the Group II Loans as of the Cut-off Date. While the
statistical distribution of the final characteristics of the Group I Loans and
Group II 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 II Loans as of the Cut-off Date.
The Initial Group I Loans and the Initial Group II Loans had an
aggregate outstanding principal balance as of the Cut-off Date of approximately
$__________ and $__________, respectively (each such group of Mortgage Loans,
"Loan Group I" or "Loan Group II," respectively, or a "Loan Group"). Each Loan
Group constitutes a separate sub-trust, and collectively the Loan Groups
comprise the Trust Fund. The Group I Loans will consist of conventional,
adjustable rate, monthly payment, first lien mortgage loans. Approximately
_____% and _____% of the Initial Group I Loans have terms to maturity from the
date of origination or modification of 15 years and 30 years, respectively. The
Initial Group II Loans will consist of conventional, fixed-rate, monthly
payment, first lien mortgage loans. Approximately _____% of the Initial Group II
Loans have terms to maturity from the date of origination or modification of 20
to 30 years and approximately _____% of the Initial Group II Loans have terms to
maturity from the date of origination or modification of 15 years or less. The
Company has acquired or will acquire the Group I Loans and Group II Loans to be
included in the Mortgage Pool from SPFC, an affiliate of the Company. SPFC in
turn either has originated or will originate such Mortgage Loans or has acquired
or will acquire them pursuant to various mortgage loan purchase agreements. The
Mortgage Loans have been or 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 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 the Certificateholders
or the Certificate Insurer. 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.
S-24
<PAGE>
Each Initial Group I Loan, Initial Group II Loan, Additional Group I
Loan and Additional Group II Loan will have been originated or acquired by the
Seller on or before the Delivery Date. Certain of such Mortgage Loans will have
their first Monthly Payments due on November 1, 1998. As to those Mortgage
Loans, no principal amortization payments will be distributed (unless
prepayments are received thereon) until the Distribution Date occurring in
October 1998, 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 1998, the month prior to the month in
which the first Monthly Payment is due.
The majority of the Group I Loans and Group II Loans provide for
payment of a prepayment charge. Generally, each such Mortgage Loan provides for
payment of a prepayment charge for certain partial prepayments and all
prepayments in full made within approximately three or five years of the
origination of such Mortgage Loan, in an amount equal to six months' advance
interest on the amount of the prepayment that, when added to all other amounts
prepaid during the twelve-month period immediately preceding the date of the
prepayment, exceeds twenty percent of the original principal amount of the
Mortgage Loan. The Originators will be entitled to all prepayment charges
received on the Mortgage Loans and such amounts will not be available for
distribution on the Certificates.
None of the Mortgage Loans are covered by a primary mortgage insurance
policy. See "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder" in
the Prospectus.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate (as defined herein) on each Initial Group I Loan will
be subject to adjustment, commencing (i) with respect to approximately _____%
and _____% of the Initial Group I Loans, approximately six months or one year
after the date of origination, respectively, (ii) with respect to approximately
_____% of the Initial Group I Loans, approximately two years after origination
(each such Group I Loan, a "2/28 Loan") and (iii) with respect to approximately
_____% of the Initial Group I Loans, approximately three years after origination
(each such Group I Loan, a "3/27 Loan"). Thereafter, the Mortgage Rate on each
Group I Loan will adjust semi-annually or annually on the first day of the month
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"). The amount of this adjustment 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 _____% of
the Initial Group I Loans, 1.50% with respect to approximately _____% of the
Initial Group I Loans, 2.00% with respect to approximately _____% of the Initial
Group I Loans by aggregate Principal Balance as of the Cut-off Date and 3.00%
with respect to approximately _____% of the Initial Group I Loans by aggregate
Principal Balance as of the Cut-off Date; provided, however, that the 2/28 Loans
and 3/27 Loans have a Periodic Rate Cap on their first Adjustment Date of up to
3.00%. The Mortgage Rate on each Group I Loan is subject to specified maximum
and minimum lifetime Mortgage Rates ("Lifetime Rate Caps" and "Lifetime Rate
Floors," respectively). The Index applicable with respect to the Initial Group I
Loans is based upon either (i) the average of the interbank offered rates for
six-month United States dollar deposits in the London market ("Six-Month LIBOR")
as published in THE WALL STREET JOURNAL or (ii) the average of the interbank
offered rates for one-year United States dollar deposits in the London market
("One-Year LIBOR") as published in THE WALL STREET JOURNAL, in each case 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. All of
the Initial Group I Loans will have an Index of Six-Month LIBOR or One-Year
LIBOR. Due to the application of the Periodic Rate Caps, Lifetime Rate Caps and
Lifetime Rate Floors, the Mortgage Rate on any Group I Loan as adjusted on any
related Adjustment Date, may not equal the sum of the related Index and the
Gross Margin. The Mortgage Rate on each Group II Loan is fixed. The Due Date is
generally the first day of the month for all of the Mortgage Loans.
S-25
<PAGE>
The majority of the Group I 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 that have not reached their first
Adjustment Date are, therefore, more likely to be subject to the Periodic Rate
Cap on their first Adjustment Date.
MORTGAGE LOAN CHARACTERISTICS
INITIAL GROUP I LOANS
The Initial Group I Loans will consist of first lien 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
$_____________. All percentages of the Initial Group I Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
Principal Balance of the Initial Group I Loans as of the Cut-off Date.
Approximately _____% and _____% of the Initial Group I Loans have terms
to maturity from the date of origination or modification of 15 years and 30
years, respectively. As of the Cut-off Date, the weighted average remaining term
to stated maturity of the Initial Group I Loans was approximately ___ months.
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 __
months.
As of the Cut-off Date, each Initial Group I Loan had an unpaid
principal balance of not less than $___________ or more than $_________ and the
average unpaid principal balance of the Initial Group I Loans was approximately
$__________. The latest stated maturity date of any of the Initial Group I Loans
will be October 1, 2028; 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). Percentages may not add up to totals due to rounding.
S-26
<PAGE>
<TABLE>
<CAPTION>
INITIAL MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
INTEREST RATES GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
6.001% - 6.500%
6.501% - 7.000%
7.001% - 7.500%
7.501% - 8.000%
8.001% - 8.500%
8.501% - 9.000%
9.001% - 9.500%
9.501% - 10.000%
10.001% - 10.500%
10.501% - 11.000%
11.001% - 11.500%
11.501% - 12.000%
12.001% - 12.500%
12.501% - 13.000%
13.001% - 13.500%
13.501% - 14.000%
14.001% - 14.500%
14.501% - 15.000%
15.001% - 15.500%
15.501% - 16.000%
------- ---------- -------
100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average Initial Mortgage Rate of
the Initial Group I Loans was approximately _____% per annum.
S-27
<PAGE>
<TABLE>
<CAPTION>
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
--------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
August 1998
September 1998
October 1998
November 1998
December 1998
January 1999
April 1999
May 1999
June 1999
August 1999
December 1999
January 2000
February 2000
March 2000
April 2000
May 2000
June 2000
July 2000
March 2001
April 2001
May 2001
------- ---------- -------
100%
TOTAL................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average remaining months to the
next interest Adjustment Date of the Initial Group I Loans was approximately
_____ months.
S-28
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGIN
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
3.501% - 4.000%
4.001% - 4.500%
4.501% - 5.000%
5.001% - 5.500%
5.501% - 6.000%
6.001% - 6.500%
6.501% - 7.000%
7.001% - 7.500%
7.501% - 8.000%
8.001% - 8.500%
8.501% - 9.000%
9.001% - 9.500%
9.501% - 10.000%
10.001% - 10.500%
10.501% - 11.000%
------- ---------- -------
100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average Gross Margin of the
Initial Group I Loans was approximately _____% per annum.
S-29
S-29
<PAGE>
<TABLE>
<CAPTION>
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
----------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
11.501% - 12.000%
12.001% - 12.500%
12.501% - 13.000%
13.001% - 13.000%
13.501% - 14.000%
14.001% - 14.500%
14.501% - 15.000%
15.001% - 15.500%
15.501% - 16.000%
16.001% - 16.500%
16.501% - 17.000%
17.001% - 17.500%
17.501% - 18.000%
18.001% - 18.500%
18.501% - 19.000%
19.001% - 19.500%
19.501% - 20.000%
20.001% - 20.500%
20.501% - 21.000%
21.001% - 21.500%
21.501% - 22.000%
22.001% - 22.500%
22.501% or greater
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average Lifetime Rate Cap of the
Initial Group I Loans was approximately _______% per annum.
S-30
<PAGE>
<TABLE>
<CAPTION>
LIFETIME RATE FLOOR
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LIFETIME RATE FLOOR GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
5.001% - 5.500%
6.001% - 6.500%
6.501% - 7.000%
7.001% - 7.500%
7.501% - 8.000%
8.001% - 8.500%
8.501% - 9.000%
9.001% - 9.500%
9.501% - 10.000%
10.001% - 10.500%
10.501% - 11.000%
11.001% - 11.500%
11.501% - 12.000%
12.001% - 12.500%
12.501% - 13.000%
13.001% - 13.500%
13.501% - 14.000%
14.001% - 14.500%
14.501% - 15.000%
15.001% - 15.500%
15.501% - 16.000%
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average Lifetime Rate Floor of the
Initial Group I Loans was approximately ____% per annum.
S-31
<PAGE>
<TABLE>
<CAPTION>
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
-------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
10.01% - 15.00%
15.01% - 20.00%
20.01% - 25.00%
25.01% - 30.00%
30.01% - 35.00%
35.01% - 40.00%
40.01% - 45.00%
45.01% - 50.00%
50.01% - 55.00%
55.01% - 60.00%
60.01% - 65.00%
65.01% - 70.00%
70.01% - 75.00%
75.01% - 80.00%
80.01% - 85.00%
85.01% - 90.00%
90.01% - 95.00%
95.01% - 100.00%
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the minimum and maximum Loan-to-Value Ratios at
origination of the Initial Group I Loans were approximately ______% and 100.00%,
respectively, and the weighted average Loan-to-Value Ratio at origination of the
Initial Group I Loans was approximately _______%.
S-32
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ------------- ----------------- -----------------
<S> <C> <C> <C>
Full Documentation
Quick Documentation
Stated Income
Limited Documentation
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
See "--Underwriting" below and Appendix A to the Prospectus Supplement
for a description of SPFC's, BOMAC's and MorCap's mortgage loan documentation
programs. Each Initial Group I 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.
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
PRINCIPAL BALANCE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
$0.01 - $50,000.00
$50,001.01 - $100,000.00
$100,001.01 - $150,000.00
$150,001.01 - $200,000.00
$200,001.01 - $250,000.00
$250,001.01 - $300,000.00
$300,001.01 - $350,000.00
$350,001.01 - $400,000.00
$400,001.01 - $450,000.00
$450,001.01 - $500,000.00
$500,001.01 - $550,000.00
$550,001.01 - $600,000.00
$600,001.01 - $650,000.00
$650,001.01 - $700,000.00
$700,001.01 - $750,000.00
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
The average original principal balance of the Initial Group I Loans was
approximately $__________.
S-33
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family
2-4 Family
PUD
Condo
Manufactured Housing
Mobile Home
Townhouse
Mixed Use
Rowhouse
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
RISK CATEGORY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
A+
A
A-
B
C
D
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
See "--Underwriting" below and Appendix A to this Prospectus Supplement
for a description of SPFC's, BOMAC's and MorCap's risk classifications. Each
Initial Group I Mortgage Loan originated by a Strategic Partner was classified
by credit grade to SPFC's guidelines.
S-34
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- --------------- ------------------- ------------------
<S> <C> <C> <C>
California
Maryland
Illinois
Texas
Georgia
Florida
Washington
Virginia
Colorado
Michigan
Indiana
Ohio
Pennsylvania
New York
Oregon
Connecticut
District of Columbia
Massachusetts
New Jersey
New Mexico
Alabama
Tennessee
Utah
North Carolina
Missouri
Arizona
Idaho
Oklahoma
Minnesota
Delaware
Wisconsin
Nevada
Maine
Iowa
Kansas
Hawaii
Kentucky
Montana
Wyoming
Rhode Island
South Carolina
Mississippi
New Hampshire
West Virginia
Alaska
Arkansas
Louisiana
Nebraska
Vermont
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
S-35
<PAGE>
As of the Cut-off Date, no more than approximately ______% of the
Initial Group I Loans was secured by Mortgaged Properties located in any one zip
code.
<TABLE>
<CAPTION>
PURPOSES OF INITIAL GROUP I LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Out Refinance
Rate/Term Refinance
Purchase
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
In general, in the case of an Initial Group I Loan made for "rate/term"
refinance purposes (not for "cash out 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. Initial Group I
Loans made for "cash 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>
<TABLE>
<CAPTION>
OCCUPANCY STATUS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
OCCUPANCY STATUS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Primary
Investment
Secondary
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
INITIAL GROUP II LOANS
The Initial 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
$___________. All percentages of the Initial Group II Loans described herein are
approximate percentages (except as otherwise indicated) by aggregate principal
balance as of the Cut-off Date.
Approximately _______% of the Initial Group II Loans have original
terms to stated maturity of approximately 20 to 30 years. Approximately _______%
of the Initial Group II Loans have original terms to stated maturity of
approximately 15 years or less.
Approximately ________% of the Initial Group II Loans are balloon
payment mortgage loans. Each such Initial Group II Loan amortizes over 360
months, but the final payment (the "Balloon Payment") on each such Initial Group
II Mortgage Loan is due and payable on the 180th month. The amount of the
Balloon Payment on each such Group II Loan is substantially in excess of the
amount of the scheduled monthly payment on such Group II Loan for the period
prior to the Due Date of such Balloon Payment.
As of the Cut-off Date, each Initial Group II Loan had an unpaid
principal balance of not less than $_____________ or more than $______________
and the average unpaid principal balance of the Initial Group II Loans was
approximately $__________. The latest stated maturity date of any of the Initial
Group II Loans will be in October 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 II Loan provides for
negative amortization or deferred interest.
Set forth below is a description of certain additional characteristics
of the Initial Group II Loans as of the Cut-off Date (except as otherwise
indicated). Percentages may not add up to totals due to rounding.
S-37
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
MORTGAGE RATES GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.001% - 7.500%
7.501% - 8.000%
8.001% - 8.500%
8.501% - 9.000%
9.001% - 9.500%
9.501% - 10.000%
10.001% - 10.500%
10.501% - 11.000%%
11.001% - 11.500%
11.501% - 12.000%
12.001% - 12.500%
12.501% - 13.000%
13.001% - 13.500%
13.501% - 14.000%
14.001% - 14.500%
14.501% - 15.000%
15.001% - 15.500%
15.501% - 16.000%
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the
Initial Group II Loans was approximately _______% per annum.
S-38
<PAGE>
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
PERCENTAGE OF
CUT-OFF DATE
REMAINING MONTHS NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
TO STATED MATURITY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
115 - 120
169 - 174
175 - 180
235 - 240
295 - 300
349 - 354
355 - 360
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Initial Group II Loans was approximately ______ months.
S-39
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
ORIGINAL LOAN-TO-VALUE RATIOS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.01% - 10.00%
10.01% - 15.00%
15.01% - 20.00%
20.01% - 25.00%
25.01% - 30.00%
30.01% - 35.00%
35.01% - 40.00%
40.01% ` 45.00%
45.01% - 50.00%
50.01% - 55.00%
55.01% - 60.00%
60.01% - 65.00%
65.01% - 70.00%
70.01% - 75.00%
75.01% - 80.00%
80.01% - 85.00%
85.01% - 90.00%
90.01% - 95.00%
95.01% - 100.00%
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group II Loans were approximately ___________% and 100%, respectively,
and the weighted average Loan-to-Value Ratio at origination of the Initial Group
II Loans was approximately _______%.
S-40
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PROGRAM GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Full Documentation
Quick Documentation
Stated Income
Limited Documentation
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
See "--Underwriting" below and Appendix A to the Prospectus Supplement
for a description of SPFC's, BOMAC's and MorCap's mortgage loan documentation
programs. Each Initial Group II 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.
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
PRINCIPAL BALANCE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$0.01 - $50,000.00
$50,000.01 - $100,000.00
$100,000.01 - $150,000.00
$150,000.01 - $200,000.00
$200,000.01 - $250,000.00
$250,000.01 - $300,000.00
$300,000.01 - $350,000.00
$350,000.01 - $400,000.00
$400,000.01 - $450,000.00
$450,000.01 - $500,000.00
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
The average original principal balance of the Initial Group II Loans
was approximately $_________.
S-41
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
PROPERTY TYPE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ------------------- ------------------
<S> <C> <C> <C>
Single Family
2 - 4 Family
Manufactured Housing
Mobile Home
Mixed Use
Condo
PUD
Townhouse
Rowhouse
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
RISK CATEGORY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
A
A-
B
C
D
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
See "--Underwriting" below and Appendix A to this Prospectus Supplement
for a description of SPFC's, BOMAC's and MorCap's risk classifications. Each
Initial Group II Loan originated by Liberty or a Strategic Partner was
classified by credit grade to SPFC's guidelines.
S-42
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
STATE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ------------------- ------------------
<S> <C> <C> <C>
California
Alabama
Florida
Maryland
Georgia
New York
Pennsylvania
Virginia
Oregon
Texas
Washington
Indiana
Ohio
Illinois
Tennessee
Colorado
District of Columbia
North Carolina
Missouri
Michigan
Oklahoma
South Carolina
New Mexico
Arizona
New Jersey
Connecticut
Mississippi
Delaware
Massachusetts
Idaho
Minnesota
Kentucky
Montana
West Virginia
Iowa
Utah
Wisconsin
Louisiana
Kansas
Rhode Island
Maine
Arkansas
New Hampshire
Alaska
Wyoming
North Dakota
Vermont
Nevada _____
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
S-43
<PAGE>
As of the Cut-off Date, no more than approximately ______% of the
Initial Group II Loans were secured by Mortgaged Properties located in any one
zip code.
<TABLE>
<CAPTION>
PURPOSES OF INITIAL GROUP II LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
LOAN PURPOSE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Out Refinance
Rate/Term Refinance
Purchase
----- --------------- ----
1,889 $134,757,845.79 100%
TOTAL.................... ===== =============== ====
</TABLE>
In general, in the case of an Initial Group II Loan made for
"rate/term" refinance purposes (not for "cash 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. Initial Group II
Loans made for "cash out" refinance purposes involve the use of the proceeds to
pay in full the principal balance of such previous mortgage loan and related
costs except that a portion of the proceeds are generally retained by the
mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial.
<TABLE>
<CAPTION>
OCCUPANCY STATUS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE UNPAID
OCCUPANCY STATUS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Primary
Investment
Secondary
------- ---------- -------
$ 100%
TOTAL.................... ======= ========== =======
</TABLE>
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 is a publicly-traded company based in Lake
Oswego, Oregon, with assets as of June 30, 1998 in excess of $___ million.
During the quarter ending June 30, 1998, SPFC originated or purchased
_____ loans, with a principal balance of approximately $___ million. In the
years ended December 31, 1997, 1996 and 1995, SPFC originated or purchased
23,355, 7,165 and 3,313 loans, respectively, with a principal balance of
approximately $1,964 million, $790 million and $288 million, respectively.
S-44
<PAGE>
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, JUNE 30,
1995 1996 1997 1998
---------------------- --------------------- ------------------- -----------------------
% OF LOANS
% OF LOANS % OF LOANS IN % OF LOANS
IN SERVICING IN SERVICING SERVICING IN SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Serviced.............. $270,193 100.0% $908,220 100.0% $2,477,194 100.0% $ 100.0%
30-59 days delinquent....... 3,072 1.1 23,486 2.6 71,928 2.9
60-89 days delinquent....... 1,896 0.7 16,183 1.8 27,095 1.1
90 days or more delinquent.. 4,396 1.6 22,751 2.5 6,384 0.3(1) (1)
-------- ----- -------- ----- --------- ----- ---------- -----
Total delinquencies......... $ 9,364 3.4% $ 62,420 6.9% $ 105,407 4.3%(1) $ %(1)
======== ===== ======== ===== ========= ===== ========== =====
Delinquent loans in
foreclosure................. $ 4,883 1.8% $ 20,546 2.3% $ 100,283 4.1% $ %
Total real estate owned..... $ 141 ----- $ 1,227 0.1% $ 22,007 0.9% $ %
</TABLE>
(1) For reporting purposes delinquencies do not include loans in foreclosure or
real estate owned properties.
As of December 31, 1997, statements to certificateholders prepared by
the trustee for each of the ten securitizations in which loans originated and
purchased by the Seller were included total reported losses of approximately
$4.6 million and such statements reported losses of approximately $___ million
for the quarter ended June 30, 1998; 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, BOMAC'S NON-CONFORMING LOAN PROGRAM AND
MORCAP'S NON- CONFORMING LOAN PROGRAM
The Mortgage Loans underwritten by SPFC were underwritten in accordance
with SPFC's "Standard NonConforming Program." The Mortgage Loans underwritten by
BOMAC were underwritten in accordance with BOMAC's "Non-Conforming Loan
Program," and the Mortgage Loans underwritten by MorCap were underwritten in
accordance with MorCap's "Non-Conforming Loan Program." The Mortgage Loans
underwritten by the Strategic Partners 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 and Group II 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, BOMAC and
MorCap are described separately in detail in Appendix A to this Prospectus
Supplement.
Each of the Originators' current single family mortgage loan volume is
generally based on loan packages submitted through mortgage broker networks.
Such loan packages, which generally contain relevant credit, property and
underwriting information on the loan request, are compiled by the applicable
mortgage broker and submitted to the respective Originator for approval and
funding. The mortgage broker receives as compensation all or a
S-46
<PAGE>
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 non-affiliated appraisal review firm, or by another
review appraiser acceptable to the respective Originator before the mortgage
loan is made.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the 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.
S-47
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1998-3 Mortgage Loan Asset-Backed Pass-Through Certificates
(the "Certificates") will include the following nine senior classes (the "Class
A Certificates"): (i) Class A-1 Certificates; (ii) Class A-2 Certificates (the
"Group I Lockout Certificates"); (iii) Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7
Certificates; (iv) Class A-8 Certificates (the "Group II Lockout Certificates");
and (v) Class A-9 Certificates (the "Fixed Strip Certificates"). In addition to
the Class A Certificates, the Series 1998-3 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 four components (each, a "Component"), the
Class A-9 Components A, B and C (collectively, the "Group I Fixed Strip
Components") and the Class A-9 Component D (the "Group II Fixed Strip
Component"). The Class A-1 Certificates, Group I Lockout Certificates and Group
I Fixed Strip Components are also referred to herein as the "Group I Class A
Certificates." The Class A-3, Class A-4, Class A-5, Class A-6, Class A-7 and
Group II Lockout Certificates and the Group II Fixed Strip Component are also
referred to herein as the "Group II 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 1998, to
Certificateholders of record on the immediately preceding Record Date. The
record date (the "Record Date") for each Distribution Date will be the close of
business on the last day of the month immediately preceding the related
Distribution Date.
The Class A Certificates will be issued, maintained and transferred on
the book-entry records of The Depository Trust Company ("DTC") and its
Participants (as defined in the Prospectus). The Class A Certificates (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
S-48
<PAGE>
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.
Accordingly, none of the Company, the Master Servicer, any Subservicer
or the Trustee will have any liability for any actions taken by DTC or its
nominee or Cedel or Euroclear, including, without limitation, actions for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Class A Certificates held by Cede, as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Securities--Form of Securities."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," 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.
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 depositories which in turn will hold such positions in
customers' securities accounts in the depositories' 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 Depositories").
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 in the Prospectus)
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.
S-49
<PAGE>
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositories.
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
Depository. 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.
For additional information regarding DTC, Cedel, Euroclear and the
Class A Certificates, see "Description of the Securities--Form of Securities" in
the Prospectus and Annex I attached hereto.
MULTIPLE LOAN GROUP STRUCTURE
The Mortgage Loans in the Trust Fund consist of the Group I Loans and Group
II Loans, as described above under "Description of the Mortgage Pool." All
distributions (other than 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.
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
S-50
<PAGE>
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, (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"), or (v) a Group I
Basis Risk Shortfall exists (a "Cross-Collateralized Basis Risk Shortfall") the
Certificate Insurer, the Group I or Group II 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 that are otherwise payable on
such Distribution Date to the Class R-II Certificates or, with respect to the
Group I Class A Certificates, to cover Group I Basis Risk Shortfall.
S-51
<PAGE>
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
and Group II 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 (as
defined herein) 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
the 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;
(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;
S-52
<PAGE>
(j) to the Class A-1 Certificates, an amount equal to the
lesser of (x) any amount then remaining in either
Certificate Account after the applications described in
clauses (a) through (i) above and (y) the aggregate Group
I Basis Risk Shortfall for such Distribution Date shall
be paid to the Class A-1 Certificateholders on account of
the Group I Basis Risk Shortfall, if any;
(k) from amounts then on deposit in the Certificate Account
for the Group II Loans, an amount equal to the Group I
Basis Risk Shortfall remaining after distributions have
been made in respect thereof pursuant to clause (j),
shall be paid to the Class A-1 Certificateholders on
account of the Group I Basis Risk Shortfall, if any; and
(l) 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, to the extent of the amounts remaining for
distributions after payments under clauses (a) through (c) under "--Priority of
Payment" above, 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, 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 or Group II Class A Carry-Forward
Amount, as applicable, allocable to interest. The aggregate amount of interest
allocable to the Group I and Group II 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. For each Distribution Date, with respect to
the Class A-1 Certificates, the "Accrual Period" is the period commencing on the
Distribution Date immediately preceding the month on which such Distribution
Date occurs and ending on the calendar day immediately preceding such
Distribution Date, except with respect to the calender day immediately preceding
such Distribution Date, which has an accrual period from the Closing Date to the
first Distribution Date. With respect to the Group I Lockout Certificates, the
Fixed Strip Certificates and the Group II Class A Certificates, the "Accrual
Period" is the previous calendar month. The Class A Interest Distribution Amount
with respect the Class A Certificates is calculated on the basis of a 360-day
year consisting of twelve 30-day months (or, with respect to the Class A-1
Certificates, the actual number of days elapsed during the related Accrual
Period).
With respect to any Distribution Date and the Group I and Group II 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.
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 weighted average of the Class A-1 Formula Pass-Through Rate
applicable to the Class A-1 Certificates for such Distribution Date and the
Pass-Through Rates on the Group I Lockout Certificates and (ii) the Group I
Fixed Strip Effective Rate times a fraction equal to (x) the aggregate
Certificate Principal Balance of the Group I Lockout Certificates
S-54
<PAGE>
divided by (y) the aggregate principal balance of the Group I Loans as of the
end of the second preceding Due Period (or, in the case of the first
Distribution Date, as of the Closing Date). The Group I Class A CarryForward
Amount does not include any Group I Basis Risk Shortfall.
The "Group I Fixed Strip Effective Rate" for a Distribution Date is equal
to the sum of the Pass-Through Rates on the Class A-9 Component A, Class A-9
Component B and Class A-9 Component C.
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
times a fraction equal to 30 divided by the number of days in the immediately
preceding Accrual Period. The "Net Lifetime Rate Cap" on each Group I Loan is
equal to the related Lifetime Rate Cap minus the Servicing Fee Rate (as defined
herein) and the rates per annum at which the Trustee's Fee and the Premium
Amount accrue.
The Pooling and Servicing Agreement provides that if the Pass-Through Rate
on the Class A-1 Certificates is less than the Class A-1 Formula Pass-Through
Rate and any resulting shortfall in interest is not paid on such Distribution
Date from any available Net Monthly Excess Cashflow, as described below, then
the amount of any such shortfall will be carried forward and be paid to the
extent of available funds, as described herein, to the Holders of the Class A-1
Certificates on future Distribution Dates and shall accrue interest at the
applicable Class A-1 Formula Pass-Through Rate, until paid (such shortfall,
together with such accrued interest, the "Group I Basis Risk Shortfall"). The
Certificate Insurance Policy does not cover the Group I Basis Risk Shortfall,
nor do the ratings assigned to the Class A-1 Certificates address the payment of
the Group I Basis Risk Shortfall.
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 weighted average of the
Pass-Through Rates applicable to the Group II Class A Certificates (other than
the Group II Fixed Strip Component) and (ii) the Pass-Through Rate on the Group
II Fixed Strip Component for such Distribution Date times a fraction equal to
(x) the Certificate Principal Balance of the Group II Lockout Certificates
divided by (y) the aggregate Certificate Principal Balance of the Group II 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 1998, and
on each Distribution Date thereafter, the Pass-Through Rate on the Class A-1
Certificates will be adjusted to equal the lesser of (i) (a) with respect to any
Distribution Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is less than
S-55
<PAGE>
10% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, One-Month LIBOR (as defined below) plus 0.17% per annum or (b) with
respect to any Distribution Date thereafter, One-Month LIBOR plus 0.34% per
annum 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 a rate equal to (i) a fraction equal to 30 divided by the
number of days in the immediately preceding Accrual Period multiplied by (a) the
weighted average of the Mortgage Rates of the Group I Loans, minus (b) the sum
of the Servicing Fee Rate (as defined herein) and the rates per annum at which
the Trustee's Fee and Premium Amount (each as defined herein) accrue, and minus
(c) the Group I Fixed Strip Effective Rate (as defined herein) times a fraction
equal to (x) the aggregate Certificate Principal Balance of the Group I Lockout
Certificates divided by (y) the aggregate principal balance of the Group I Loans
as of the end of the second preceding Due Period (or, in the case of the first
Distribution Date, as of the Closing Date) minus (ii) commencing on the
thirteenth Distribution Date, 0.50% per annum.
The Pass-Through Rate with respect to the Group I Lockout, Class A-3, Class
A-4 and Class A-5 Certificates is equal to the fixed rate set forth on the cover
hereof. The Pass-Through Rate on the Class A-6, Class A-7 and Group II Lockout
Certificates is equal to the lesser of (i) the fixed rate set forth on the cover
hereof and (ii) the Maximum Group II Rate for the first 36 Distribution Dates.
The "Maximum Group II Rate" will be equal to the weighted average of the
Mortgage Rates on the Group II Loans, less the Servicing Fee Rate and the rates
per annum at which the Trustee's Fee and Premium Amount accrue, weighted on the
basis of the related Principal Balance of each Group II Loan as of the first day
of the month preceding the month of such Distribution Date, minus the product of
(x) the Pass-Through Rate on the Group II Fixed Strip Component and (y) a
fraction, the numerator of which is the Certificate Principal Balance of the
Group II Lockout Certificates and the denominator of which is the aggregate
Principal Balance of the Group II Loans as of the first day of the month
preceding the month of such Distribution Date. Additionally, with respect to any
Distribution Date and the Class A-7 Certificates, after 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, the
Pass-Through Rate shall be increased by ___%.
The Pass-Through Rate for the Class A-9 Component A will be equal to ___%
for the first 20 Distribution Dates, and 0.00% thereafter. The Pass-Through Rate
for the Class A-9 Component B will be equal to 1.00% for the first 12
Distribution Dates, and 0.00% thereafter. The Pass-Through Rate for the Class
A-9 Component C will be equal to 1.00% for the first 6 Distribution Dates and
0.00% thereafter. The Pass-Through Rate for the Class A-9 Component D will be
equal to (a) the weighted average of the Mortgage Rates of the Group II Loans,
minus (b) the sum of the Servicing Fee Rate and the rates per annum at which the
Trustee's Fee and Premium Amount accrue 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). Any amount
distributed in respect of the Components of the Fixed Strip Certificates shall
be distributed to the holders of the Fixed Strip Certificates. The Components of
the Fixed Strip Certificates are not separately transferable.
As described herein, the Class A Interest Distribution Amounts allocable to
the Class A Certificates are 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 Fixed Strip Component as of any
Distribution Date is equal to the Certificate Principal Balance of the Group I
Lockout Certificates immediately prior to such date. The Notional Amount of the
Group II Fixed Strip Component as of any Distribution Date is equal to the
Certificate Principal Balance of the Group II Lockout Certificates immediately
prior to such date.
S-56
<PAGE>
On any Distribution Date, the amount of the premium (the "Premium Amount")
payable to the Certificate Insurer is equal to one-twelfth of the product of a
percentage specified in an exhibit to the Pooling and Servicing Agreement and
the Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
With respect to the first Distribution Date, on the Delivery Date, and,
with respect to each Distribution Date thereafter, on the second LIBOR Business
Day preceding such Distribution Date (each such date, an "Interest Determination
Date"), One-Month LIBOR shall be established by the Trustee and as to any
Accrual Period, One-Month LIBOR with respect to the Class A-1 Certificates will
equal the rate for United States dollar deposits for one month which appears on
the Telerate Screen Page 3750 as of 11:00 A.M., London time, on such Interest
Determination Date. "Telerate Screen Page 3750" means the display designated as
page 3750 on the Telerate Service (or such other page as may replace page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page as
may replace that page on that service, or if such service is no longer offered,
such other service for displaying One-Month LIBOR or comparable rates as may be
selected by the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee) as of 11:00 A.M., London time, on the Interest
Determination Date, to prime banks in the London interbank market for a period
of one month in amounts approximately equal to the aggregate Certificate
Principal Balance of the Class A-1 Certificates. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Trustee, as of
11:00 A.M., New York City time, on the Interest Determination Date, for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the Class
A-1 Certificates. If no such quotations can be obtained, the rate will be
One-Month LIBOR for the prior Distribution Date. 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 for the related Accrual Period
shall (in the absence of manifest error) be final and binding.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Group I Class A Certificates and Group II Class A
Certificates (other than the Fixed Strip Certificates, which are not entitled to
distributions with respect to principal) will be entitled to receive on each
Distribution Date a distribution with respect to principal to the extent of the
portion of the amount remaining for distribution after payment of the related
Class A Interest Distribution Amount, an amount equal to the related Class A
Principal Distribution Amount. The Class A Principal Distribution Amount, as
determined separately for the Group I Class A Certificates and Group II Class A
Certificates, will equal the sum of (i) the portion of any Group I or Group II
Class A Carry-Forward Amount, as applicable, which relates to a shortfall in a
distribution of a related Subordination Deficit, (ii) all scheduled installments
of principal in respect of the Mortgage Loans in the related Loan Group received
or advanced during the 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
S-57
<PAGE>
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 Group I Class
A Certificates (other than the Group I Fixed Strip Components) will be allocated
as follows:
(i) first, to the Class A-2 Certificates, the Group I 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-1 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero; and
(iii) third, to the Class A-2 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 I
Loans, the related Class A Principal Distribution Amount payable to the Group I
Class A Certificates will be allocated to the Group I 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 "Group I Lockout Distribution Percentage" for any Distribution Date
occurring prior to the Distribution Date in April 2000 will be equal to 0%. The
"Group I Lockout Distribution Percentage" for any Distribution Date occurring
thereafter will be 95%. Notwithstanding the foregoing, if the Certificate
Principal Balances of the Class A-1 Certificates have been reduced to zero, the
Group I Lockout Distribution Percentage will be equal to 100%.
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 II Class
A Certificates (other than the Group II Fixed Strip Component) will be allocated
as follows:
(i) first, to the Group II Lockout Certificates, the Group II
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;
S-58
<PAGE>
(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;
(v) fifth, to the Class A-6 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(vi) sixth, to the Class A-7 Certificates in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero; and
(vii) seventh, to the Group II 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 II
Loans, the related Class A Principal Distribution Amount payable to the Group II
Class A Certificates will be allocated to the Group II Class A Certificates on a
pro rata basis based on the Certificate Principal Balances thereof, in reduction
of the Certificate Principal Balances thereof, until the
Certificate Principal Balances thereof have been reduced to zero.
The "Group II Lockout Certificate Percentage" will be calculated for
each Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Group II Lockout Certificates, immediately prior to
such Distribution Date, divided by the sum of the aggregate Certificate
Principal Balances of the Group II Class A Certificates, immediately prior to
such Distribution Date.. The "Group II Lockout Distribution Percentage" for any
Distribution Date occurring prior to the Distribution Date in October 2001 will
be equal to 0%. The "Group II 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 Group II Lockout Certificate
Percentage for such Distribution Date; for any Distribution Date during the
sixth year after the Delivery Date, 80% of the Group II Lockout Certificate
Percentage for such Distribution Date; for any Distribution Date during the
seventh year after the Delivery Date, 100% of the Group II Lockout Certificate
Percentage for such Distribution Date, and for any Distribution Date thereafter,
the lesser of (x) 100% and (y) 300% of the Group II Lockout Certificate
Percentage. Notwithstanding the foregoing, if the Certificate Principal Balances
of the Group II Class A Certificates (other than the Group II Lockout
Certificates) have been reduced to zero, the Group II Lockout Distribution
Percentage will be equal to 100%.
The "Master Servicer Remittance Date" with respect to any Distribution
Date is the 18th day of the month in which such Distribution Date occurs, or if
such 18th day is not a business day, the business day immediately preceding such
18th day.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of the Due Date
preceding such date of determination, as such principal balance is specified for
such Due Date in the amortization schedule, (before any adjustment to such
amortization schedule by reason of any bankruptcy (other than Deficient
Valuations (as defined in the Prospectus)) or similar proceeding or any
moratorium or similar waiver or grace period) after giving effect to prepayments
received prior to such Due Date, Deficient Valuations incurred prior to such Due
Date, and to the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor. The Principal Balance of a
Mortgage Loan which becomes a Liquidated Mortgage Loan (as defined herein) on or
prior to such Due Date shall be zero.
S-59
<PAGE>
See "Summary--Special Prepayment Considerations" and "--Special Yield
Considerations" and "Certain Yield and Prepayment Considerations" herein.
OVERCOLLATERALIZATION PROVISIONS
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. Except with respect to the first 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 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 addition, the
Required Subordinated Amount may be reduced at the discretion of the Certificate
Insurer.
In the event that the Required Subordinated Amount with respect to any
Loan Group is permitted to decrease on any Distribution Date, 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 Basis Risk
Shortfall, 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
S-60
<PAGE>
such Distribution Date is the related "Excess Subordinated Amount" with respect
to such Distribution Date. With respect to any Distribution Date, an amount
equal to the lesser of (a) the related Excess Subordinated Amount and (b) the
principal collections received by the Master Servicer with respect to the prior
Due Period is the related "Subordination Reduction Amount."
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.
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.
S-61
<PAGE>
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment (as defined below)
will be received by the Trustee, or its successor as Trustee for the Owners, on
behalf of the Owners from the Certificate Insurer, for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Certificate Insurance
Policies with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Certificate Insurance
Policies, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Class A Certificates, unless such acceleration is at the
sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust Fund, 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
S-62
<PAGE>
or any failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policies.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
"Business Day" means any day other than a Saturday, a Sunday
or a day on which 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
subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment
which shall be due and owing on the applicable Distribution Date.
"Owner" means each related Class A Certificateholder (as
defined in the Pooling and Servicing Agreement) who, on the applicable
Distribution Date, is entitled under the terms of the applicable Class
A Certificate to payment thereunder.
"Pooling and Servicing Agreement" means the Pooling and
Servicing Agreement dated as of September 1, 1998, by and among
Southern Pacific Secured Assets Corp., as Company, Southern Pacific
Funding Corporation, as Master Servicer, and Norwest Bank Minnesota,
National Association, 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 __, 1998.
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.
S-63
<PAGE>
The Certificate Insurance Policies are being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policies is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason.
The premium on each of the Certificate Insurance Policies is not refundable for
any reason including payment, or provision being made for payment, prior to
maturity of the Class A Certificates.
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.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Certificate Insurer.
MBIA Inc. is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1997 and December 31, 1996 and for each of the three years in the period ended
December 31, 1997, 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, 1997 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries as of June 30, 1998 and for the three
month periods ended June 30, 1998 and June 30, 1997 included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ending June 30, 1998, 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.
S-64
<PAGE>
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"):
<TABLE>
<CAPTION>
SAP
------------------------------------------------------------
DECEMBER 31, 1997 JUNE 30, 1998
--------------------------- ---------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................... $5,256 $
Liabilities....................... 3,496
Capital and Surplus............... 1,760
GAAP
------------------------------------------------------------
DECEMBER 31, 1997 JUNE 30, 1998
--------------------------- ---------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Assets............................ $5,988 $
Liabilities....................... 2,624
Shareholder's Equity.............. 3,364
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1997
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 IBCA, Inc. (formerly known as 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
S-65
<PAGE>
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.
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. 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 II Loans) would be expected to
increase. Conversely, if prevailing mortgage rates rose significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayments on the Mortgage
Loans would be expected to decrease
Because the Mortgage Rates on the Group II Loans and the Pass-Through
Rates on the Group I Lockout, Class A-3, Class A-4, Class A-5, Class A-6, Class
A-7 and Group II Lockout Certificates and the Components of the Fixed Strip
Certificates are generally 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 such Class A Certificates were to rise,
the market value of such Class A Certificates may decline.
The effective yield to maturity to each holder of a Group I Lockout
Certificate, Fixed Strip Certificates and Group II 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 the related
Mortgage Loans from the first day of each month, the distribution of such
interest will be made on the 25th day (or if such day is not a business day, the
next succeeding business day) of the month following the month of accrual.
The Group II Loans with balloon payments will not be fully amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Mortgage loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a borrower to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price
S-66
<PAGE>
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 Group II
Class A Certificates and thereby extend the weighted average life of the Group
II Class A Certificates and, if the Group II 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 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 Group I 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 April 2000 and thereafter
will receive a disproportionately large or small portion of principal payments,
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
Group I Lockout Certificates of changes in market interest rates or market
yields for similar securities may be greater or lesser than for the Class A-1
Certificates.
Investors in the Group II Lockout Certificates should be aware that
because the Group II Lockout Certificates do not receive any portion of
principal payments prior to the Distribution Date occurring in October 2001 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,
Class A-5, Class A-6 Class A-7 Certificates have been reduced to zero), the
weighted average life of the Group II Lockout Certificates will be longer or
shorter than would otherwise be the case, and the effect on the market value of
the Group II Lockout Certificates of changes in market interest rates or market
yields for similar securities may be greater or lesser than for other classes of
Group II Class A Certificates entitled to such distributions.
The servicing of mortgage loans of the type included in the Trust Fund
requires special skill and diligence. Investors should note that the Master
Servicer has limited experience in servicing the types of mortgage loans
included in the Trust Fund. Accordingly, in the event of the transfer of the
servicing to the
S-67
<PAGE>
Master Servicer, there may be a greater risk of delinquencies on the Mortgage
Loans and, to the extent such delinquencies result in losses, a greater risk of
increased losses, than for a servicer with more experience servicing the types
of mortgage loans included in the Trust Fund. Such losses will be allocated to
the Class A Certificates to the extent they are not covered by the Certificate
Insurance Policies or by overcollateralization. In addition, any higher default
rate resulting from such transfer may result in an accelerated principal
prepayments on the Mortgage Loans.
The following discussion assumes the characteristics set forth in the
tables below. The Final Scheduled Maturity Dates for the Class A Certificates
(other than the Fixed Strip Certificates) are as follows: Class A-1
Certificates, October 25, 2029; Class A-2 Certificates, October 25, 2029; Class
A-3 Certificates, ___________, 20____; Class A-4 Certificates, _____________;
Class A-5 Certificates, ______________; and Class A-6 Certificates, September
__, 2027. The Class A-1 Certificates, Class A-2 Certificates, Class A-7
Certificates and Class A-8 Certificates were assigned a Final Scheduled Maturity
Date of October 25, 2029. Such Final Scheduled Maturity Dates for the Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6 Certificates were calculated
assuming, (i) 0% of the Prepayment Assumption with respect to the Group I Loans
and Group II Loans and (ii) no Net Monthly Excess Cashflows are used to make
accelerated payments of principal on such classes of Class A Certificates. 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 Principal Balance of the Mortgage Loans is
less than 10% (5% with respect to the Master Servicer (or the Certificate
Insurer, if SPFC is removed as Master Servicer)) 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 Certificates is a prepayment assumption (the "Prepayment Assumption" or
"PPA"), which represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of the pool of mortgage loans for the
life of such mortgage loans. A 100% Prepayment Assumption assumes a constant
prepayment rate of 4% 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 1.45454% (precisely 16/11) (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, 0% Prepayment Assumption assumes a prepayment rate
equal to 0% or 0% of the Prepayment Assumption, i.e., no prepayments.
Correspondingly, 50% Prepayment Assumption assumes prepayment rates equal to 50%
of the Prepayment Assumption, and so forth. The Prepayment Assumption does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the Mortgage Loans.
The following tables have been prepared assuming that Loan Group I and
Loan Group II are comprised of Mortgage Loans having the following
characteristics (dollar amounts are approximate):
S-68
<PAGE>
LOAN GROUP I
(i) the 1st through 7th hypothetical Mortgage Loans set forth below
comprise the Group I Loans included in Loan Group I:
<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>
</TABLE>
LOAN GROUP II
(i) the 1st through 4th hypothetical Mortgage Loans set forth below
comprise the Group II Loans included in Loan Group II:
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM ORIGINAL
TO MATURITY TO MATURITY AMORTIZATION TERM
PRINCIPAL BALANCE MORTGAGE RATE NET COUPON (IN MONTHS) (IN MONTHS) (IN MONTHS)
----------------- ------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
</TABLE>
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 1998, and prepayments are assumed to be received on the last day of each
month, commencing in September 1998; (v) the Mortgage Rate for the Group I Loans
is adjusted on its next Adjustment Date and on subsequent Adjustment Dates as
necessary to a rate equal to the sum of the Index and the related Gross Margin,
subject to the related Periodic Rate Cap and Lifetime Rate Cap; (vi) there are
no Prepayment Interest Shortfalls; (vii) distributions on the Class A
Certificates are made in cash on the 25th day of each month, commencing in
October 1998; (viii) the Delivery Date is September __, 1998; (ix) Six-Month
LIBOR will remain constant at ______% and One Month LIBOR will remain constant
at ______% per annum; (x) the Required Subordinated Amounts will be set as
provided in the Pooling and Servicing Agreement; (xi) the Mortgage Loans will
prepay at the indicated assumed percentages of the Prepayment Assumption set
forth in the tables; and (xii) neither the holder of a majority percentage
interest of the Class R-II Certificates or the Master Servicer (or the
Certificate Insurer, if SPFC 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 with regard to the weighted average lives,
as noted in footnote (2) set forth on the following tables) ((i) through (xii)
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
S-69
<PAGE>
the initial Certificate Principal Balance of each such class that would be
outstanding after each of the dates shown at various percentages of the
Prepayment Assumption which will occur simultaneously for both Loan Groups.
S-70
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999..............................
SEPTEMBER 2000..............................
SEPTEMBER 2001..............................
SEPTEMBER 2002..............................
SEPTEMBER 2003..............................
SEPTEMBER 2004..............................
SEPTEMBER 2005..............................
SEPTEMBER 2006..............................
SEPTEMBER 2007..............................
SEPTEMBER 2008..............................
SEPTEMBER 2009..............................
SEPTEMBER 2010..............................
SEPTEMBER 2011..............................
SEPTEMBER 2012..............................
SEPTEMBER 2013..............................
SEPTEMBER 2014..............................
SEPTEMBER 2015..............................
SEPTEMBER 2016..............................
SEPTEMBER 2017..............................
SEPTEMBER 2018..............................
SEPTEMBER 2019..............................
SEPTEMBER 2020..............................
SEPTEMBER 2021..............................
SEPTEMBER 2022..............................
SEPTEMBER 2023..............................
SEPTEMBER 2024..............................
SEPTEMBER 2025..............................
SEPTEMBER 2026..............................
SEPTEMBER 2027..............................
SEPTEMBER 2028 AND THEREAFTER...............
WEIGHTED AVERAGE
LIVES IN YEARS(1)..................
WEIGHTED AVERAGE
LIVES IN YEARS(2)..................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-71
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999..............................
SEPTEMBER 2000..............................
SEPTEMBER 2001..............................
SEPTEMBER 2002..............................
SEPTEMBER 2003..............................
SEPTEMBER 2004..............................
SEPTEMBER 2005..............................
SEPTEMBER 2006..............................
SEPTEMBER 2007..............................
SEPTEMBER 2008..............................
SEPTEMBER 2009..............................
SEPTEMBER 2010..............................
SEPTEMBER 2011..............................
SEPTEMBER 2012..............................
SEPTEMBER 2013..............................
SEPTEMBER 2014..............................
SEPTEMBER 2015..............................
SEPTEMBER 2016..............................
SEPTEMBER 2017..............................
SEPTEMBER 2018 .............................
SEPTEMBER 2019 .............................
SEPTEMBER 2020 AND THEREAFTER...............
WEIGHTED AVERAGE
LIVES IN YEARS(1)..................
WEIGHTED AVERAGE
LIVES IN YEARS(2)..................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-72
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-3 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999...............................
SEPTEMBER 2000...............................
SEPTEMBER 2001...............................
SEPTEMBER 2002...............................
SEPTEMBER 2003...............................
SEPTEMBER 2004...............................
SEPTEMBER 2005...............................
SEPTEMBER 2006...............................
SEPTEMBER 2007...............................
SEPTEMBER 2008...............................
SEPTEMBER 2009...............................
SEPTEMBER 2010...............................
SEPTEMBER 2011...............................
SEPTEMBER 2012...............................
SEPTEMBER 2013...............................
SEPTEMBER 2014...............................
SEPTEMBER 2015...............................
SEPTEMBER 2016...............................
SEPTEMBER 2017...............................
SEPTEMBER 2018...............................
SEPTEMBER 2019...............................
SEPTEMBER 2020 AND THEREAFTER................
WEIGHTED AVERAGE
LIVES IN YEARS(1)...................
WEIGHTED AVERAGE
LIVES IN YEARS(2)...................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-73
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999.............................
SEPTEMBER 2000.............................
SEPTEMBER 2001.............................
SEPTEMBER 2002.............................
SEPTEMBER 2003.............................
SEPTEMBER 2004.............................
SEPTEMBER 2005.............................
SEPTEMBER 2006.............................
SEPTEMBER 2007.............................
SEPTEMBER 2008.............................
SEPTEMBER 2009.............................
SEPTEMBER 2010.............................
SEPTEMBER 2011.............................
SEPTEMBER 2012.............................
SEPTEMBER 2013.............................
SEPTEMBER 2014.............................
SEPTEMBER 2015.............................
SEPTEMBER 2016.............................
SEPTEMBER 2017.............................
SEPTEMBER 2018.............................
SEPTEMBER 2019.............................
SEPTEMBER 2020.............................
SEPTEMBER 2021 AND THEREAFTER..............
WEIGHTED AVERAGE
LIVES IN YEARS(1).................
WEIGHTED AVERAGE
LIVES IN YEARS(2).................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-74
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-5 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999.............................
SEPTEMBER 2000.............................
SEPTEMBER 2001.............................
SEPTEMBER 2002.............................
SEPTEMBER 2003.............................
SEPTEMBER 2004.............................
SEPTEMBER 2005.............................
SEPTEMBER 2006.............................
SEPTEMBER 2007.............................
SEPTEMBER 2008.............................
SEPTEMBER 2009.............................
SEPTEMBER 2010.............................
SEPTEMBER 2011.............................
SEPTEMBER 2012.............................
SEPTEMBER 2013.............................
SEPTEMBER 2014.............................
SEPTEMBER 2015.............................
SEPTEMBER 2016.............................
SEPTEMBER 2017.............................
SEPTEMBER 2018.............................
SEPTEMBER 2019.............................
SEPTEMBER 2020.............................
SEPTEMBER 2021.............................
SEPTEMBER 2022.............................
SEPTEMBER 2023 AND THEREAFTER..............
WEIGHTED AVERAGE
LIVES IN YEARS(1).................
WEIGHTED AVERAGE
LIVES IN YEARS(2).................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-75
<PAGE>
<TABLE>
<CAPTION>
CLASS A-6 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999..............................
SEPTEMBER 2000..............................
SEPTEMBER 2001..............................
SEPTEMBER 2002..............................
SEPTEMBER 2003..............................
SEPTEMBER 2004..............................
SEPTEMBER 2005..............................
SEPTEMBER 2006..............................
SEPTEMBER 2007..............................
SEPTEMBER 2008..............................
SEPTEMBER 2009..............................
SEPTEMBER 2010..............................
SEPTEMBER 2011..............................
SEPTEMBER 2012..............................
SEPTEMBER 2013..............................
SEPTEMBER 2014..............................
SEPTEMBER 2015..............................
SEPTEMBER 2016..............................
SEPTEMBER 2017..............................
SEPTEMBER 2018..............................
SEPTEMBER 2019..............................
SEPTEMBER 2020..............................
SEPTEMBER 2021..............................
SEPTEMBER 2022..............................
SEPTEMBER 2023..............................
SEPTEMBER 2024..............................
SEPTEMBER 2025..............................
SEPTEMBER 2026..............................
SEPTEMBER 2027..............................
SEPTEMBER 2028 AND THEREAFTER...............
WEIGHTED AVERAGE
LIVES IN YEARS(1)..................
WEIGHTED AVERAGE
LIVES IN YEARS(2)..................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-76
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-7 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999..............................
SEPTEMBER 2000..............................
SEPTEMBER 2001..............................
SEPTEMBER 2002..............................
SEPTEMBER 2003..............................
SEPTEMBER 2004..............................
SEPTEMBER 2005..............................
SEPTEMBER 2006..............................
SEPTEMBER 2007..............................
SEPTEMBER 2008..............................
SEPTEMBER 2009..............................
SEPTEMBER 2010..............................
SEPTEMBER 2011..............................
SEPTEMBER 2012..............................
SEPTEMBER 2013..............................
SEPTEMBER 2014..............................
SEPTEMBER 2015..............................
SEPTEMBER 2016..............................
SEPTEMBER 2017..............................
SEPTEMBER 2018..............................
SEPTEMBER 2019..............................
SEPTEMBER 2020..............................
SEPTEMBER 2021..............................
SEPTEMBER 2022..............................
SEPTEMBER 2023..............................
SEPTEMBER 2024..............................
SEPTEMBER 2025..............................
SEPTEMBER 2026..............................
SEPTEMBER 2027 .............................
SEPTEMBER 2028 AND THEREAFTER...............
WEIGHTED AVERAGE
LIVES IN YEARS(1)..................
WEIGHTED AVERAGE
LIVES IN YEARS(2)..................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-77
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-8 CERTIFICATES
---------------------------------------------------------------------
GROUP I (PPA) 0% 50% 100% 140% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
GROUP II (PPA) 0% 50% 100% 120% 150% 200% 250%
--------- ---------- --------- ---------- --------- ---------- ------
DISTRIBUTION DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................ 100% 100% 100% 100% 100% 100% 100%
SEPTEMBER 1999..............................
SEPTEMBER 2000..............................
SEPTEMBER 2001..............................
SEPTEMBER 2002..............................
SEPTEMBER 2003..............................
SEPTEMBER 2004..............................
SEPTEMBER 2005..............................
SEPTEMBER 2006..............................
SEPTEMBER 2007..............................
SEPTEMBER 2008..............................
SEPTEMBER 2009..............................
SEPTEMBER 2010..............................
SEPTEMBER 2011..............................
SEPTEMBER 2012..............................
SEPTEMBER 2013..............................
SEPTEMBER 2014..............................
SEPTEMBER 2015..............................
SEPTEMBER 2016..............................
SEPTEMBER 2017..............................
SEPTEMBER 2018..............................
SEPTEMBER 2019..............................
SEPTEMBER 2020..............................
SEPTEMBER 2021..............................
SEPTEMBER 2022..............................
SEPTEMBER 2023..............................
SEPTEMBER 2024..............................
SEPTEMBER 2025..............................
SEPTEMBER 2026 .............................
SEPTEMBER 2027 .............................
SEPTEMBER 2028 AND THEREAFTER...............
WEIGHTED AVERAGE
LIVES IN YEARS(1)........................
WEIGHTED AVERAGE
LIVES IN YEARS(2)........................
</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
AGGREGATE PRINCIPAL BALANCE OF THE HYPOTHETICAL MORTGAGE LOANS AS SET FORTH
IN THE STRUCTURING ASSUMPTIONS.
S-78
<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 THE PREPAYMENT ASSUMPTION UNTIL MATURITY OR THAT ALL OF THE
MORTGAGE LOANS WILL PREPAY AT THE SAME LEVEL OF 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 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 2001. In
addition, if, prior to the Distribution Date in September 2000, the aggregate
Principal Balance of the Group I Loans has been reduced to approximately ______%
of the aggregate principal balance of the Group I Loans as of the Cut-off Date,
the yield to investors on the Fixed Strip Certificates will be extremely
sensitive to the rate and timing of principal payments on the Group I Loans
(including prepayments, defaults and liquidations), which rate may fluctuate
significantly over time. In addition, if, prior to the Distribution Date in
October 2001, the aggregate Principal Balance of the Group II Loans has been
reduced to 10% of the aggregate principal balance of the Group II Loans as of
the Cut-off Date, the yield to investors on the Fixed Strip Certificates will be
extremely sensitive to the rate and timing of principal payments on the Group II
Loans (including prepayments, defaults and liquidations), which rate may
fluctuate significantly over time. Finally, if the aggregate Principal Balance
of all of the Mortgage Loans has been reduced to 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, and the Master Servicer,
Certificate Insurer or holder of 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,
1998, among the Company, the Master Servicer and Norwest Bank Minnesota,
National Association, 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
Southern Pacific Funding Corporation ("SPFC"; or, 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. Prior to October
30, 1997, the Master Servicer had no experience in the servicing of mortgage
loans. However, on October 30, 1997, SPFC announced the signing of a definitive
agreement to purchase the loan servicing operations of North American Mortgage
Company ("NAMCO"). Under the terms of the agreement, SPFC
S-79
<PAGE>
acquired NAMCO's servicing operation assets and retained its senior management
team and loan servicing employees. SPFC has been preliminarily approved by S&P
as a residential mortgage servicer.
The Master Servicer will act as servicer with respect to all of the
Initial Group I Loans and Initial Group II Loans in part with the assets and
employees acquired from NAMCO.
The Master Servicer's loan servicing operation is located in Santa
Rosa, California. The management and servicing teams have serviced a residential
loan portfolio in excess of $20 billion. Additionally, the management team has
experience servicing distressed loans as a master servicer of more than 36,000
loans for the Resolution Trust Corporation. The facility's technology
incorporates the use of the Alltel Mortgage Servicing Package ("MSP")
Information Services and the facility has developed a number of proprietary
subsystems to enhance Alltel's MSP servicing system.
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, National Association (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.
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 SPFC is removed as Master
Servicer) may, at its option and at its sole cost and expense, on any
Distribution Date when the aggregate
S-80
<PAGE>
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 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 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 Fixed Strip Certificates) will not, and the Fixed Strip
Certificates will, be treated as having been issued with original issue
discount. The prepayment assumption that will be used with respect to the Group
I Class A Certificates and Group II 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 140% Prepayment Assumption, with respect to Loan Group I, and a 120%
Prepayment Assumption, with respect to Loan Group II. 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. 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
S-81
<PAGE>
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 rules similar to those 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 generally would be to calculate original issue
discount for such Certificate (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 Fixed Strip 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 Fixed Strip Certificates will be
reported to the IRS and the Fixed Strip 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 Fixed Strip 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 against
future original issue discount (if any) attributable to such Certificates.
Although the matter is not free from doubt, a Fixed Strip 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, if any. See "Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates" and "--Premium" in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(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.
S-82
<PAGE>
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 __, 1998 (the "Underwriting Agreement"), among
Greenwich Capital Markets, Inc. (the "Underwriter"), the Company and the Seller,
the Underwriter has agreed to purchase and the Company has agreed to sell to the
Underwriter the Underwritten Certificates. It is expected that delivery of the
Underwritten Certificates will be made only in book-entry form through the Same
Day Funds Settlement System of DTC, on or about September __, 1998, against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Underwritten 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 Underwritten Certificates by the Underwriter
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. The net
proceeds to the Company from the sale of the Underwritten Certificates, before
deducting expenses payable by the Company, will be approximately _______% of the
aggregate initial Certificate Principal Balance of the Underwritten Certificates
plus accrued interest on the Underwritten Certificates (other than the Class A-1
Certificates). The Underwriter 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
Underwriter. In connection with the sale of the Underwritten Certificates, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Underwritten
Certificates may be deemed to be underwriters and any profit on the resale of
the Underwritten 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 Underwriter, and that under limited
circumstances the Underwriter 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.
The Fixed Strip Certificates may be offered by the Company from time to
time directly or through an underwriter or agent in one or more negotiated
transactions, or otherwise, at varying prices to be determined at the time of
sale. Proceeds to the Company from any sale of the Fixed Strip Certificates will
equal the purchase price paid by the purchaser thereof, net of any expenses
payable by the Company and any compensation payable to any such underwriter or
agent.
There can be no assurance that a secondary market for the Underwritten
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Underwritten
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
S-83
<PAGE>
of the Underwritten Certificates. There can be no assurance that any additional
information regarding the Underwritten Certificates will be available through
any other source. In addition, the Company is not aware of any source through
which price information about the Underwritten Certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the Underwritten Certificates may adversely affect the liquidity of the
Underwritten Certificates, even if a secondary market for the Underwritten
Certificates becomes available.
S-84
<PAGE>
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
Underwriter 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"), "AAA" by 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 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 Basis Risk Shortfall.
S-85
<PAGE>
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 constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
for so long as they are rated in at least the second highest rating category by
one or more nationally recognized statistical rating agencies, and, as such, are
legal investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provisions on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991.
The Company makes no representations as to the proper characterization
of the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the Class A Certificates constitutes a legal investment or is subject to
investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
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 the Underwriter an
administrative exemption (Prohibited Transaction Exemption )__-__, as amended;
Exemption Application ____________ (the "Exemption") as described in the
Prospectus under "ERISA Considerations." The Exemption generally exempts 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 an Underwriter (as hereinafter defined), 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." 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 or (c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager with respect
to the certificates.
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 Exemption.
However, the Exemption contains a number of conditions which must be met for the
Exemption 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
S-86
<PAGE>
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 Exemption
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.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption
and any of the prohibited transaction class exemptions issued by the DOL and the
potential consequences in their specific circumstances prior to making an
investment in the Class A Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Class A Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. See "ERISA Considerations" in
the Prospectus.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
S-87
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
----
Summary S-4
RISK FACTORS S-19
DESCRIPTION OF THE MORTGAGE POOL S-21
DESCRIPTION OF THE CERTIFICATES S-43
MBIA INSURANCE CORPORATION S-57
CERTAIN YIELD AND PREPAYMENT S-59
CONSIDERATIONS
POOLING AND SERVICING AGREEMENT S-71
CERTAIN FEDERAL INCOME TAX CONSEQUENCES S-73
METHOD OF DISTRIBUTION S-74
LEGAL OPINIONS S-76
RATINGS S-76
LEGAL INVESTMENT S-77
ERISA CONSIDERATIONS S-77
EXPERTS S-78
APPENDIX A -- UNDERWRITING GUIDELINES A-1
APPLICABLE TO THE MORTGAGE LOANS
ANNEX I -- GLOBAL CLEARANCE, SETTLEMENT I-1
AND
TAX DOCUMENTATION PROCEDURES
PROSPECTUS
SUMMARY OF PROSPECTUS 4
RISK FACTORS 12
THE MORTGAGE POOLS 15
SERVICING OF MORTGAGE LOANS 25
DESCRIPTION OF THE SECURITIES 31
DESCRIPTION OF CREDIT ENHANCEMENT 44
PURCHASE OBLIGATIONS 52
PRIMARY MORTGAGE INSURANCE, HAZARD 52
INSURANCE; CLAIMS THEREUNDER
THE COMPANY 55
THE AGREEMENTS 55
YIELD CONSIDERATIONS 63
MATURITY AND PREPAYMENT CONSIDERATIONS 65
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS 66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 78
STATE AND OTHER TAX CONSEQUENCES 102
ERISA CONSIDERATIONS 102
LEGAL INVESTMENT MATTERS 106
USE OF PROCEEDS 107
METHODS OF DISTRIBUTION 108
LEGAL MATTERS 109
FINANCIAL INFORMATION 109
RATING 109
INDEX OF PRINCIPAL DEFINITIONS 110
================================================================================
SOUTHERN PACIFIC SECURED
ASSETS CORP., COMPANY
SOUTHER PACIFIC FUNDING
CORPORATION,
SELLER AND MASTER SERVICER
MORTGAGE LOAN ASSET-
BACKED PASS-THROUGH
CERTIFICATES, SERIES 1998-3
$ Class A-1 Certificates
$ Class A-2 Certificates
$ Class A-3 Certificates
$ Class A-4 Certificates
$ Class A-5 Certificates
$ Class A-6 Certificates
$ Class A-7 Certificates
$ Class A-8 Certificates
$ 0 Variable Rate Class A-9 Certificates
---------------------------
PROSPECTUS SUPPLEMENT
September __, 1998
---------------------------
GREENWICH CAPITAL MARKETS
================================================================================
<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 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) verbal 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
only isolated (usually three or less) 30- day late payments within the last 24
months and within the prior 24 month period no 30-day late payments are
permitted on an existing mortgage loan. No collection accounts, unpaid
charge-offs, judgments or a derogatory public record is permitted within the
past two years (medical collections under $500.00 are excluded, but must be
explained by the borrower). No bankruptcy, foreclosure or repossession may have
occurred during the preceding five years commencing from the date of discharge
or the date the foreclosure was filed. No State or Federal Tax liens (paid or
unpaid) and no delinquent property taxes are permitted within the past four
years. A maximum Loan-to-Value Ratio of 90% for mortgage loans originated under
the Full Documentation program and the Lite Documentation program (or 80% if the
mortgage loan is originated under the Stated 1003 program) is permitted for a
mortgage loan less than $400,000 on an owner-occupied property . A maximum
Loan-to-Value Ratio of 80% for a mortgage loan originated under the Full
Documentation and the Lite Documentation program (or 70% if the mortgage loan is
originated under the Stated 1003 program) is permitted for a mortgage loan less
than $650,000 on an owner occupied property. A maximum Loan-to-Value Ratio of
70% for a mortgage loan originated under the Full Documentation, the Lite
Documentation program and the Stated 1003 program is permitted for a mortgage
loan less than $750,000 on an owner occupied property. A maximum Loan-to-Value
Ratio of 90% for mortgage loans originated under the Full Documentation program
and the Lite Documentation program (or 80% if the mortgage loan is originated
under the Stated 1003 program) is permitted for a mortgage loan less than
$400,000 on a non-owner occupied property . A maximum Loan-to-Value Ratio of 80%
for a mortgage loan originated under the Full Documentation and the Lite
Documentation program (or 75% if the mortgage loan is originated under the
Stated 1003 program) is permitted for a mortgage loan less than $500,000 on a
non-owner occupied property. A maximum Loan-to-Value Ratio of 75% for a mortgage
A-5
<PAGE>
loan originated under the Full Documentation and the Lite Documentation program
(or 70% if the mortgage loan is originated under the Stated 1003 program) is
permitted for a mortgage loan less than $650,000 on a non-owner occupied
property. A maximum Loan-to-Value Ratio of 65% for a mortgage loan originated
under the Full Documentation, the Lite Documentation program (or 60% for the
Stated 1003 program) is permitted for a mortgage loan less than $750,000 on a
non-owner occupied property. The maximum debt service-to-income ratio is 45%,
but will be increased to 50% for an accepted percentage point increase in the
mortgage loan rate and gross margin rate and six month payment reserves will be
verified. All loans greater than $500,000 require written approval from the
executive loan committee of BOMAC. The maximum cash-out loan amount is $400,000
under the Full documentation, Lite Documentation and the Stated 1003 programs
for an owner occupied residence and $400,000 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 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 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
A-6
<PAGE>
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% 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.
A-7
<PAGE>
"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 (BOMAC will
increase the maximum loan amount to $750,000 on a case by case basis) 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,
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
A-8
<PAGE>
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 (BOMAC will increase the maximum loan amount to $750,000 on a
case by case basis) 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.
MORCAP, INC.
The Mortgage Loans originated by MorCap, Inc. ("MorCap") were
originated under MorCap's Non-Conforming Loan Program. The Non-Conforming Loan
Program is applicable to residential loans which, for credit reasons, do not
conform to FNMA or FHLMC underwriting guidelines.
THE NON-CONFORMING LOAN PROGRAM
The Mortgage Loans underwritten under the Non-Conforming Loan Program
were underwritten in accordance with the underwriting criteria of MorCap. MorCap
began underwriting mortgage loans in accordance with such standards in March,
1996.
MorCap's underwriting standards under the Non-Conforming Loan Program are
primarily intended to assess creditworthiness of the mortgagor, the value of the
mortgaged property and to evaluate the adequacy of such property as collateral
for a mortgage loan. While MorCap's primary consideration in underwriting a
mortgage loan is the mortgagor's employment stability and debt-to-income ratio,
the value of the mortgaged property relative to the amount of the mortgage loan
is another critical factor. In addition, MorCap also considers, among other
things, a mortgagor's credit history and repayment ability, as well as the type
and use of the mortgaged property. Each of the Mortgage Loans underwritten under
the NonConforming Loan Program were underwritten pursuant to the "Full
Documentation," "Limited Documentation," or "Lite Documentation," the stated
income from the application (the "Stated 1003") and the "Quick Documentation"
residential loan programs. Under each of the these programs, MorCap reviews the
loan applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed and reviews the property for compliance with
MorCap's standards. MorCap's
A-9
<PAGE>
underwriting standards are applied in a standardized procedure which complies
with applicable federal and state laws and regulations.
MorCap's criteria require it to verify the income of each borrower and
the source of funds (if any) required to be deposited by the applicant into
escrow under its various programs. Under the Full Documentation program
borrowers are generally required to submit written verification of income signed
by the employer covering the most recent two-year period or a current paystub
and two years' W-2 forms covering the time period for the credit grade. MorCap
also performs a verbal verification of employment prior to funding the mortgage
loan. Under the Limited Documentation program, which was developed for
self-employed borrowers, a standard form of verification of income is not
required. However, reasonable assets in relation to the stated income and
verification that the borrower has been self-employed for a minimum of one year
is required. The following documentation must also be provided: (1) A business
license (only required when using personal bank statements) and (2) the most
recent 12 months, bank statements from the borrowers bank account. Business or
personal bank statements can be used as directed by the underwriter. Under the
Stated 1003 program, no verification of income is required. However, reasonable
assets in relation to stated income is required. The following documentation is
also required: (1) Proof the business has been in existence for a minimum of one
year for self-employed borrowers; (2) verification of employment if not
self-employed, and (3) income must be deemed reasonable and be consistent with
the borrower's profession. Under the Quick Documentation program, which is
designed to offer brokers a quick and easy way to fund lower Loan-to-Value
("LTV") loans the following criteria must be met: For A risk and A- risk
borrowers a maximum LTV of 70% (or 65% for B risk and C risk borrowers or 60%
for D risk borrowers) for owner occupied single family residences, one-four unit
attached family residences, manufactured homes which are 10 years old or newer,
condominiums, townhouses and planned unit developments. For non-owner occupied
residences the respective LTV is reduced by 5% in each risk category and is not
available for the D risk category. Additionally, only refinances are permitted
under the Quick Documentation program and seasoning of the purchase is not
permitted. If the market value exceeds the purchase price by more than 10%, a
satisfactory explanation is required. Under all of the foregoing programs all
documentation must be no more than 90 days old at the time of the underwriting
and no more than 120 days old (except in-house credit reports generated by
MorCap may be no more than 30 days old) at the time of the funding of the
related loan .
MorCap uses the following categories and characteristics as guidelines to grade
the potential likelihood that the mortgagor will satisfy the repayment
conditions of a mortgage loan:
"A" RISK. Under the "A" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms with a maximum
number of three 30-day late payments within the last 12 months or five 30-day
late payments, or two 60-day late payments within the last 24 months. Within
this 24 month period, however, a maximum of two 30-day late payments is
permitted on an existing mortgage loan on the subject property, or no 30-day
late payments within the last 12 months. 25 basis points are added to the
interest rate of the mortgage loan if there is a 30-day late payment within the
last 12 months on an existing mortgage loan on the subject property. The
existing mortgage obligation must be current. Any collection accounts or unpaid
charge-offs or judgments will be required to be paid from the proceeds of the
mortgage loan. Non-creditor judgments and past due child support and alimony are
permitted, but must be paid at the closing or brought current. No bankruptcy or
foreclosures may have occurred during the preceding three years commencing from
the date of discharge or the date the foreclosure was filed. A maximum
Loan-to-Value Ratio of 90% for mortgage loans originated under the Full
Documentation program, (or 80% for a mortgage loan originated under the Lite
Documentation program and 75% if the mortgage loan is originated under the
Stated 1003 program) is permitted for a mortgage loan on an owner-occupied
property. A maximum Loan-to-Value Ratio of 80% for a mortgage
A-10
<PAGE>
loan originated under the Full Documentation (or 75% for a mortgage loan
originated under the Lite Documentation program and 70% if the mortgage loan is
originated under the Stated 1003 program) is permitted for a loan on a non-owner
occupied property. The maximum debt service-to-income ratio is 45%. The maximum
loan amount is $600,000 (or $500,000 for a mortgage loan originated under the
Lite Documentation program and $400,000 for a mortgage loan originated under the
Stated 1003 program) for an owner-occupied property for a mortgage loan
originated under the Full Documentation program. The maximum loan amount is
$350,000 (or $300,000 for a mortgage loan originated under the Stated 1003
program) for a non-owner occupied property or second home under the Full
Documentation program and the Lite Documentation program. The maximum cash-out
loan amount is $50,000 under the Full documentation, Lite Documentation and the
Stated 1003 programs for an owner occupied residence and $25,000 for a non-owner
occupied residence or second home. The maximum cash-out loan amount can be
doubled on an owner or a non-owner occupied residence with the acceptance of a
25 basis point increase on the Mortgage Loan rate.
"A-" RISK. Under the "A-" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms with a maximum
number of five 30-day late payments within the last 12 months or two 60-day late
payments within the last 12 months. Within this 12 month period, however, a
maximum of two 30-day late payments is permitted on an existing mortgage loan on
the subject property. The existing mortgage obligation must be current. Any
collection accounts or unpaid charge-offs or judgments may be required to be
paid from the proceeds of the mortgage loan. Non-creditor judgments and past due
child support and alimony are permitted, but must be paid at the closing or
brought current. No bankruptcy or foreclosures may have occurred during the
preceding two years commencing from the date of discharge (except that in the
case of discharged Chapter 13 bankruptcies ("Discharged Chapter 13
Bankruptcies") the date of filing is used, provided the bankruptcy plan lasted
at least three years and no 30-day late payments were incurred within the last
12 months) or the date the foreclosure was filed. A maximum Loan-to-Value Ratio
of up to 90% for a mortgage loan originated under the Full Documentation
program, (or 80% for a mortgage loan originated under the Lite Documentation
program and 75% if the mortgage loan is originated under the Stated 1003
program) is permitted for a mortgage loan on an owner-occupied property. A
maximum Loan-to-Value Ratio of 75% for a mortgage loan originated under the Full
Documentation program or the Lite Documentation program (or 70% for a mortgage
loan originated under the Stated 1003 program) is permitted for a loan on a
non-owner occupied property or second home property. The maximum debt
service-to-income ratio is 45% for a mortgage loan with a Loan-to-Value Ratio
greater than 75% and increases as follows: (1) to 50% when the Loan-to-Value
Ratio less than or equal to 75% but greater than 70%; (2) to 55% when the
Loan-to-Value Ratio is less than or equal to 70% but greater than 65%, and (3)
60% when the Loan-to-Value Ratio is less than or equal to 65%. The maximum loan
amount is $650,000 (or $500,000 for a mortgage loan originated under the Lite
Documentation program or the Stated 1003 program) for an owner-occupied property
for a mortgage loan originated under the Full Documentation program. The maximum
loan amount is $400,000 for a mortgage loan originated under the Full
Documentation Program and 350,000 for a mortgage loan originated under the Lite
Documentation program or the Stated 1003 program for a non-owner occupied
property or second home. The maximum cash-out loan amount is $250,000 under the
Full documentation, Lite Documentation and the Stated 1003 programs for an owner
occupied residence and $50,000 for a non-owner occupied residence or a second
home. The maximum cash-out loan amount can be doubled on a non-owner occupied
residence with the acceptance of a 25 basis point increase on the Mortgage Loan
rate, the margin and the mortgage issuance fee.
"B" RISK. Under the "B" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms with a maximum
number of eight 30-day late payments or four 60-
A-11
<PAGE>
day late payments; within the last 12 months or two 90-day late payments within
the last 12 months. The existing mortgage obligation can be up to 40 days past
due at the funding of the loan, but must be paid off at the time of the funding.
Any collection accounts or unpaid charge-offs or judgments may be required to be
paid from the proceeds of the mortgage loan. However, for mortgage loans with a
Loan-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. Non-creditor judgments and past due child support and alimony are
permitted, but must be paid at the closing or brought current. No bankruptcy or
foreclosures may have occurred during the preceding 24 months (or previous 18
months if the mortgagor accepts a 50 basis point increase on the Mortgage Loan
rate) commencing from the date of discharge (except that in the case of
Discharged Chapter 13 Bankruptcies, the date of filing is used, provided the
bankruptcy plan lasted at least three years and no 30-day late payments were
incurred within the last 12 months) or the date the foreclosure was filed. A
maximum Loan-to-Value Ratio of up to 85% for a mortgage loan originated under
the Full Documentation program, (or 75% for a mortgage loan originated under the
Lite Documentation program and 70% if the mortgage loan is originated under the
Stated 1003 program) is permitted for a mortgage loan on an owner-occupied
property. A maximum Loan-to-Value Ratio of 75% for a mortgage loan originated
under the Full Documentation program (or 70% for a mortgage loan originated
under the Lite Documentation program or 65% for a mortgage loan originated under
the Stated 1003 program) is permitted for a loan on a nonowner occupied property
or second home property. The maximum debt service-to-income ratio is 50-60%. The
maximum loan amount is $600,000 for an owner-occupied property for a mortgage
loan originated under the Full Documentation program and $500,000 for a mortgage
loan originated under the Lite Documentation program or the Stated 1003 program.
The maximum loan amount is $300,000 for a nonowner occupied property or second
home under the Full Documentation program, the Lite Documentation program and
the Stated 1003 program. The maximum cash-out loan amount is $200,000 under the
Full documentation, Lite Documentation and the Stated 1003 programs for an owner
occupied residence and $50,000 for a non-owner occupied residence or second
home. The maximum cash-out loan amount can be doubled on a non-owner occupied
residence with the acceptance of a 25 basis point increase on the Mortgage Loan
rate, the margin and the mortgage issuance fee.
"C" RISK. Under the "C" risk category, the prospective mortgagor must
have repaid installment or revolving debt according to its terms within the last
12 months. A maximum of twelve 30-day late payments or six 60-day late payments
or four 90-day late payments within the last 12 months is permitted. On an
existing mortgage loan on the subject property, a mortgagor can roll any number
of consecutive 30- day late payments one time only. Non-consecutive 30, 60 and
90-day late payments are considered using the conversion rule (60-day = 2 x
30-day, 90-day = 3 x 30-day) of converting 60 and 90-day late payments into
30-day late payments. Using this conversion formula, a maximum of six 30-day
late payments is permitted within the last 12 months. The existing mortgage
obligation can be no more than 45 days past due at the time of the funding and
must be paid off at such time. Unpaid collection accounts or unpaid charge-offs
or judgments within the last 24 months cannot exceed $6,000 and generally must
be paid from the proceeds of the mortgage loan. However, collection accounts,
unpaid charge-offs or judgments are not required to be paid from the proceeds of
the mortgage loan, provided the mortgagor accepts a 25 basis point increase on
the Mortgage Loan Rate. No bankruptcy or foreclosures may have occurred during
the preceding 12 months commencing from the date of discharge (except that in
the case of Discharged Chapter 13 Bankruptcies, the date of filing is used,
provided the bankruptcy plan lasted at least three years and no 30-day late
payments were incurred within the last 12 months) or the date the foreclosure
was filed. A maximum Loan-to-Value Ratio of 75% for a mortgage loan originated
under the Full Documentation program, (or 70% for a mortgage loan originated
under the Lite Documentation program or 65% if the mortgage loan is originated
under the Stated 1003 program) is permitted for a mortgage loan on an
owner-occupied property. A maximum Loan-to-Value Ratio of 70% for a mortgage
A-12
<PAGE>
loan originated under the Full Documentation program (or 65% for a mortgage loan
originated under the Lite Documentation program or 60% for a mortgage loan
originated under the Stated 1003 program) is permitted for a mortgage loan on a
non-owner occupied property or second home property. The permitted debt
service-to-income ratio is 55-60%. The maximum loan amount is $500,000 for an
owner-occupied property for a mortgage loan originated under the Full
Documentation program and $400,000 under the Lite Documentation program or the
Stated 1003 program. The maximum loan amount is $300,000 under the Full
Documentation program and the Lite Documentation program (or $200,000 for a
mortgage loan originated under the Stated 1003 program) for a non-owner occupied
property or second home. The maximum cash-out loan amount is $200,000 under the
Full documentation, Lite Documentation and the Stated 1003 programs for an owner
occupied residence and $50,000 for a non-owner occupied residence or second
home.
"D" RISK. Under the "D" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, there is a general disregard for timely payments by the prospective
mortgagor on outstanding installment or revolving debt. A prior history of
bankruptcy or foreclosure by the borrower is also generally disregarded and
buyouts from bankruptcy are permitted. With respect to an existing mortgage on
the subject property, no payment can be more than 149 days past due at the time
of the closing. For payments more than 149 days past due at the time of closing
50 basis points is added to the Mortgage Loan Rate. Selected collection accounts
or unpaid charge-offs or judgments must be paid from the proceeds of the
mortgage loan if they affect the title to the subject property. However,
collection accounts, unpaid charge-offs or judgments are not required to be paid
from the proceeds of the mortgage loan, provided the mortgagor accepts a 25
basis point increase on the Mortgage Loan Rate. A maximum Loan-to-Value Ratio of
up to 65% for a mortgage loan originated under the Full Documentation program,
the Lite Documentation program or the Stated 1003 program is permitted for a
mortgage loan on an owner-occupied property. A maximum Loan-to-Value Ratio of
60% for a mortgage loan originated under the Full Documentation program, the
Lite Documentation program and the Stated 1003 program is permitted for a
mortgage loan on a non-owner occupied property. The permitted debt
service-to-income ratio is 55-65%. The maximum loan amount is $350,000 for a
mortgage loan originated under the Full Documentation program, the Lite
Documentation program or the Stated 1003 program for both owner-occupied
properties and non-owner occupied properties. The maximum cash-out loan amount
is $1,000 under the Full documentation, Lite Documentation or the Stated 1003
programs for an owner occupied residence and $1,000 for a non-owner occupied
residence or second home.
EXCEPTIONS. As described above, MorCap uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis, it
may determine that the prospective mortgagor warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category (collectively called an "upgrade" or an "exception"). An upgrade or
exception may generally be allowed if the application reflects certain
compensating factors, among others: low loan-to-value ratio; pride of ownership;
stable employment; an "A" or "A-" mortgage history; and the length of residence
in the subject property. Accordingly, MorCap may classify certain mortgage loan
applications in a more favorable risk category than other mortgage loan
applications that, in the absence of such compensating factors, would satisfy
only the criteria of a less favorable risk category.
A-13
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Southern
Pacific Secured Assets Corp., Mortgage Loan Asset-Backed Pass-Through
Certificates, Series 1998-3 (the "GLOBAL SECURITIES") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
I-1
<PAGE>
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in sameday funds. Trading between Cedel
and/or Euroclear Participants. Secondary market trading between Cedel
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds. Trading between DTC,
Seller and Cedel or Euroclear Participants. When Global Securities are to be
transferred from the account of a DTC Participant to the account of a Cedel
Participant or a Euroclear Participant, the purchaser will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one business day prior to settlement. Cedel or Euroclear will instruct the
Relevant Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depositary to
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (I.E.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later. As an
alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel
Participants or Euroclear Participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds. Since the settlement is taking
place during New York business hours, DTC Participants can employ their usual
procedures for crediting Global Securities to the respective European Depositary
for the benefit of Cedel Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently than
a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global
I-2
<PAGE>
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of the actual number of days in such accrual period
and a year assumed to consist to 360 days. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. The payment will then be reflected in the account of
Cedel Participant or Euroclear Participant the following day, and receipt of the
cash proceeds in the Cedel Participant's or Euroclear Participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Cedel Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Cedel Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
I-3
<PAGE>
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Holders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
PERSON" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity organized in or under the laws of the
United States or any political subdivision thereof (unless, in the case of a
partnership, future Treasury regulations provide otherwise), (iii) an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income, or (iv) a trust other than a "foreign trust," as defined in Section
7701(a)(31) of the Code. The term "NON-U.S. PERSON" means any person who is not
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 21, 1998
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 __, 1998.
<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...................................................25
General ............................................................25
The Master Servicer..................................................25
Collection and Other Servicing Procedures;
Mortgage Loan Modifications.................................25
Subservicers.........................................................27
Special Servicers....................................................28
Realization Upon or Sale of Defaulted Mortgage Loans
...........................................................28
Servicing and Other Compensation and
Payment of Expenses; Spread.................................30
Evidence as to Compliance............................................31
DESCRIPTION OF THE SECURITIES.................................................31
General ............................................................31
Form of Securities...................................................33
Assignment of Trust Fund Assets......................................35
Certificate Account..................................................37
Distributions........................................................40
Distributions of Interest and Principal
on the Securities...........................................41
Distributions on the Securities in Respect of
Prepayment Premiums or in Respect
of Equity Participations...................................42
Allocation of Losses and Shortfalls..................................42
Advances ............................................................42
Reports to Securityholders...........................................43
DESCRIPTION OF CREDIT ENHANCEMENT.............................................44
General ............................................................44
Subordinate Securities...............................................45
Letter of Credit.....................................................46
Mortgage Pool Insurance Policies.....................................46
Special Hazard Insurance Policies....................................48
Bankruptcy Bonds.....................................................48
Reserve Funds........................................................49
Maintenance of Credit Enhancement....................................49
Reduction or Substitution of Credit Enhancement......................51
PURCHASE OBLIGATIONS..........................................................52
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER....................................................52
General ............................................................52
Primary Mortgage Insurance Policies..................................52
Hazard Insurance Policies............................................53
FHA Insurance........................................................55
THE COMPANY...................................................................55
THE AGREEMENTS................................................................55
General ............................................................56
Certain Matters Regarding the Master Servicer
and the Company............................................56
Events of Default and Rights Upon Event Default......................57
Amendment............................................................60
Termination; Retirement of Securities................................61
The Trustee..........................................................61
Duties of the Trustee................................................61
Certain Matters Regarding the Trustee................................62
Resignation and Removal of the Trustee...............................62
YIELD CONSIDERATIONS..........................................................62
MATURITY AND PREPAYMENT CONSIDERATIONS........................................64
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................65
Single Family Loans and Multifamily Loans............................66
Contracts............................................................66
Foreclosure on Mortgages and Certain Contracts.......................68
Repossession with respect to Contracts...............................69
Rights of Redemption.................................................70
Anti-Deficiency Legislation and Other
Limitations on Lenders......................................71
Environmental Legislation............................................72
Consumer Protection Laws with respect to
Contracts...................................................73
Enforceability of Certain Provisions.................................74
Subordinate Financing................................................75
Applicability of Usury Laws..........................................75
Alternative Mortgage Instruments.....................................76
Formaldehyde Litigation with respect to Contracts....................76
Soldiers' and Sailors' Civil Relief Act of 1940......................76
Forfeitures in Drug and RICO Proceedings.............................77
Junior Mortgages.....................................................77
Negative Amortization Loans..........................................78
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................78
General ............................................................78
REMICS ............................................................79
Notes ............................................................93
Grantor Trust Funds..................................................93
STATE AND OTHER TAX CONSEQUENCES.............................................101
ERISA CONSIDERATIONS.........................................................102
Representation from Plans Investing in
Notes with "Substantial Equity
Features" or Certain Certificates..........................105
Tax Exempt Investors................................................105
Consultation with Counsel...........................................106
LEGAL INVESTMENT MATTERS.....................................................106
USE OF PROCEEDS..............................................................107
METHODS OF DISTRIBUTION......................................................107
LEGAL MATTERS................................................................108
FINANCIAL INFORMATION........................................................108
RATING ....................................................................109
INDEX OF PRINCIPAL DEFINITIONS...............................................110
-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 an
owner trust established by the Company
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 Fund to
secure the Notes under the lien of the
Indenture.
-4-
<PAGE>
As to each series of Notes, 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 combination of two
or more such Security Interest Rates.
The related Prospectus Supplement will
specify
-5-
<PAGE>
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.
The Mortgage Pools......................Unless otherwise specified in the
related Prospectus Supplement, each
Trust Fund will consist primarily of
-6-
<PAGE>
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 up to, but not
including, 90 days, as of the Cut-off
Date. Such Mortgage Loans will be
limited to 20% (by principal balance) of
any Trust Fund. No non-performing
Mortgage Loan will be included in any
Trust Fund. A Mortgage Loan is
"non-performing" if it is 90 days or
more delinquent as of the related
Cut-off Date.
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
-7-
<PAGE>
selected by the Company from among those
purchased, either directly or
indirectly, from a prior holder thereof
(a "Seller"), which prior holder may or
may not be the originator of such
Mortgage Loan or the issuer of such
Mortgage Security and may be an
affiliate of the Company. A Mortgage
Security included in a Trust Fund,
however, may also have been issued
previously by the Company or an
affiliate thereof.
A Current Report on Form 8-K will be
available upon request to purchasers of
the Offered Securities of the related
series and will be filed, together with
the related Pooling Agreement, with
respect to each series of Certificates,
and the related Servicing Agreement,
Owner Trust Agreement and Indenture,
with respect to each series of Notes,
with the Securities and Exchange
Commission within fifteen days after
such initial issuance.
Interest Distributions..................Except as otherwise specified herein or
in the related Prospectus Supplement,
interest on each class of Offered
Securities of each series, other than
Strip Securities or Accrual Securities
(prior to the time when accrued interest
becomes payable thereon), will accrue at
the applicable Security Interest Rate
(which may be a fixed, variable or
adjustable rate or any combination
thereof) on such class's principal
balance outstanding from time to time
and will be remitted on the 25th day
(or, if such day is not a business day,
on the next succeeding business day) of
each month, commencing with the month
following the month in which the Cut-off
Date (as defined in the applicable
Prospectus Supplement) occurs (each, a
"Distribution Date"). Distributions, if
any, with respect to interest on Strip
Securities will be calculated and made
on each Distribution Date as described
herein and in the related Prospectus
Supplement. Interest that has accrued
but is not yet payable on any Accrual
Securities will be added to the
principal balance of such class on each
Distribution Date, and will thereafter
bear interest. Distributions of interest
with respect to one or more classes of
Offered Securities (or, in the case of a
class of Accrual Securities, accrued
interest to be added to the principal
balance thereof) may be reduced as a
result of the occurrence of certain
delinquencies not covered by advances,
losses, prepayments and other
contingencies described herein and in
the related Prospectus Supplement. See
"Yield Considerations" and "Description
of the Securities."
-8-
<PAGE>
Principal Distributions.................Except as otherwise specified in the
related Prospectus Supplement, principal
distributions on the Securities of each
series will be payable on each
Distribution Date, commencing with the
Distribution Date in the month following
the month in which the Cut-off Date
occurs, to the holders of the Securities
of such series, or of the class or
classes of Securities then entitled
thereto, on a pro rata basis among all
such Securities or among the Securities
of any such class, in proportion to
their respective outstanding principal
balances, or in the priority and manner
otherwise specified in the related
Prospectus Supplement. Strip Securities
with no principal balance will not
receive distributions in respect of
principal. Distributions of principal
with respect to any series of
Securities, or with respect to one or
more classes included therein, may be
reduced to the extent of certain
delinquencies not covered by advances or
losses not covered by the applicable
form of credit enhancement. See "The
Mortgage Pools," "Maturity and
Prepayment Considerations" and
"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
-12-
<PAGE>
at their levels on the dates of origination of the related Mortgage Loans. If
the residential real estate market should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans, and
any secondary financing on the Mortgaged Properties, in a particular Mortgage
Pool become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. In addition,
in the case of Mortgage Loans that are subject to negative amortization, due to
the addition to principal balance of Deferred Interest, the principal balances
of such Mortgage Loans could be increased to an amount equal to or in excess of
the value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by any
reserve fund or instrument of credit enhancement in the related Trust Fund,
holders of Securities of the series evidencing interests in the related Mortgage
Pool will bear all risk of loss resulting from default by Mortgagors and will
have to look primarily to the value of the Mortgaged Properties for recovery of
the outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of loans which may be included in the Mortgage Pools may
involve additional uncertainties not present in traditional types of loans. For
example, certain of the Mortgage Loans provide for escalating or variable
payments by the borrower under the Mortgage Loan (the "Mortgagor"), as to which
the Mortgagor is generally qualified on the basis of the initial payment amount.
In some instances, Mortgagors may not be able to make their loan payments as
such payments increase and thus the likelihood of default will increase. In
addition to the foregoing, certain geographic regions of the United States from
time to time will experience weaker regional economic conditions and housing
markets, and, consequently, will experience higher rates of loss and delinquency
than will be experienced on mortgage loans generally. For example, a region's
economic condition and housing market may be directly, or indirectly, adversely
affected by natural disasters or civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots. The economic impact of any of these
types of events may also be felt in areas beyond the region immediately affected
by the disaster or disturbance. The Mortgage Loans underlying certain series of
Securities may be concentrated in these regions, and such concentration may
present risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Moreover, as described
below, any Mortgage Loan for which a breach of a representation or warranty
exists will remain in the related Trust Fund in the event that a Seller is
unable, or disputes its obligation, to repurchase such Mortgage Loan and such a
breach does not also constitute a breach of any representation made by any other
person. In such event, any resulting losses will be borne by the related form of
credit enhancement, to the extent available.
Certain of the Mortgage Loans included in a Trust Fund, particularly
those secured by Multifamily Properties, may not be fully amortizing (or may not
amortize at all) over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to fully refinance
the loan or to sell the related Mortgaged Property at a price sufficient to
permit the Mortgagor to make the balloon payment. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the Mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
It is anticipated that some or all of the Mortgage Loans included in
any Trust Fund, particularly Mortgage Loans secured by Multifamily Properties,
will be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may
entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with loans made on the
security of Single Family Properties. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence
-13-
<PAGE>
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 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.
BOOK-ENTRY SECURITIES. Issuance of any class of Offered Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
trading market since investors may be unwilling to purchase Securities for which
they cannot obtain physical securities.
Since transactions in Book-Entry Securities will be effected only
through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Beneficial Owner to pledge
Book-
-14-
<PAGE>
Entry Securities to persons or entities that do not participate in the DTC,
Cedel or Euroclear systems, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing such
Securities.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Book-Entry Securities 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.
THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of Mortgage Loans, minus the Spread, if
any, or any other interest retained by the Company or any affiliate of the
Company. The Mortgage Loans may consist of Single Family Loans, Multifamily
Loans and Contracts, each as
described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related Mortgaged Property. The Mortgaged Properties for such loans may consist
of attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home. The
Mortgaged Properties for such loans may also consist of residential properties
consisting of five or more rental or cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment buildings or projects ("Multifamily
Properties" and the related loans, "Multifamily Loans").
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "manufactured home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company,
any of its affiliates or, unless otherwise specified in the related Prospectus
Supplement, by any governmental agency or instrumentality or other person.
However, if so specified in the related Prospectus Supplement, the Mortgage
Loans may be insured by the Federal Housing Administration (the "FHA" and such
loans, "FHA Loans"). See "Description of Primary Insurance
Policies--FHA Insurance."
If so specified in the related Prospectus Supplement, some Mortgage
Loans may be delinquent up to, but not including, 90 days, as of the Cut-off
Date. Such Mortgage Loans will be limited to 20% (by principal balance) of any
Trust Fund. No non-performing Mortgage Loan will be included in any Trust Fund.
A Mortgage Loan is "non-performing" if it is 90 days or more delinquent as of
the related Cut-off Date.
-15-
<PAGE>
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
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
-16-
<PAGE>
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 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 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.
-17-
<PAGE>
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 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
-18-
<PAGE>
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 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
-19-
<PAGE>
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 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
-20-
<PAGE>
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
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
-21-
<PAGE>
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 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
-22-
<PAGE>
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 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
-23-
<PAGE>
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 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.
-24-
<PAGE>
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 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
-25-
<PAGE>
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 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
-26-
<PAGE>
Prospectus Supplement, the Master Servicer will determine whether to exercise
any right the Trustee may have under any due-on-sale or due-on-encumbrance
provision in a Multifamily Loan in a manner consistent with the Servicing
Standard. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will be entitled to retain as additional servicing compensation
any fee collected in connection with the permitted transfer of a Mortgaged
Property. See "Certain Legal Aspects of Mortgage Loans--Enforceability of
Certain Provisions." FHA Loans contain no such clause and may be assumed by the
purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family and Multifamily Loans secured by junior
liens on the related Mortgaged Properties, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will be required to file (or
cause to be filed) of record a request for notice of any action by a superior
lienholder under the Senior Lien for the protection of the related Trustee's
interest, where permitted by local law and whenever applicable state law does
not require that a junior lienholder be named as a party defendant in
foreclosure proceedings in order to foreclose such junior lienholder's equity of
redemption. Unless otherwise specified in the related Prospectus 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."
-27-
<PAGE>
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 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.
-28-
<PAGE>
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 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.
-29-
<PAGE>
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 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.
-30-
<PAGE>
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 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
-31-
<PAGE>
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 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
-32-
<PAGE>
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 "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") in the United States or
through Cedel or Euroclear in Europe. 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, some of which (and/or their representatives) own DTC. 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.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of DTC Registered Securities among Participants and to receive and transmit
distributions of principal of, and interest on, such DTC Registered Securities.
Participants and Intermediaries with which Beneficial Owners have accounts with
respect to such DTC Registered Securities 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 DTC Registered
Securities, 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 DTC Registered Securities.
-33-
<PAGE>
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.
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 Bank, societe anonyme ("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.
The Euroclear System ("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
-34-
<PAGE>
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
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 Depository 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.
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 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
-35-
<PAGE>
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 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
-36-
<PAGE>
Ratio, principal balance as of the Cut-off Date, Mortgage Rate and maturity).
Upon a breach of any such representation which materially and adversely affects
the interests of the Securityholders in a Mortgage Loan, the Company will be
obligated to cure the breach in all material respects, to purchase the Mortgage
Loan at its Purchase Price or, unless otherwise specified in the related
Prospectus Supplement, to substitute for such Mortgage Loan a Qualified
Substitute Mortgage Loan in accordance with the provisions for such substitution
by Affiliated Sellers as described above under "The Mortgage
Pools--Representations by Sellers." However, the Company will not be required to
repurchase or substitute for any Mortgage Loan in connection with a breach of a
representation and warranty if the substance of any such breach also constitutes
fraud in the origination of the related Mortgage Loan. Unless otherwise
specified in the related Prospectus Supplement, this purchase or substitution
obligation constitutes the sole remedy available to Securityholders or the
Trustee for such a breach of representation by the Company. Any Mortgage Loan
not so purchased or substituted for shall remain in the related Trust Fund.
Pursuant to the related Pooling Agreement or Servicing Agreement, the
Master Servicer for any Mortgage Pool, either directly or through Subservicers,
will service and administer the Mortgage Loans included in such Mortgage Pool
and assigned to the related Trustee as more fully set forth under "Servicing of
Mortgage Loans." The Master Servicer will make certain representations and
warranties regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling Agreement or Servicing Agreement.
CERTIFICATE ACCOUNT
GENERAL. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more separate accounts for the collection of payments on the related Mortgage
Loans and/or Mortgage Securities constituting such Trust Fund (collectively, the
"Certificate Account"), which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Securities of the related series. A Certificate Account may be maintained either
as an interest-bearing or a non-interest-bearing account, and the funds held
therein may be held as cash or invested in United States government securities
and other investment grade obligations specified in the related Pooling
Agreement or the 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
-37-
<PAGE>
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";
(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.
-38-
<PAGE>
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;
(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;
-39-
<PAGE>
(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 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
-40-
<PAGE>
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 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
-41-
<PAGE>
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.
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.
-42-
<PAGE>
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.
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);
-43-
<PAGE>
(vi) the aggregate amount of advances included in the
distributions on such Distribution Date, and the aggregate amount of
unreimbursed advances at the close of business on such Distribution
Date;
(vii) the aggregate principal balance of the Mortgage Loans in
the related Mortgage Pool on, or as of a specified date shortly prior
to, such Distribution Date;
(viii) the number and aggregate principal balance of any
Mortgage Loans in the related Mortgage Pool in respect of which (A) one
scheduled payment is delinquent, (B) two scheduled payments are
delinquent, (C) three or more scheduled payments are delinquent and (D)
foreclosure proceedings have been commenced;
(ix) the book value of any real estate acquired by such Trust
Fund through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
(xi) the amount of coverage under any Letter of Credit,
Mortgage Pool Insurance Policy or other form of credit enhancement
covering default risk as of the close of business on the applicable
Determination Date and a description of any credit enhancement
substituted therefor;
(xii) the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
such amounts;
(xiii) in the case of Securities benefitting 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
-44-
<PAGE>
required under the Mortgage Note, but not including Special Hazard Losses,
Extraordinary Losses or other losses resulting from damage to a Mortgaged
Property, Bankruptcy Losses or Fraud Losses (any such loss, a "Defaulted
Mortgage Loss"); (ii) of a type generally covered by a Special Hazard Insurance
Policy (as defined below) (any such loss, a "Special Hazard Loss"); (iii)
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court of
the principal balance of or the Mortgage Rate on a Mortgage Loan or an extension
of its maturity (any such loss, a "Bankruptcy Loss"); and (iv) incurred on
defaulted Mortgage Loans as to which there was fraud in the origination of such
Mortgage Loans (any such loss, a "Fraud Loss"). Unless otherwise specified in
the related Prospectus Supplement, Defaulted Mortgage Losses, Special Hazard
Losses, Bankruptcy Losses and Fraud Losses in excess of the amount of coverage
provided therefor and losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks ("Extraordinary
Losses") will not be covered. To the extent that the credit support for the
Offered Securities of any series is exhausted, the holders thereof will bear all
further risks of loss not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Letter of Credit or a Mortgage Pool Insurance Policy, (ii) coverage
with respect to Special Hazard Losses may be provided by one or more of a Letter
of Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Letter of
Credit or a Bankruptcy Bond and (iv) coverage with respect to Fraud Losses may
be provided by one or more of a Letter of Credit, Mortgage Pool Insurance Policy
or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of a Reserve Fund to cover
such losses, in the form of subordination of one or more classes of Subordinate
Securities to provide credit support to one or more classes of Senior
Securities, or in the form of a specified entity's agreement to repurchase
certain Mortgage Loans or fund certain losses pursuant to a Purchase 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
-45-
<PAGE>
Subordinate Securities to receive distributions from the Certificate Account on
any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related prospectus
Supplement will set forth information concerning the manner and amount of
subordination provided by a class or classes of Subordinate Securities in a
series and the circumstances under which such subordination will be available.
The Offered Securities of any series may include one or more classes of
Subordinate Securities.
If the Mortgage Loans and/or Mortgage Securities in any Trust Fund are
divided into separate groups, each supporting a separate class or classes of
Securities of the related series, credit enhancement may be provided by cross-
support provisions requiring that distributions be made on Senior Securities
evidencing interests in one group of Mortgage Loans and/or Mortgage Securities
prior to distributions on Subordinate Securities evidencing interests in a
different group of Mortgage Loans and/or Mortgage Securities within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
LETTER OF CREDIT
If any component of credit enhancement as to the Offered Securities of
any series is to be provided by a letter of credit (the "Letter of Credit"), a
bank (the "Letter of Credit Bank") will deliver to the related Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation to
make certain payments to the related Trustee with respect to one or more
components of credit enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
credit enhancement, will be specified in the applicable Prospectus Supplement.
If so specified 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
-46-
<PAGE>
applicable Mortgage Rate to the date of purchase and certain expenses incurred
by the Master Servicer, Special Servicer or Subservicer on behalf of the related
Trustee and Securityholders, or (b) to pay the amount by which the sum of the
principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under any related Primary Insurance Policy. Securityholders will
experience a shortfall in the amount of interest payable on the related
Securities in connection with the payment of claims under a Mortgage Pool
Insurance Policy because the Pool Insurer is only required to remit unpaid
interest through the date a claim is paid rather than through the end of the
month in which such claim is paid. In addition, the Securityholders will also
experience losses with respect to the related Securities in connection with
payments made under a Mortgage Pool Insurance Policy to the extent that the
Master Servicer expends funds to cover unpaid real estate taxes or to repair the
related Mortgaged Property in order to make a claim under a Mortgage Pool
Insurance Policy, as those amounts will not be covered by payments under such
policy and will be reimbursable to the Master Servicer from funds otherwise
payable to the Securityholders. If any Mortgaged Property securing a defaulted
Mortgage Loan is damaged and proceeds, if any (see "Special Hazard Insurance
Policies" below for risks which are not covered by such policies), from the
related hazard insurance policy or applicable Special Hazard Instrument are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Mortgage Pool Insurance Policy, the Master Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (x) that such restoration will increase the proceeds to one or more
classes of Securityholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (y) that such expenses
will be recoverable by it through Liquidation Proceeds or Insurance Proceeds.
Unless otherwise specified in the related Prospectus Supplement, a
Mortgage Pool Insurance Policy (and certain Primary Insurance Policies) will
likely not insure against loss sustained by reason of a default arising from,
among other things, (i) fraud or negligence in the origination or servicing of a
Mortgage Loan, including 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.
-47-
<PAGE>
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Securities from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies ("Special Hazard Losses"). See
"Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder." However, a
Special Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, chemical
contamination, waste by the Mortgagor and certain other risks. Aggregate claims
under a Special Hazard Insurance Policy will be limited to the amount set forth
in the related Prospectus Supplement and will be subject to reduction as
described in such related Prospectus Supplement. A Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the 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
-48-
<PAGE>
Loan can result from a bankruptcy proceeding, including a reduction in the
amount of the Monthly Payment on the related Mortgage Loan (a "Debt Service
Reduction"; Debt Service Reductions and Deficient Valuations, collectively
referred to herein as Bankruptcy Losses). See "Certain Legal Aspects of Mortgage
Loans and Related Matters--Anti-Deficiency Legislation and Other Limitations on
Lenders." Any Bankruptcy Bond to provide coverage for Bankruptcy Losses for
proceedings under the federal Bankruptcy Code obtained by the Company for a
Trust Fund will be issued by an insurer named in the applicable Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the relevant Rating Agency or Agencies, which will be applied and maintained
in the manner and under the conditions specified in such Prospectus Supplement.
In the alternative or in addition to such deposit, to the extent described in
the related Prospectus Supplement, a Reserve Fund may be funded through
application of all or a portion of amounts otherwise payable on any related
Subordinate Securities, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Securities, Spread or other cash flows attributable to the related
Mortgage Loans or on reinvestment income, the Reserve Fund may provide less
coverage than initially expected if the cash flows or reinvestment income on
which such funding is dependent are lower than anticipated. In addition, with
respect to any series of Securities as to which credit enhancement includes a
Letter of Credit, if so specified in the related Prospectus Supplement, under
certain circumstances the remaining amount of the Letter of Credit may be drawn
by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Securityholders, or applied to reimburse the Master Servicer for
outstanding advances, or may 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
-49-
<PAGE>
has not been exhausted and no substitution has occurred, the Trustee will draw
the amount available under the Letter of Credit and maintain such amount in
trust for such Securityholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Securities, the Master Servicer will be obligated to exercise reasonable efforts
to keep such Mortgage Pool Insurance Policy (or an alternate form of credit
support) in full force and effect throughout the term of the applicable Pooling
Agreement or Servicing Agreement, unless coverage thereunder has been exhausted
through payment of claims or until such Mortgage Pool Insurance Policy is
replaced in accordance with the terms of the applicable Pooling Agreement or
Servicing Agreement. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will agree to pay the premiums for each Mortgage
Pool Insurance Policy on a timely basis. In the event the Pool Insurer ceases to
be a Qualified Insurer (such term being defined to mean a private mortgage
guaranty insurance company duly qualified as such under the laws of the state of
its incorporation and each state having jurisdiction over the insurer in
connection with the Mortgage Pool Insurance Policy and approved as an insurer by
FHLMC, FNMA or any successor entity) because it ceases to be qualified under any
such law to transact such insurance business or coverage is terminated for any
reason other than exhaustion of such coverage, the Master Servicer will use
reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy comparable to the Mortgage Pool Insurance Policy with a total
coverage equal to the then outstanding coverage of such Mortgage Pool Insurance
Policy, provided that, if the cost of the replacement policy is greater than the
cost of such Mortgage Pool Insurance Policy, the coverage of the replacement
policy will, unless otherwise agreed to by the Company, be reduced to a level
such that its premium rate does not exceed the premium rate on such Mortgage
Pool Insurance Policy. In the event that the Pool Insurer ceases to be a
Qualified Insurer because it ceases to be approved as an insurer by FHLMC, FNMA
or any successor entity, the Master Servicer will be obligated to review, not
less often than monthly, the financial condition of the Pool Insurer with a view
toward determining whether recoveries under the Mortgage Pool Insurance Policy
are jeopardized for reasons related to the financial condition of the Pool
Insurer. If the Master Servicer determines that recoveries are so jeopardized,
it will be obligated to exercise its best reasonable efforts to obtain from
another Qualified Insurer a replacement insurance policy as described above,
subject to the same cost limit. 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
-50-
<PAGE>
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
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
-51-
<PAGE>
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 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
-52-
<PAGE>
negative amortization may cause such Mortgage Loan's Loan-to-Value Ratio (based
on the then-current balance) to subsequently exceed the limits which would have
required such coverage upon their origination. Multifamily Loans will not be
covered by a Primary Insurance Policy, regardless of the related Loan-to-Value
Ratio.
While the terms and conditions of the Primary Insurance Policies issued
by one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and possession
of, the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
For any 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
-53-
<PAGE>
the standard form of fire insurance policy with extended coverage customary in
the state in which the property is located. Unless otherwise specified in the
related Prospectus Supplement, such coverage generally will be in an amount
equal to the lesser of the principal balance owing on such Mortgage Loan or 100%
of the insurable value of the improvements securing the Mortgage Loan except
that, if generally available, such coverage must not be less than the minimum
amount required under the terms thereof to fully compensate for any damage or
loss on a replacement cost basis. The ability of the Master Servicer to ensure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to the Master Servicer by Mortgagors or
Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Certificate Account. The Pooling Agreement or Servicing Agreement will provide
that the Master Servicer may satisfy its obligation to cause hazard policies to
be maintained by maintaining a blanket policy insuring against losses on the
Mortgage Loans. If such blanket policy contains a deductible clause, the Master
Servicer will deposit in the applicable Certificate Account all sums which would
have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from 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.
-54-
<PAGE>
However, the ability of the Master Servicer to present such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are
reasonably necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a wholly-owned subsidiary of 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.
-55-
<PAGE>
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".
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
-56-
<PAGE>
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 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
-57-
<PAGE>
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.
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.
-58-
<PAGE>
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 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
-59-
<PAGE>
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 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
-60-
<PAGE>
of such class or (iii) reduce the aforesaid percentage of Voting Rights required
for the consent to any such amendment without the consent of the holders of all
Notes covered by such Agreement then outstanding. The Voting Rights evidenced by
any Certificate will be the portion of the voting rights of all of the Notes in
the related series allocated in the manner described in the related Prospectus
Supplement.
TERMINATION; RETIREMENT OF SECURITIES
The obligations created by the related Agreements for each series of
Securities (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Securityholders of that series of all amounts held in the Certificate Account or
by the Master Servicer and required to be paid to them pursuant to such
Agreements following the earlier of (i) the final payment or other liquidation
or disposition (or any advance with respect thereto) of the last Mortgage Loan,
REO Property and/or Mortgage Security subject thereto and (ii) the purchase by
the Master Servicer or the Company or (A) if specified in the related Prospectus
Supplement with respect to each series of Certificates, by the holder of the
REMIC Residual Certificates (see "Certain Federal Income Tax Consequences"
below) or (B) if specified in the Prospectus Supplement with respect to each
series of Notes, by the holder of the Equity Certificates, from the Trust Fund
for such series of all remaining Mortgage Loans, REO Properties and/or Mortgage
Securities. In addition to the foregoing, the Master Servicer or the Company
will have the option to purchase, in whole but not in part, the Securities
specified in the related Prospectus Supplement in the manner set forth in the
related Prospectus Supplement. Upon the purchase of such Securities or at any
time thereafter, at the option of the Master Servicer or the Company, the assets
of the Trust Fund may be sold, thereby effecting a retirement of the Securities
and the termination of the Trust Fund, or the Securities so purchased may be
held or resold by the Master Servicer or the Company. In no event, however, will
the trust created by the Pooling Agreement continue beyond the expiration of 21
years from the death of the survivor of certain persons named in such Pooling
Agreement. Written notice of termination of the Pooling Agreement will be given
to each Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee which will 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
-61-
<PAGE>
paid to the Master Servicer or Special Servicer in respect of the Securities or
the underlying Mortgage Loans or Mortgage Securities, or any funds deposited
into or withdrawn from the Certificate Account for such series or any other
account by or on behalf of the Master Servicer or Special Servicer. If no Event
of Default has occurred and is continuing, the Trustee for each series of
Securities will be required to perform only those duties specifically required
under the related Pooling Agreement or Indenture. However, upon receipt of any
of the various certificates, reports or other instruments required to be
furnished to it pursuant to the related Agreement, a Trustee will be required to
examine such documents and to determine whether they conform to the requirements
of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement,
the fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Securities will be entitled to indemnification, from
amounts held in the Certificate Account for such series, for any loss, liability
or expense incurred by the Trustee in connection with the Trustee's acceptance
or administration of its trusts under the related Pooling Agreement or
Indenture; provided, however, that such indemnification will not extend to any
loss liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Securities will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
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
-62-
<PAGE>
interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans.
See "Maturity and Prepayment Considerations" below. The yield on the Securities
will also be affected by liquidations of Mortgage Loans following Mortgagor
defaults and by purchases of Mortgage Loans in the event of breaches of
representations made in respect of such Mortgage Loans by the Company, the
Master Servicer and others, or conversions of ARM Loans to a fixed interest
rate. See "The Mortgage Pools--Representations by Sellers" and "Descriptions of
the Securities--Assignment of Trust Fund Assets" above. Holders of certain Strip
Securities or a class of Securities having a Security Interest Rate that varies
based on the weighted average Mortgage Rate of the underlying Mortgage Loans
will be affected by disproportionate prepayments and repurchases of Mortgage
Loans having higher Net Mortgage Rates or rates applicable to the Strip
Securities, as applicable.
With respect to any series of Securities, a period of time will elapse
between the date upon which payments on the related Mortgage Loans are due and
the Distribution Date on which such payments are passed through to
Securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Securityholders on or near the date they were due.
In general, if a class of Securities is purchased at initial issuance
at a premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Securities is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities, Securities with a Security Interest Rate which
fluctuates inversely with or at a multiple of an index or certain other classes
in a series including more than 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
-63-
<PAGE>
describe any other amounts available to offset such shortfalls. See Servicing of
Mortgage Loans--Servicing and Other Compensation and Payment of Expenses;
Spread".
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans and thus the yield on the
Securities. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. However, there is a risk that
Mortgage Loans, including Multifamily Loans, that require Balloon Payments may
default at maturity, or that the maturity of such a Mortgage Loan may be
extended in connection with a workout. The rate of default on Single Family
Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans, including Multifamily Loans, with high Loan-to- Value Ratios,
may be higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the Mortgagor under each Mortgage Loan
generally will be qualified, or the Mortgage Loan otherwise approved, on the
basis of the Mortgage Rate in effect at origination. The repayment of any such
Mortgage Loan may thus be dependent on the ability of the mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate. In
addition, the periodic increase in the amount paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under applicable underwriting guidelines, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination 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
-64-
<PAGE>
loan interest rates, the Mortgagor's equity in the related Mortgaged Property,
tax laws and prevailing general economic conditions. Unless otherwise specified
in the related Prospectus Supplement, none of the Company, the Master Servicer,
or any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to sell the Mortgaged Property.
The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located and, in the case of
Multifamily Loans, the quality of management of the Mortgage Properties, the
servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
Mortgage Loans may be affected by the existence of Lock-out Periods and
requirements that principal prepayments be accompanied by Prepayment Premiums,
as well as due-on-sale and due-on-encumbrance provisions, and by the extent to
which such provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures" and "Certain Legal Aspects of
the Mortgage Loans--Enforceability of Certain Provisions" for a description of
certain provisions of the Pooling Agreement and certain legal developments that
may affect the prepayment experience on the Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally will,
unless otherwise specified in the related Prospectus Supplement, (i) not
increase or decrease such Mortgage Rates by more than a fixed percentage amount
on each adjustment date, (ii) not increase such Mortgage Rates over a fixed
percentage amount during the life of any ARM Loan and (iii) be based on an index
(which may not rise and fall consistently with mortgage interest rates) plus the
related Note Margin (which may be different from margins being used at the time
for newly originated adjustable rate mortgage loans). As a result, the Mortgage
Rates on the ARM Loans at any time may not equal the prevailing rates for
similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of 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
-65-
<PAGE>
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 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.
-66-
<PAGE>
The Master Servicer will be required under the related Pooling
Agreement or Servicing Agreement to effect such notation or delivery of the
required documents and fees, and to obtain possession of the certificate of
title, as appropriate under the laws of the state in which any Manufactured Home
is registered. In the event the Master Servicer fails, due to clerical errors or
otherwise, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that manufactured homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located. Generally,
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, other parties could obtain an interest in the Manufactured Home
that is prior to the security interest originally retained by the Seller and
transferred to the Company.
The Company will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Company,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Company or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the Company's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, such assignment of the security interest might not
be held effective against creditors of the Company or Seller.
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 re- register
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
-67-
<PAGE>
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.
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
-68-
<PAGE>
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 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
-69-
<PAGE>
from the manufactured home and maintaining possession of the
manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of the lease
of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in
the event that the home is already set up, because the expenses of
retaking and redelivery will be saved. However, in those cases where
the home is left on location, expenses for site rentals will usually be
incurred.
(ii) Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgement in those states that do
not prohibit or limit such judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall. Occasionally,
after resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
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.
-70-
<PAGE>
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 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
-71-
<PAGE>
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 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
-72-
<PAGE>
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 deed- in-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.
-73-
<PAGE>
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.
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.
-74-
<PAGE>
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages,
as well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In certain states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the enforceability
of provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
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
-75-
<PAGE>
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.
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
-76-
<PAGE>
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.
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.
-77-
<PAGE>
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.
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
-78-
<PAGE>
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, 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
-79-
<PAGE>
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.
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.
-80-
<PAGE>
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 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
-81-
<PAGE>
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 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
-82-
<PAGE>
remaining after the date of its purchase. In interpreting a similar rule with
respect to original issue discount on obligations payable in installments, the
OID Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the Prepayment Assumption. If market discount is
treated as de minimis under this rule, it appears that the actual discount would
be treated in a manner similar to original issue discount of a de minimis
amount. See "Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount" above. Such treatment would result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue 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.
-83-
<PAGE>
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. 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
-84-
<PAGE>
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 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.
-85-
<PAGE>
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the 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,
-86-
<PAGE>
gain will be recognized to such REMIC Residual Certificateholders on such
distributions and will be treated as gain from the sale of their REMIC Residual
Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS. Although it
has not done so, the Treasury 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
-87-
<PAGE>
transfer was to enable the transferor to impede the assessment or collection of
tax." If such transfer is disregarded, the purported transferor will continue to
remain liable for any taxes due with respect to the income on such "noneconomic"
REMIC Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, 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
-88-
<PAGE>
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 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.
-89-
<PAGE>
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code
imposes a tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income 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
-90-
<PAGE>
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 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
-91-
<PAGE>
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.
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
-92-
<PAGE>
foregoing tax exemption should not apply with respect to a REMIC Regular
Certificate held by a REMIC Residual Certificateholder that owns directly or
indirectly a 10% or greater interest in the REMIC Residual Certificates. If the
holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that are not United States persons
will be prohibited under the related Pooling Agreement.
NOTES
Upon the issuance of each series of Notes, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
for federal income tax purposes, assuming compliance with all provisions of the
Indenture, Owner Trust Agreement and certain related documents, (i) the Notes
will be treated as indebtedness and (ii) the Issuer, as created pursuant to the
terms and conditions of the Owner Trust Agreement, will not be characterized as
an association (or publicly traded partnership) 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
-93-
<PAGE>
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.
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
-94-
<PAGE>
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) 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
-95-
<PAGE>
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 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."
-96-
<PAGE>
"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 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
-97-
<PAGE>
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 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
-98-
<PAGE>
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
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
-99-
<PAGE>
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 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.
-100-
<PAGE>
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 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.
-101-
<PAGE>
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain specified relationships to such Plans ("Parties in
Interest" within the meaning of ERISA or "Disqualified Persons" within the
meaning of the Code, collectively "Parties in Interest"), unless a statutory or
administrative exemption is available with respect to any such transaction.
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be invested
in the Securities without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal, state and local law. Any
such plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Certain transactions involving the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Plan that purchases the Securities, if the Mortgage Loans and other assets
included in a Trust Fund are deemed to be assets of the Plan. The U.S.
Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
ss.2510.3-101 (the "DOL Regulations") defining the term "Plan Assets" for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under the DOL
Regulations, generally, when a Plan acquires an "equity interest" in another
entity (such as the Trust Fund), the underlying assets of that entity may be
considered to be Plan Assets unless certain exceptions apply. Exceptions
contained in the DOL Regulations provide that a Plan's assets will not include
an undivided interest in each asset of an entity in which such Plan makes an
equity investment if: (1) the entity is an operating company; (2) the equity
investment made by the Plan is either a "publicly-offered security" that is
"widely held," both as defined in the DOL Regulations, or a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended; or (3) Benefit Plan Investors do not own 25% or more in value of any
class of equity securities issued by the entity. For this purpose, "Benefit Plan
Investors" include Plans, as well as any "employee benefit plan" (as defined in
Section 3(3) or ERISA) which is not subject to Title I of ERISA, such as
governmental plans (as defined in Section 3(32) of ERISA) and church plans (as
defined in Section 3(33) of ERISA) which have not made an election under Section
410(d) of the Code, and any 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
-102-
<PAGE>
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)
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
-103-
<PAGE>
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.
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
-104-
<PAGE>
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) Regulations may be treated as Plan Assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as Plan Assets of any Plan invested in such
separate account. Insurance companies contemplating the investment of general
account assets in the Securities should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Securities after the date which is 18
months after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN CERTIFICATES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies transfers of any such Securities to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Company, the Trustees and the Master Servicer with
an opinion of counsel satisfactory to the Company, the Trustee (or Indenture
Trustee in the case of transfer of Notes) and the Master Servicer, which opinion
will not be at the expense of the Company, the Trustee (or the Indenture Trustee
in the case of the transfer of Notes) or the Master Servicer, that the purchase
of such Securities by or on behalf of such Plan is permissible under applicable
law, will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Company, the
Trustee (or the Indenture Trustee in the case of the transfer of Notes) or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Company, the Trustees or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
the following statements are correct: (i) the transferee is an insurance
company, (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60),
(iii) the conditions set forth in PTCE 95-60 have been satisfied and (iv) there
is no Plan with respect to which the amount of such general account's reserves
and liabilities for contracts held by or on behalf of such Plan and all other
Plans maintained by the same employer (or any "affiliate" thereof, as defined in
PTCE 95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Securities.
An opinion of counsel or certification will not be required with
respect to the purchase of DTC registered Securities. Any purchaser of a DTC
registered Security will be deemed to have represented by such purchase that
either (a) such purchaser is not a Plan and is not purchasing such Securities on
behalf of, or with Plan Assets of, any Plan or (b) the purchase of any such
Security by or on behalf of, or with Plan Assets of, any Plan is permissible
under applicable law, will not result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Company, the
Trustee or the Master Servicer to any obligation in addition to those undertaken
in the related Agreement.
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."
-105-
<PAGE>
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with
respect to any particular Plan that acquires the Securities or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the Trust Fund. Prospective Plan investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in the Securities. Neither the Company, the Trustees, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, A FIDUCIARY OF A PLAN OR OTHER PLAN
ASSET INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL
CONDITIONS SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION
401(C) OF ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE
PURCHASED UNDER THE EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR
PURPOSES OF THE EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE
AVAILABILITY OF THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS
EXEMPTIONS OR SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS
GENERAL FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is rated in one of the
two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
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
-106-
<PAGE>
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.
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;
-107-
<PAGE>
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 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.
-108-
<PAGE>
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.
-109-
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
401(c) Regulations........................................................104
Accrual Certificates................................................6, 32, 41
Accrued Certificate Interest...............................................41
Affiliated Sellers.........................................................16
Agreement .........................................................31
ARM Loans .........................................................16
Available Distribution Amount..............................................40
Balloon Loans .........................................................17
Balloon Payment .........................................................17
Bankruptcy Code .........................................................71
Bankruptcy Loss .........................................................45
Beneficial Owner .........................................................33
Buydown Account .........................................................19
Buydown Agreement .........................................................39
Buydown Funds .........................................................19
Buydown Mortgage Loans.....................................................19
Buydown Period .........................................................19
Cedel .........................................................34
Cedel Participants.........................................................34
CERCLA .....................................................22, 72
Certificate Account........................................................37
Certificate Registrar......................................................33
Certificates ..........................................................1
Class Exemptions ........................................................104
Closing Date .........................................................80
Code ......................................................6, 78
Commission ..........................................................3
Committee Report .........................................................80
Company .......................................................1, 4
Conservation Act .........................................................72
Contingent Payment Regulations............................................100
Contracts .........................................................15
Contributions Tax .........................................................90
Convertible Mortgage Loan..................................................19
Cooperative .........................................................34
Crime Control Act .........................................................77
Debt Service Coverage Ratio................................................20
Debt Service Reduction.....................................................49
Defaulted Mortgage Loss....................................................45
Deferred Interest .........................................................17
Deficient Valuation........................................................48
Deleted Mortgage Loan......................................................23
Designated Seller Transaction..............................................16
Determination Date.........................................................41
DIDMC .........................................................78
Distribution Date ..........................................................8
DOL ........................................................102
DOL Regulations ........................................................102
DTC .........................................................33
DTC Registered Securities..................................................33
Due Period .........................................................42
-110-
<PAGE>
Environmental Lien.........................................................73
Equity Certificates.........................................................5
Equity Participation.......................................................18
ERISA ....................................................11, 102
ERISA Plans ........................................................102
Euroclear .........................................................34
Euroclear Operator.........................................................34
Euroclear Participants.....................................................34
Event of Default .........................................................59
Exchange Act ..........................................................3
Excluded Plan ........................................................104
Exemption Rating Agencies.................................................103
Extraordinary Losses.......................................................45
FDIC .........................................................16
FHA .........................................................15
FHA Loans .........................................................15
FHLMC .........................................................21
FIRREA .........................................................21
FNMA .........................................................21
Fraud Loss .........................................................45
FTC Rule .........................................................74
Garn-St Germain Act........................................................74
Grantor Trust Certificates.............................................11, 78
Grantor Trust Fractional Interest Certificate..............................93
Grantor Trust Fund.........................................................78
Grantor Trust Strip Certificate............................................94
Holder .........................................................33
Housing Act .........................................................22
HUD .........................................................55
Indenture ....................................................1, 4, 5
Index .........................................................17
Insurance Proceeds.........................................................38
Intermediaries .........................................................33
IRS .....................................................78, 81
Issue Premium .........................................................86
Issuer ..........................................................4
Letter of Credit .........................................................46
Letter of Credit Bank......................................................46
Liquidated Mortgage Loan...................................................29
Liquidation Proceeds.......................................................38
Loan-to-Value Ratio........................................................18
Lock-out Expiration Date...................................................18
Lock-out Period .........................................................18
Loss .........................................................53
Manufactured Homes.........................................................15
Manufacturer's Invoice Price...............................................18
Mark-to-Market Regulations.................................................88
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
-111-
<PAGE>
Mortgagor .........................................................13
Multifamily Loans .........................................................15
Multifamily Properties.....................................................15
Multifamily Property........................................................7
Net Mortgage Rate .........................................................62
Net Operating Income.......................................................20
Nonrecoverable Advance.....................................................43
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 .........................................................79
OTS ........................................................107
Owner Trust ..........................................................4
Owner Trustee .......................................................4, 5
Participants .........................................................33
Parties in Interest.......................................................102
Pass-Through Rate ..........................................................5
Permitted Investments......................................................37
Plan .........................................................11
Plan Assets ........................................................102
Plans ........................................................102
Policy Statement ........................................................106
Pool Insurer .........................................................39
Pooling Agreement ...................................................1, 5, 56
Pre-Funding Account........................................................32
Prepayment Assumption..................................................80, 96
Prepayment Interest Shortfall..............................................63
Prepayment Penalty.........................................................18
Primary Insurance Policy...................................................52
Primary Insurer .........................................................53
Prohibited Transactions Tax................................................90
Prospectus Supplement.......................................................1
PTCE ........................................................104
PTCE 83-1 ........................................................104
Purchase Obligation........................................................52
Purchase Price .........................................................23
Qualified Substitute Mortgage Loan.........................................23
Rating Agency .........................................................10
Realized Losses .........................................................44
Record Date .........................................................41
Related Proceeds .........................................................43
Relief Act .........................................................76
REMIC ...................................................1, 6, 78
REMIC Administrator........................................................78
REMIC Certificates.........................................................78
REMIC Provisions .........................................................78
REMIC Regular Certificates.............................................11, 79
REMIC Regulations .........................................................79
REMIC Residual Certificates............................................11, 79
REO Mortgage Loan .........................................................29
REO Property .........................................................27
-112-
<PAGE>
Reserve Fund .........................................................49
RICO .........................................................77
RTC .........................................................16
Securities .......................................................1, 4
Securities Act .....................................................3, 108
Security .........................................................56
Security Interest Rate......................................................5
Security Register .........................................................33
Security Registrar.........................................................33
Securityholder .........................................................33
Securityholders ..........................................................1
Seller ..........................................................8
Sellers ......................................................1, 16
Senior Certificates.....................................................6, 32
Senior Liens .........................................................17
Senior/Subordinate Series..................................................32
Servicing Default .........................................................58
Servicing Standard.........................................................25
Single Family Loans........................................................15
Single Family Property.....................................................15
SMMEA ....................................................11, 106
Special Hazard Instrument..................................................45
Special Hazard Insurance Policy............................................48
Special Hazard Insurer.....................................................48
Special Hazard Loss........................................................45
Special Hazard Losses......................................................48
Special Servicer ......................................................4, 28
SPFC ......................................................4, 55
Spread ..........................................................5
Strip Certificates......................................................6, 32
Subordinate Certificates................................................6, 32
Subservicer .........................................................27
Subservicers .........................................................20
Tax Favored Plans ........................................................102
Tax-Exempt Investor.......................................................105
Terms and Conditions.......................................................34
Tiered REMICs .........................................................80
Title V .........................................................75
Title VIII .........................................................76
Trust Agreement ..........................................................4
Trust Fund .......................................................1, 5
Trustee ..........................................................5
UBTI ........................................................105
Unaffiliated Sellers.......................................................16
Underwriter ........................................................103
United States person.......................................................92
Value .........................................................18
-113-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement............. $295,000
Legal Fees and Expenses........................... 390,000
Accounting Fees and Expenses...................... 312,500
Trustee's Fees and Expenses
(including counsel fees)................... 150,000
Printing and Engraving Fees....................... 187,500
Rating Agency Fees................................ 375,000
Miscellaneous..................................... 25,000
----------
Total ........................................... $1,735,000
==========
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
The Pooling and Servicing Agreements with respect to each series of
Certificates and the Servicing Agreements, Indentures and Owner Trust Agreements
with respect to each series of Notes will provide that no director, officer,
employee or agent of the Registrant is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith or
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements with respect to
each series of Certificates and the Servicing Agreements, Indentures and Owner
Trust Agreements with respect to each series of Notes will further provide that,
with the exceptions stated above, a director, officer, employee or agent of the
Registrant is entitled to be indemnified against any loss, liability or expense
incurred in connection with legal action relating to such Agreements and related
Securities other than such expenses related to particular Mortgage Loans.
Any underwriters who execute an Underwriting Agreement in the form
filed as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Section 317 of the California Corporations Code allows for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under
<PAGE>
-2-
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article VI of the Registrant's Amended and Restated Articles of Incorporation
(Exhibit 3.1 hereto) and Article XI of the Registrants Restated Bylaws (Exhibit
3.2 hereto) provide for indemnification of the Registrant's directors, officers,
employees and other agents to the extent and under the circumstances permitted
by the California Corporations Code. The Registrant has also entered into
agreements with its directors and executive officers that would require the
Registrant, among other things, to indemnify them against certain liabilities
that may arise by reason of their status or service as directors to the fullest
extent not prohibited by law.
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
* 1.1 -- Form of Underwriting Agreement.
* 3.1 -- Amended and Restated Articles of Incorporation.
* 3.2 -- Restated By-Laws.
* 4.1 -- Form of Pooling and Servicing Agreement for an offering of
Mortgage Pass-Through Certificates consisting of senior and
subordinate certificate classes.
* 4.2 -- Form of Pooling and Servicing Agreement for alternate forms
of credit support (single class).
** 4.3 -- Form of Servicing Agreement for an offering of Mortgage-
Backed Notes.
** 4.4 -- Form of Trust Agreement for an offering of Mortgage-Backed
Notes.
** 4.5 -- Form of Indenture for an offering of Mortgage-Backed Notes.
*** 5.1 -- Opinion of Thacher Proffitt & Wood with respect to legality.
*** 8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain tax
matters (included with Exhibit 5.1).
*** 23.1 -- Consent of Thacher Proffitt & Wood (included as part of
Exhibit 5.1 and Exhibit 8.1).
** 24.1 -- Power of Attorney.
- -------
* Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-91756).
** Incorporated by reference from the Registration Statement on Form S-3
(File No. 333-26215).
*** Previously filed.
<PAGE>
-3-
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement, and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement; PROVIDED, HOWEVER, that subparts (i)
and (ii) do not apply if the information required to be included in the
post-effective amendment by those subparts is contained in periodic reports
filed by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(f) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
<PAGE>
-4-
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Southern
Pacific Secured Assets Corp. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3, reasonably
believes that the security rating requirement contained in Transaction
Requirement B.5 of Form S-3 will be met by the time of the sale of the
securities registered hereunder, and has duly caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Lake Oswego, State of Oregon, on the 21st day of
September, 1998.
SOUTHERN PACIFIC SECURED
ASSETS CORP.
By: /s/ James L. Smith
--------------------------------
James L. Smith
Director and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
SIGNATURE TITLE
DATE
* Director, Chairman September 21, 1998
- ------------------------- of the Board (Principal
Robert W. Howard Executive Officer)
/s/ James L. Smith Director and Secretary September 21, 1998
- -------------------------
James L. Smith
* Director and Chief September 21, 1998
- ------------------------- Operating Officer
Bernard Guy
* Director and Chief September 21, 1998
- -------------------------
Frank Frazzitta Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)
*By: /s/ James L. Smith
---------------------------
James L. Smith
