PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 23, 1998)
$99,744,000
[LOGO FOR SOUTHERN PACIFIC]
MASTER SERVICER
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
SOUTHERN PACIFIC CMN TRUST SERIES 1998-H1
COLLATERALIZED ASSET-BACKED NOTES, SERIES 1998-H1
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
$27,600,000 Adjustable Rate Class A-1 Notes $ 0(2) 0.50%(3) Class A-6 IO Notes
$10,800,000 6.31% Class A-2 Notes $10,555,000 7.49%(1) Class M-1 Notes
$16,000,000 6.41% Class A-3 Notes $7,916,000 7.63%(1) Class M-2 Notes
$10,000,000 6.61% Class A-4 Notes $11,346,000 9.01%(1) Class B-1 Notes
$5,527,000 7.13%(1) Class A-5 Notes
- ----------
</TABLE>
(1) The Note Interest Rate for each such class of Notes remaining outstanding
will be increased by 0.50% after the Step-Up Date (as defined herein).
(2) Based on a Notional Amount (as defined herein) of $105,549,158 as described
herein.
(3) After the 30th Payment Date, the Note Interest Rate on the Interest Only
Notes shall be reduced to 0.00%.
------------------------
The Series 1998-H1 Collateralized Asset-Backed Notes will include the
following nine classes (the "Notes" or the "Offered Notes"): Class A-1 Notes,
Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5 Notes and Class A-6
IO Notes (collectively, the "Senior Notes"); (ii) Class M-1 Notes and Class M-2
Notes (together, the "Class M Notes"); (iii) Class B-1 Notes (together with the
Class M Notes, the "Subordinate Notes"). The Class A-6 IO Notes are also
referred to herein as the "Interest Only Notes." The Series 1998-H1
Collateralized Asset-Backed Certificates will include the Class B-2 Certificates
and Class X Certificates (together, the "Certificates").
(CONTINUED ON FOLLOWING PAGE)
--------------------------
THE ASSETS PLEDGED TO SECURE THE OFFERED NOTES ARE THE SOLE SOURCE OF PAYMENTS
ON THE OFFERED NOTES. THE OFFERED NOTES WILL REPRESENT OBLIGATIONS SOLELY OF
THE ISSUER AND WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE MASTER SERVICER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE
OR ANY OF THEIR AFFILIATES, OTHER THAN THE ISSUER. NEITHER THE
OFFERED NOTES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY.
THESE OFFERED NOTES 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.
--------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-14 OF THIS PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE 15 OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE OFFERED NOTES.
There is currently no secondary market for the Offered Notes. Greenwich
Capital, Inc. (the "Underwriter") intends to make a secondary market in the
Offered Notes, but is not obligated to do so. There can be no assurance that a
secondary market for the Offered Notes will develop or, if it does develop, that
it will continue. The Offered Notes will not be listed on any securities
exchange.
The Offered 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 net proceeds to the Company from the sale of the Offered Notes, before
deducting expenses payable by the Company, will be equal to approximately
100.99% of the aggregate initial principal balance of the Offered Notes, plus
accrued interest on the Offered Notes (other than the Class A-1 Notes) from June
1, 1998.
The Offered 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 Offered Notes will be made in book-entry
form through the Same Day Funds Settlement System of The Depository Trust
Company as discussed herein, against payment therefor in immediately available
funds.
GREENWICH CAPITAL
The date of this Prospectus Supplement is June 23, 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Notes will represent obligations of the Southern Pacific CMN Trust
Series 1998-H1 (the "Issuer") which will be formed pursuant to a Trust Agreement
to be dated as of June 8, 1998 (as amended and restated by the Amended and
Restated Trust Agreement dated June 25, 1998, the "Trust Agreement"), between
Southern Pacific Secured Assets Corp. (the "Company") and Wilmington Trust
Company (the "Owner Trustee"). The Notes will be issued pursuant to an Indenture
to be dated as of June 25, 1998 (the "Indenture") between the Issuer and Norwest
Bank Minnesota, N.A. (the "Indenture Trustee").
The Notes will represent indebtedness of the trust fund (the "Trust Fund")
created by the Trust Agreement. The Trust Fund will consist of certain
closed-end, fixed-rate mortgage loans (the "Home Loans") secured primarily by
second mortgages or deeds of trust on one- to four-family residential
properties. The proceeds of the Home Loans generally were used by the related
borrowers for debt consolidation. In addition, substantially all of the Home
Loans will be secured by second liens on Mortgaged Properties in which the
borrowers have little or no equity (approximately 94.63% of the Home Loans (by
principal balance as of the Cut-off Date) will have Combined Loan-to-Value
Ratios in excess of 100%). See "Risk Factors--Risks Associated with the Home
Loans."
The Home Loans were generally underwritten in accordance with the related
underwriting standards described in "Description of the Home Loan
Pool--Underwriting" and Appendix A to this Prospectus Supplement. See also "Risk
Factors--Underwriting Standards" in this Prospectus Supplement.
Payments on the Notes will be made on the 25th day of each month or, if such
day is not a business day, then on the next business day, commencing in July
1998 (each, a "Payment Date"). Interest will accrue on each class of Notes at an
interest rate (the related "Note Interest Rate") which is set forth on the cover
hereof. See "Description of the Securities--Interest Distributions". As
described herein, interest payable on the Notes will accrue on the basis of a
30-day month and a 360-day year. Payments in respect of principal of the Notes
will be made as described under "Description of the Securities--Principal
Distributions".
The Notes may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the Payment Date on which the aggregate Principal
Balance of the Home Loans is less than or equal to 10% of an amount (the
"Cut-off Date Balance") equal to the aggregate Principal Balance of such Home
Loans as of the Cut-off Date. See "Description of the Securities--Maturity and
Optional Redemption" herein.
The Offered Notes initially will be registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"), as further described herein.
The interests of beneficial owners of the Offered Notes will be represented by
book entries on the records of DTC and the participating members of DTC.
Definitive Notes will be available for the Offered Notes only under the limited
circumstances described herein. See "Description of the Securities--Book-Entry
Notes" herein.
It is a condition of the issuance of the Senior Notes (other than the
Interest Only Notes) that they be rated "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies ("S&P") and Fitch IBCA, Inc.
("Fitch"). It is a condition to the issuance of the Interest Only Notes that
they be rated not lower than "AAAr" by S&P and "AAA" by Fitch. It is a condition
to the issuance of the Class M-1 Notes that they be rated not lower than "AA" by
S&P and Fitch. It is a condition to the issuance of the Class M-2 Notes that
they be rated not lower than "A" by S&P and Fitch. It is a condition to the
issuance of the Class B-1 Notes that they be rated not lower than "BBB-" by S&P
and "BBB" by Fitch.
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON, AMONG OTHER THINGS, THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES,
DEFAULTS AND LIQUIDATIONS) ON THE HOME LOANS. IN GENERAL, DEFAULTS ON MORTGAGE
LOANS SECURED BY SECOND LIENS ARE EXPECTED TO OCCUR WITH GREATER FREQUENCY IN
THEIR EARLY YEARS. THE RATE OF DEFAULTS AND THE SEVERITY OF LOSSES ON SUCH
MORTGAGE LOANS SECURED BY SECOND LIENS MAY BE SUBSTANTIALLY HIGHER THAN MORTGAGE
LOANS SECURED BY FIRST LIENS. SEE "RISK FACTORS" HEREIN AND IN THE PROSPECTUS.
IN ADDITION, THE YIELD TO MATURITY OF EACH CLASS OF SUBORDINATE NOTES WILL BE
EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE HOME LOANS (AND THE TIMING
THEREOF), TO THE EXTENT THAT SUCH LOSSES ARE NOT COVERED BY THE
OVERCOLLATERALIZATION AMOUNT (AS DEFINED HEREIN), THE CLASS B-2 CERTIFICATES OR
BY ANY CLASS OF SUBORDINATE NOTES HAVING A LOWER PAYMENT PRIORITY, AS DESCRIBED
HEREIN. THE HOME LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME.
IN ADDITION, INVESTORS IN THE INTEREST ONLY NOTES SHOULD FULLY CONSIDER THAT AN
EXTREMELY RAPID RATE OF PRINCIPAL PAYMENTS ON THE HOME LOANS COULD RESULT IN THE
FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. SEE
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD AND PREPAYMENT
CONSIDERATIONS" IN THE PROSPECTUS.
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF NOTES BEING OFFERED PURSUANT TO THE COMPANY'S PROSPECTUS
DATED JUNE 23, 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 OFFERED NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-2
<PAGE>
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.
The Notes............................... $99,744,000 Collateralized
Asset-Backed Notes, Series 1998-H1.
The Notes will be issued pursuant to
an Indenture dated as of June 25, 1998
between the Issuer and the Indenture
Trustee.
Issuer.................................. The Notes will be issued by Southern
Pacific CMN Trust Series 1998-H1 (the
"Issuer") a Delaware business trust
established pursuant to a Trust
Agreement, dated as of June 8, 1998
(as amended and restated by the
Amended and Restated Trust Agreement
dated June 25, 1998, the "Trust
Agreement"), between the Company and
the Owner Trustee. The Notes will
represent obligations solely of the
Issuer, and the proceeds of the assets
of the Issuer (such assets, the "Trust
Fund") will be the sole source of
payments on the Notes.
Company................................. Southern Pacific Secured Assets Corp.
(the "Company"). See "The Company" in
the Prospectus.
Master Servicer and Seller.............. Southern Pacific Funding Corporation
("SPFC," the "Master Servicer" or the
"Seller"), an affiliate of the
Company. See "Description of the Home
Loan Pool--The Seller" herein.
Owner Trustee........................... Wilmington Trust Company, a Delaware
trust company.
Indenture Trustee....................... Norwest Bank Minnesota, N.A., a
national banking association.
Cut-off Date............................ With respect to each Home Loan (as
defined herein), June 1, 1998.
Delivery Date........................... On or about June 25, 1998.
Payment Date............................ The 25th day of each month (or, if
such day is not a business day, the
next business day), commencing in July
1998 (each, a "Payment Date").
Note Registration....................... The Offered Notes will be issued,
maintained and transferred on the
book-entry records of DTC and its
Participants (as defined in the
Prospectus). The Offered Notes will be
offered in registered form in the name
of Cede & Co., as nominee of DTC. No
Beneficial Owner will be entitled to
receive an Offered Note in fully
registered, certificated form (a
"Definitive Note"), except under the
limited circumstances described
herein. For further registration
information and information regarding
denominations. See "Description of the
Securities" herein.
The Home Loan Pool...................... The Home Loans are closed-end,
fixed-rate mortgage loans. The
proceeds of the Home Loans generally
were used by the related borrowers for
debt consolidation. In addition,
substantially all of the
S-3
<PAGE>
Home Loans will be secured by second
liens on Mortgaged Properties in which
the borrowers have little or no
equity. The Home Loans are primarily
secured by second liens on fee simple
interests in one- to four-family
residential real properties (each, a
"Mortgaged Property"). The Home Loans
have an aggregate principal balance as
of the Cut-off Date of approximately
$105,549,158. At origination, the Home
Loans had individual principal
balances of at least $3,000 but not
more than $145,250, with an average
original principal balance of
approximately $33,148. The Home Loans
have terms to maturity from the date
of origination or modification of not
more than 30 years, and a weighted
average remaining term to maturity of
approximately 218 months as of the
Cut-off Date. The Home Loans will bear
interest at Home Loan Rates of at
least 6.990% per annum but not more
than 19.500% per annum, with a
weighted average Home Loan Rate of
13.745% per annum as of the Cut-off
Date.
Approximately 0.60% of the Home Loans
were thirty days or more but less than
sixty days delinquent in their Monthly
Payments as of the May 31, 1998.
Prospective investors in the Notes
should be aware, however, that
approximately 75.21% had a first
Monthly Payment due on or before May
1, 1998, and therefore, the remaining
Home Loans could not have been thirty
or more days delinquent as of May 31,
1998.
The Home Loans will have been made to
borrowers that typically have limited
access to traditional mortgage
financing for a variety of reasons,
such as insufficient home equity
value, high level of debt-to-income
ratios, past credit experience or a
limited credit history. See "Risk
Factors--Underwriting Standards"
herein.
Approximately 79.50% of the Home Loans
were originated by the Seller or an
affiliate thereof. Approximately
20.50% of the Home Loans were acquired
in bulk purchases from third-party
originators. For a further description
of the Home Loans, see "Description of
the Home Loan Pool" herein.
Interest Payments ...................... With respect to any Payment Date,
"Accrued Note Interest" will be equal
to, in respect of each class of Notes,
interest on the Note Principal Balance
thereof at the related Note Interest
Rate. The "Note Interest Rate" on each
class of Offered Notes (other than the
Class A-1 Notes and the Interest Only
Notes) for each Payment Date will be
the fixed rate set forth on the cover
hereof. The Note Interest Rate on the
Class A-1 Notes for each Payment Date
will be a floating rate equal to the
lesser of (i) LIBOR plus 0.09% per
annum and (ii) 12.00% per annum. The
Note Interest Rate on the Interest
Only Notes will equal 0.50% per annum
for the first 30 Payment Dates, and
0.00% thereafter.
The "Accrual Period" with respect to
any Payment Date will be (i) in the
case of the Class A-1 Notes, the
period from and including the Payment
Date in the calendar month preceding
the month in
S-4
<PAGE>
which the related Payment Date occurs
(or in the case of the first Payment
Date, beginning on the Closing Date)
to but excluding the related Payment
Date and (ii) in the case of the
Offered Notes other than the Class A-1
Notes, the calendar month preceding
the month in which the related Payment
Date occurs. Interest on the Class A-
1 Notes will be based on the actual
number of days in the related Accrual
Period and a 360-day year. Interest on
the Offered Notes other than the Class
A-1 Notes will be based on a 30-day
month and a 360-day year.
The "Notional Amount" of the Interest
Only Notes as of any Payment Date will
be equal to approximately
$105,549,158. References herein to the
Notional Amount are used solely for
certain calculations and do not
represent the right of the Interest
Only Notes to receive distributions
allocable to principal.
Principal Distributions................. Holders of the Senior Notes (other
than the Interest Only Notes, which
will not be entitled to distributions
with respect to principal) will be
entitled to receive a distribution of
principal on each Payment Date, in the
manner and priority set forth herein,
to the extent of the Senior Principal
Distribution Amount (as defined
herein).
Following the earlier to occur of (i)
the Stepdown Date (as defined herein)
or (ii) the retirement of the Senior
Notes and any Class M Notes senior
thereto, holders of the Class M Notes
will be entitled to receive a
distribution of principal on each
Payment Date, in the manner and
priority set forth herein, to the
extent of the portion of the Principal
Distribution Amount (as defined
herein) remaining after distributions
in respect of principal to the holders
of the Senior Notes and any class of
Class M Notes having a higher payment
priority.
Following the earlier to occur of (i)
the Stepdown Date or (ii) the
retirement of the Senior Notes and the
Class M Notes, holders of the Class
B-1 Notes will be entitled to receive
a distribution of principal on each
Payment Date, in the manner and
priority set forth herein, to the
extent of the portion of the Principal
Distribution Amount remaining after
distributions in respect of principal
to the holders of the Senior Notes and
the Class M Notes.
See "Description of the
Securities--Principal Distributions"
herein.
Net Monthly Excess Cash Flow............ Holders of the Notes then entitled to
payments in respect of principal may
be entitled to receive additional
distributions in respect of principal
(included in the Principal
Distribution Amount) on each Payment
Date to the extent of Net Monthly
Excess Cash Flow. "Net Monthly Excess
Cash Flow" will consist primarily of
(i) the portion, if any, of the
Interest Remittance Amount (as defined
herein) not required to pay Accrued
Note Interest on the Notes and any
Unpaid Interest Shortfall (as defined
herein) on the Notes and (ii) the Net
Monthly Excess Principal Amount (as
defined herein).
S-5
<PAGE>
The Net Monthly Excess Cash Flow
generally will be used as follows: (i)
first, to pay any remaining Unpaid
Interest Shortfall on the Senior
Notes; (ii) second, as payments in
respect of principal on the Notes to
create overcollateralization until the
Overcollateralization Amount (as
defined herein) has reached the
Required Overcollateralization Amount
(as defined herein); (iii) third, to
pay any remaining Unpaid Interest
Shortfall on the Subordinate Notes and
to reimburse the Subordinate Notes for
any Realized Losses previously
allocated thereto, in the order of
priority described herein; and (iv)
fourth, to be distributed to the Class
X Certificates (as defined herein).
See "Description of the Securities-Net
Monthly Excess Cash Flow
Distributions" herein.
The Certificates........................ The Certificates will consist of the
Class B-2 Certificates and the Class X
Certificates (the "Certificates"). The
Class B-2 Certificates will have a
Certificate Principal Balance of
$5,541,000 and a Certificate Interest
Rate of 11.01% per annum. The
Certificates will be issued pursuant
to the Trust Agreement and will
represent the beneficial ownership
interests in the Issuer. The
Certificates are not offered hereby.
Credit Enhancement...................... The credit enhancement provided for
the benefit of the Noteholders
consists solely of (a) the
subordination provisions provided
herein and (b) the
overcollateralization provisions which
utilize the internal cash flows of the
Home Loans.
SUBORDINATION. The rights of the
holders of the Class M-1 Notes to
receive distributions with respect to
the Home Loans will be subordinate to
the rights of the holders of the
Senior Notes, the rights of the
holders of the Class M-2 Notes to
receive distributions with respect to
the Home Loans will be subordinate to
the rights of the holders of the
Senior Notes and the Class M-1 Notes,
and the rights of the holders of the
Class B-1 Notes to receive
distributions with respect to the Home
Loans will be subordinate to the
rights of the holders of the Senior
Notes, the Class M-1 Notes and the
Class M-2 Notes, in each case to the
extent described herein and in the
Prospectus. In addition, following
each Payment Date, Realized Losses on
the Home Loans, to the extent not
covered by the Overcollateralization
Amount (including the Net Monthly
Excess Cash Flow distributed on such
Payment Date), will be allocated first
to the Class B-2 Certificates and then
to the Notes in reverse order of
priority as described herein under
"Allocation of Losses; Subordination."
OVERCOLLATERALIZATION. The
Overcollateralization Amount will
initially be equal to approximately
$264,158 (0.25% of the Cut-off Date
Balance) and will be increased by
distributions of the Extra Principal
Distribution Amount (as defined
herein), if any, to the Notes. The
Overcollateralization Amount, if any,
will represent overcollateralization
which will be available to absorb any
Realized
S-6
<PAGE>
Losses. The "Overcollateralization
Amount" available on any Distribution
Date, is the amount, if any, by which
the aggregate Principal Balance of the
Home Loans (the "Pool Balance") at the
end of the related Collection Period
exceeds the sum of the aggregate Note
Principal Balance of the Notes and the
Certificate Principal Balance of the
Class B-2 Certificates (such sum, the
"Security Balance") on such
Distribution Date (after taking into
account the payment to the Notes and
Class B-2 Certificates of the
Principal Remittance Amount).
The Overcollateralization Amount will
increase until it reaches the required
level of overcollateralization (the
"Required Overcollateralization
Amount"), which may increase or
decrease, subject to certain trigger
tests, in accordance with the
provisions of the Indenture. An
increase would result in a temporary
period of accelerated amortization of
the Notes 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. As of the
Delivery Date, the Required
Overcollateralization Amount is equal
to 4.50% of an amount (the "Cut-off
Date Balance") equal to the aggregate
Principal Balance of the Home Loans as
of the Cut-off Date. See "Description
of the
Securities--Overcollateralization
Provisions" herein.
Advances................................ The Master Servicer is required to
make advances ("Advances") in respect
of delinquent payments of interest on
the Home Loans, subject to the
limitations described herein. See
"Description of the
Securities--Advances" herein and in
the Prospectus.
Allocation of Losses;
Subordination.......................... On each Payment Date following the
application of all amounts
distributable on such date, to the
extent the Pool Balance at the end of
the related Collection Period is less
than the Security Balance due to
Realized Losses, the Note Principal
Balances of the Subordinate Notes
shall be reduced as follows, until
such deficiency is fully allocated:
first, the Certificate Principal
Balance of the Class B-2 Certificates
shall be reduced, until the
Certificate Principal Balance thereof
has been reduced to zero; second, the
Note Principal Balance of the Class
B-1 Notes shall be reduced, until the
Note Principal Balance thereof has
been reduced to zero; third, the Note
Principal Balance of the Class M-2
Notes shall be reduced, until the
related Note Principal Balance has
been reduced to zero; and fourth, the
Note Principal Balance of the Class
M-1 Notes shall be reduced, until the
related Note Principal Balance has
been reduced to zero. The Note
Principal Balances of the Senior Notes
will not be so reduced and such Notes
will continue to receive Accrued Note
Interest on their balance subject to
available funds. Any loss allocated to
a Subordinate Note may be repaid, to
the extent funds are available
therefor, through the application of
the Net Monthly Excess Cash Flow as
described above.
S-7
<PAGE>
Optional Redemption of the Notes........ The Notes may be redeemed in whole,
but not in part, by the Issuer on any
Payment Date on or after the Payment
Date on which the Pool Balance at the
end of the related Collection Period
is less than or equal to 10% of the
Cut-off Date Balance.
See "Description of the
Securities--Maturity and Optional
Redemption" herein and "The
Agreements--Termination; Redemption of
Notes" in the Prospectus.
Special Prepayment
Considerations........................ The rate and timing of principal
payments on the Notes will depend,
among other things, on the rate and
timing of principal payments
(including prepayments, defaults,
liquidations and purchases of the Home
Loans due to a breach of a
representation or warranty) on the
Home Loans. As is the case with
mortgage-backed securities generally,
the Notes are subject to substantial
inherent cash-flow uncertainties
because the Home Loans may be prepaid
at any time.
In addition, since mortgage loans
secured by second liens are not
generally viewed by borrowers as
permanent financing and generally
carry a higher rate of interest than
mortgage loans secured by first liens,
the Home Loans may experience a higher
rate of prepayments than traditional
mortgage loans. However, because the
Home Loans have smaller balances and
smaller monthly payments than
traditional mortgage loans, the
related borrower may have a lessened
incentive to refinance if interest
rates decline. Furthermore, due to the
high Combined Loan-to-Value Ratios on
the Home Loans, the related borrowers
may have less opportunity to
refinance. In addition, the rate of
default on second mortgage loans may
be greater than that of mortgage loans
secured by first liens. See "Certain
Yield and Prepayment
Considerations--General" herein.
The multiple class structure of Notes
results in the allocation of
prepayments among certain classes as
follows:
SENIOR NOTES: The Senior Notes are
subject to various priorities for
payment of principal as described
herein. Distributions of principal on
classes of Senior Notes having an
earlier priority of payment will be
affected by the rates of prepayment of
the Home Loans early in the life of
the Home Loan Pool. The timing of
commencement of principal
distributions and the weighted average
lives of the classes of Senior Notes
with a later priority of payment will
be affected by the rates of prepayment
of the Home Loans experienced both
before and after the commencement of
principal distributions on such
classes. In addition, distributions of
the Extra Principal Distribution
Amount to the Senior Notes will result
in an accelerated reduction of the
Note Principal Balance thereof until
the Overcollateralization Amount is
equal to the Required
Overcollateralization Amount. Realized
Losses, to the extent resulting in a
reduction of the Overcollateralization
Amount, will
S-8
<PAGE>
also result in an accelerated payment
with respect to principal on the
Senior Notes.
NOTES WITH SUBORDINATION FEATURES: As
described herein, during certain
periods all or a disproportionately
large percentage of principal payments
on the Home Loans will be allocated to
the Senior Notes in the aggregate and,
during certain periods, no principal
payments will be distributed to the
Subordinate Notes and the Class B-2
Certificates. Unless the Note
Principal Balances of the Senior Notes
have been reduced to zero, the
Subordinate Notes and the Class B-2
Certificates will not be entitled to
receive distributions of principal
until the Stepdown Date. To the extent
that no principal payments are
distributed on the Subordinate Notes
and the Class B-2 Certificates, the
subordination afforded the Senior
Notes by the Subordinate Notes
(together with the
Overcollateralization Amount) and the
Class B-2 Certificates, in the absence
of offsetting Realized Losses
allocated thereto, will be increased,
and the weighted average lives of the
Subordinate Notes will be extended.
See "Description of the
Securities--Principal Distributions"
and "Certain Yield and Prepayment
Considerations" herein and "Yield and
Prepayment Considerations" in the
Prospectus. For further information
regarding the effect of principal
prepayments on the weighted average
lives of the Notes, see the tables
entitled "Percent of Initial Note
Principal Balance Outstanding at the
Following Percentages of the
Prepayment Assumption" herein.
See "Certain Yield and Prepayment
Considerations" herein, and "Maturity
and Prepayment Considerations" in the
Prospectus.
Special Yield
Considerations....................... The multiple class structure of the
Notes causes the yield of certain
classes to be particularly sensitive
to changes in the rates of prepayment
of the Home Loans and other factors,
as follows:
INTEREST ONLY NOTES: Investors in the
Interest Only Notes should fully
consider that an extremely rapid rate
of principal prepayments on the Home
Loans could result in the failure of
such investors to receive all amounts
payable under the Interest Only Notes.
See "Certain Yield and Prepayment
Considerations," especially "Certain
Yield and Prepayment
Considerations--Interest Only Note
Yield Considerations" herein.
NOTES WITH SUBORDINATION FEATURES: The
yield to investors on each class of
Subordinate Notes and particularly on
those classes of such Subordinate
Notes with lower payment priorities,
will be extremely sensitive to losses
due to defaults on the Home Loans (and
the timing thereof), to the extent
such losses are not covered by the
Overcollateralization Amount
(including overcollateralization
created by the Net Monthly Excess Cash
Flow) or by any other class of
Subordinate Notes having a lower
payment priority,
S-9
<PAGE>
because the entire amount of such
losses that are covered by
Subordination (as defined herein) will
be allocable to such class or classes
of Subordinate Notes or as described
herein.
Investors in each class of Subordinate
Notes should also be aware that on any
Payment Date prior to the Stepdown
Date, such class of Subordinate Notes
will not be entitled to distributions
of principal until the Note Principal
Balances of the Senior Notes and each
class of Subordinate Notes senior
thereto have been reduced to zero.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
The yield to maturity on the Notes
will depend on, among other things,
the rate and timing of principal
payments (including prepayments,
defaults, liquidations and purchases
of the Home Loans due to a breach of a
representation or warranty) on the
Home Loans and the allocation thereof
to reduce the Note Principal Balance
thereof. The yield to maturity on the
Notes will also depend on the related
Note Interest Rate and the purchase
price for such Notes.
If a class of Notes is purchased at a
premium and principal payments 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.
Similarly, if a class of Notes is
purchased at a discount and principal
payments 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 Notes were structured assuming,
among other things, a Prepayment
Assumption (as defined herein) of 100%
and corresponding weighted average
lives as described herein. The
prepayment, yield and other
assumptions to be used for pricing
purposes for the Notes may vary as
determined at the time of sale.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Federal Income Tax
Consequences........................... In the opinion of Tax Counsel (as
defined in the Prospectus), for
federal income tax purposes, each
class of Notes will be characterized
as indebtedness and not as
representing an ownership interest in
the Trust Fund or an equity interest
in the Issuer or the Company. In
addition, for federal income tax
purposes, the Issuer will not be (i)
classified as an association taxable
as a corporation for federal income
tax purposes, (ii) a taxable mortgage
pool as defined in Section 7701(i) of
the Code, or (iii) a "publicly traded
partnership" as defined in Treasury
Regulation Section 1.7704-1.
S-10
<PAGE>
For federal income tax purposes, the
Interest Only Notes will be issued
with "original issue discount." 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.
ERISA Considerations.................... Fiduciaries of employee benefit plans
subject to the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), or plans subject to
Section 4975 of the Internal Revenue
Code of 1986 (the "Code"), should
carefully review with their legal
advisors whether the purchase or
holding of the Notes could give rise
to a transaction prohibited or not
otherwise permissible under ERISA or
the Code. See "ERISA Considerations"
herein.
Legal Investment........................ The Notes will not constitute
"mortgage related securities" for
purposes of SMMEA. See "Legal
Investment" herein and in the
Prospectus.
Rating.................................. It is a condition of the issuance of
the Senior Notes (other than the
Interest Only Notes) that they be
rated "AAA" by Standard & Poor's
Ratings Services, a division of The
McGraw-Hill Companies ("S&P") and
Fitch IBCA, Inc. ("Fitch"). It is a
condition to the issuance of the
Interest Only Notes that they be rated
not lower than "AAAr" by S&P and "AAA"
by Fitch. It is a condition to the
issuance of the Class M-1 Notes that
they be rated not lower than "AA" by
S&P and Fitch. It is a condition to
the issuance of the Class M-2 Notes
that they be rated not lower than "A"
by S&P and Fitch. It is a condition to
the issuance of the Class B-1 Notes
that they be rated not lower than
"BBB-" by S&P and "BBB" by Fitch. 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 Home
Loans, or the corresponding effect on
yield to investors.
See "Certain Yield and Prepayment
Considerations" and "Ratings" herein.
S-11
<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:
SUBORDINATION
The yield to investors on each class of Subordinate Notes and
particularly on such classes of Subordinate Notes with lower payment priorities,
will be extremely sensitive to losses due to defaults on the Home Loans (and the
timing thereof), to the extent such losses are not covered by the
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow), the Class B-2 Certificates or by any class of
Subordinate Notes having a lower payment priority, because the entire amount of
such losses that are covered by Subordination (as defined herein) will be
allocable to such class or classes of Subordinate Notes as described herein.
Furthermore, as described herein, the timing of receipt of principal and
interest by any class of Subordinate Notes may be adversely affected by losses
even if such class does not ultimately bear such loss.
As described herein, during certain periods, all or a
disproportionately large percentage of principal payments on the Home Loans will
be allocated to the Senior Notes and, during certain periods, no principal
payments will be distributed to the Subordinate Notes and the Class B-2
Certificates. Unless the Note Principal Balances of the Senior Notes have been
reduced to zero, the Subordinate Notes and the Class B-2 Certificates will not
be entitled to receive distributions of principal until the Stepdown Date. To
the extent that no principal payments are distributed on the Subordinate Notes,
the Subordination afforded the Senior Notes by the Subordinate Notes and the
Class B-2 Certificates (together with the Overcollateralization Amount
(including overcollateralization created by the Net Monthly Excess Cash Flow)),
in the absence of offsetting Realized Losses allocated thereto, will be
increased, and the weighted average lives of the Subordinate Notes will be
extended.
DELINQUENCIES
Approximately 0.60% of the Home Loans were thirty days or more but less
than sixty days delinquent in their Monthly Payments as of May 31, 1998.
Prospective investors in the Notes should be aware, however, that approximately
75.21% had a first Monthly Payment due on or before May 1, 1998, and therefore,
the remaining Home Loans could not have been thirty or more days delinquent as
of May 31, 1998.
RISKS ASSOCIATED WITH THE HOME LOANS
Since substantially all of the Home Loans are subordinate to the rights
of the mortgagee under the related senior mortgage, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such Home Loans secured by subordinate mortgages only
to the extent that the claims of such senior mortgages have been satisfied in
full, including any related liquidation expenses (such as legal fees, real
estate taxes, and maintenance and preservation expenses). In circumstances when
it is determined to be uneconomical to foreclose on the Mortgaged Property or
engage in other loss mitigation procedures, the Master Servicer may write off
the entire outstanding balance of such Home Loan as a bad debt. The foregoing
considerations will be particularly applicable to Home Loans secured by junior
liens that have high Combined Loan-to-Value Ratios because it is comparatively
more likely that the Master Servicer would determine foreclosure to be
uneconomical in the case of such Home Loans. As of the Cut-off Date,
approximately 94.63% of the Home Loans will have Combined Loan-to- Value Ratios
in excess of 100%. Because the Home Loans have been recently originated, the
borrowers will not build equity in the related Mortgaged Properties through
amortization of the Home Loans for a substantial period of time.
The Home Loans were originated with a limited expectation of recovering
any amounts from the foreclosure of the related Mortgaged Property and are
underwritten with an emphasis on the creditworthiness of the related borrower.
If such Home Loans go into foreclosure and are liquidated, there may be no
amounts recovered from the related Mortgaged Property unless the value of the
property has increased or the principal amount of the related senior liens has
been reduced to the point where the value of the property, less any related
foreclosure costs, is greater than the principal amount of the related senior
liens. To the extent that any losses are incurred on any of the Home Loans
S-12
<PAGE>
that are not covered by Subordination, the holders of the Offered Notes will
bear all risk of such losses resulting from default by Mortgagors.
In addition, with respect to the Home Loans with Combined Loan-to-Value
Ratios in excess of 100%, there is a risk that if the related borrowers
relocate, such borrowers will be unable to pay off their Home Loans in full from
the sale proceeds of the related Mortgaged Properties and any other funds
available to these borrowers, in which case the Home Loans could experience
higher rates of delinquency and loss. With respect to Home Loans the proceeds of
which were used for debt consolidation, there can be no assurance that,
following the debt consolidation, the related borrower will not incur further
debt. This reloading of debt could impair the ability of such borrowers to
service their debts, which in turn could result in higher rates of delinquency
and loss on the Home Loans.
In the event of a delinquency or a default on a Home Loan, the Master
Servicer will not have an obligation to advance scheduled monthly payments of
principal on such Home Loan, and a limited obligation to advance interest as
described herein. Delinquencies and defaults on mortgage loans are generally
expected to occur with greater frequency in their early years. The rate of
delinquency and default of second mortgage loans may be greater than that of
mortgage loans secured by first liens on comparable properties.
UNDERWRITING STANDARDS
Approximately 33.89% of the Home Loans were originated directly by the
Seller or an affiliate thereof in accordance with the standards for the Seller
described in Appendix A attached hereto. Approximately 45.61% of the Home Loans
were originated by HomeAmerica, Inc. ("HomeAmerica"), a 100%-owned subsidiary of
Southern Pacific, in accordance with underwriting standards also included in
Appendix A attached hereto. Approximately 15.17% of the Home Loans were acquired
in bulk purchases from Emergent Mortgage Corporation ("Emergent"), in accordance
with underwriting standards also included in Appendix A attached hereto.
Approximately 5.33% of the Home Loans were acquired in bulk purchases from
third-party originators other than Emergent (such originators, along with
HomeAmerica, Emergent and the Seller in its capacity as originator,
collectively, the "Originators") and have been underwritten by the Seller to
Emergent's underwriting standards. The underwriting standards of the Originators
are generally less stringent than those of FNMA or FHLMC for first lien, single
family mortgage loans with respect to a borrower's capacity to repay, collateral
and in certain other respects. The Home Loans originated by the Originators will
have been made to borrowers that typically have limited access to traditional
mortgage financing for a variety of reasons, such as insufficient home equity
value, high level of debt-to-income ratios, past credit experience or a limited
credit history. The Originators consider the underwriting policy under which the
Home Loans are underwritten to be analogous to credit lending, rather than
equity lending, since its underwriting decisions are based primarily on the
borrower's credit history and capacity to repay rather than on the potential
value of the collateral upon foreclosure. Accordingly, the Originator's
underwriting standards allow loans to be approved with Combined Loan-to-Value
Ratios of up to approximately 125%. Because of the relatively high Combined
Loan-to- Value Ratios of the Home Loans and the fact that the Home Loans are
secured by subordinate liens, losses on the Home Loans may be higher than loans
written in conformity with FNMA or FHLMC standards for first lien, single family
mortgage 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 commenced its servicing operations in October 30, 1997, and as a result
has limited experience in the servicing of mortgage loans. 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 Home 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 Offered
Notes to extent they are not covered by Subordination. In addition, any higher
default rate resulting from such transfer may result in accelerated principal
prepayments on the Home 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
limited 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
S-13
<PAGE>
which are similar to those mortgage loans included in the Trust Fund. See
"Pooling and Servicing Agreement-- The Master Servicer" herein.
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 in the process of
upgrading its computer software to programs which 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,
SPFC's obligations as Master Servicer under the Servicing Agreement or as Seller
under the Mortgage Loan Purchase Agreement could be materially adversely
affected.
BANKRUPTCY CONSIDERATIONS
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ("NBRC") for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. The NBRC delivered its report on October 20, 1997. The NBRC's
report appears to recommend that Congress amend Bankruptcy Code section
1322(b)(2) by treating a claim secured by a junior security interest in a
borrower's principal residence as protected only to the extent that the claim
was secured when the security interest was made. Additionally, the NBRC's report
recommends that a creditor's secured claim in real property should be determined
by the property's fair market value, less hypothetical costs of sale. A bill
currently pending before the United States House of Representatives (H.R. 3146),
if enacted, would amend the Bankruptcy Code to permit chapter 13 debtors, under
a plan, to reduce the value of non-purchase money security interests in the
debtor's principal residence to the liquidation value of the property less the
value of any senior secured claims. Any such changes to the Bankruptcy Code
could have a negative effect on the Home Loans and the enforcement of rights
therein.
On June 4, 1998, a consumer bankruptcy reform bill which had previously
been introduced in the Senate (S.1301) was amended to, among other things,
propose an amendment to the Bankruptcy Code (the "TILA Amendment") that would
authorize bankruptcy judges to disallow claims based on secured debt if the
creditor failed to comply with certain provisions of the Truth in Lending Act
(15 U.S.C. ss. 1639). In its present form, S.1301 would apply only to bankruptcy
cases commenced after the enactment of such amendments but would apply
retroactively to secured debt incurred by the debtor prior to the date of
effectiveness of such amendments. The TILA Amendment has not been approved by
the full Senate. A bill that the United States House of Representatives passed
on June 10, 1998 (H.R. 3150), the House version of the consumer bankruptcy bill,
does not contain a comparable provision, and there are presently significant
differences between the House and Senate versions of the legislation that will
have to be reconciled at the House-Senate conference.
If the TILA Amendment in S.1301 becomes law, a violation of the
Truth-in-Lending Act with respect to the High Cost Loans in the Home Loan Pool
could result in a complete loss with respect to such loan if the related
borrower goes into bankruptcy. Any such violation would be a breach of the
Seller's representation and warranties, and the Seller would be obligated to
cure, repurchase or, if permitted by the Home Loan Purchase Agreement,
substitute for the loan in question. There can be no assurance that the Seller
will have sufficient resources to effect such a repurchase.
LIMITED HISTORICAL DELINQUENCY AND FORECLOSURE EXPERIENCE
SPFC has limited historical delinquency and default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Home Loans underwritten pursuant to the underwriting standards
described herein, which include those of non-related bulk purchasers. In
particular, SPFC began originating and acquiring mortgage loans similar to the
Home Loans in October 1997, and has limited historical delinquency and
S-14
<PAGE>
default experience with respect to the Home Loans. See "Risk
Factors--Underwriting Standards" herein and "The Home Loan Pool--Delinquency and
Foreclosure Experience of SPFC" herein.
See "Risk Factors" in the Prospectus for a description of certain other
risks and special considerations applicable to the Notes.
DESCRIPTION OF THE HOME LOAN POOL
GENERAL
The Home Loans had an aggregate outstanding principal balance as of the
Cut-off Date of approximately $105,549,158 (the "Cut-off Date Balance"). The
Home Loans will consist of closed-end, fixed-rate mortgage loans, which in turn
will be secured primarily by second mortgages or deeds of trust on one- to
four-family residential properties. The proceeds of the Home Loans generally
were used by the related borrowers for debt consolidation. In addition,
substantially all of the Home Loans will be secured by second liens on Mortgaged
Properties in which the borrowers have little or no equity. The Home Loans were
originated or acquired substantially in accordance with the underwriting
criteria described herein under "--Underwriting" below and in Appendix A. The
Company will acquire the Home Loans from SPFC (in such capacity, the "Seller"),
the parent of the Company, pursuant to a Home Loan Purchase Agreement dated the
Delivery Date (the "Home Loan Purchase Agreement"), between the Seller, the
Company, the Indenture Trustee and the Issuer. The Company will convey the Home
Loans to the Issuer on the Delivery Date pursuant to the Trust Agreement. The
Seller will make certain representations and warranties with respect to the Home
Loans in the Home Loan Purchase Agreement 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 Home Loans, in any event
if such breach, omission or defect cannot be cured and it materially and
adversely affects the interests of holders of the Notes and the Certificates.
See "Description of the Home Loan Pool--Representations by Sellers" and
"Description of the Securities--Assignment of Trust Fund Assets" in the
Prospectus.
None of the Home Loans will be covered by a Primary Insurance Policy.
In addition, none of the Home Loans will be covered by a hazard insurance policy
or flood insurance. See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder" the Prospectus.
HOME LOAN CHARACTERISTICS
The earliest date of first payment of any Home Loan is September 15,
1994. None of the Home Loans will have a maturity date later than June 1, 2028.
No Home Loan will have a remaining term from June 1, 1998, to the stated
maturity thereof (a "Remaining Term") of less than 23 months. The weighted
average Remaining Term of the Home Loans as of the Cut-off Date will be
approximately 218 months. The weighted average original term to stated maturity
of the Home Loans as of the Cut-off Date will be approximately 223 months. All
of the Home Loans have principal and interest payable monthly on various days of
each month as specified in the Mortgage Note (the "Due Date"). 94.63% of the
Home Loans will be secured by mortgages or deeds of trust on property in which
the borrower has no equity because the related Combined Loan-to-Value Ratio at
the time of origination exceeds 100%.
With respect to each Home Loan, the "Combined Loan-to-Value Ratio" is
the ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien's mortgage balance at the time such loan was originated plus the original
balance of the Home Loan divided by the value, determined in accordance with
applicable underwriting standards, of the related Mortgage Property. In the
instance where more than one appraisal was performed on the subject property,
the lesser of the two values was used to determine the Combined Loan-to-Value
Ratio.
Substantially all of the Home Loans were made with respect to
owner-occupied Mortgaged Properties.
S-15
<PAGE>
99.80% and 0.20% of the Home Loans are secured by second liens or first
liens, respectively, on the related Mortgaged Property.
No Home Loan provides for deferred interest, negative amortization or
future advances.
Set forth below is a description of certain additional characteristics
of the Home Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Home Loans are approximate percentages (except as otherwise
indicated) by the Cut-off Date Balance. Unless otherwise specified, all
principal balances of the Home Loans are as of the Cut-off Date.
<TABLE>
<CAPTION>
CURRENT BALANCES OF THE HOME LOANS AS OF THE CUT-OFF DATE
PERCENTAGE OF
CURRENT CUT-OFF DATE
HOME LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
863 - 15,000...................................... 207 $ 2,520,559.93 2.39%
15,001 - 30,000...................................... 1,378 32,763,744.36 31.04
30,001 - 45,000...................................... 1,146 42,368,802.75 40.14
45,001 - 60,000...................................... 354 18,091,228.46 17.14
60,001 - 75,000...................................... 118 7,904,915.12 7.49
75,001 - 90,000...................................... 12 987,415.03 0.94
90,001 - 105,000...................................... 8 769,656.09 0.73
135,001 - 142,836...................................... 1 142,835.99 0.14
---------- ---------------- ----------
Total Current Balance:......................... 3,224 $105,549,157.73 100.00%
========== ================ ==========
</TABLE>
As of the Cut-off Date, the average current principal balance of the
Home Loans will be approximately $32,739.
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE HOME LOANS AT ORIGINATION
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
HOME LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ----------- ------------------- -----------------
<S> <C> <C> <C>
3,000 - 15,000.................................... 183 $ 2,209,167.78 2.09%
15,001 - 30,000.................................... 1,380 32,442,172.53 30.74
30,001 - 45,000.................................... 1,155 42,472,259.98 40.24
45,001 - 60,000.................................... 366 18,563,259.67 17.59
60,001 - 75,000.................................... 118 7,888,295.01 7.47
75,001 - 90,000.................................... 13 1,061,510.68 1.01
90,001 - 105,000.................................... 8 769,656.09 0.73
135,001 - 145,250.................................... 1 142,835.99 0.14
------ ----------------- ------
Total Original Balance:........................ 3,224 $ 105,549,157.73 100.00%
====== ================= ======
</TABLE>
As of the Cut-off Date, the average original principal balance of the
Home Loans will be approximately $33,148.
S-16
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE HOME LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ---------- ------------------- -----------------
<S> <C> <C> <C>
6.990 - 7.000........................ 1 $ 23,886.87 0.02%
9.501 - 10.000 94 2,079,108.05 1.97
10.001 - 10.500....................... 2 115,451.35 0.11
10.501 - 11.000....................... 92 2,372,552.20 2.25
11.001 - 11.500....................... 11 501,157.31 0.47
11.501 - 12.000....................... 155 5,596,067.31 5.30
12.001 - 12.500....................... 255 9,024,720.98 8.55
12.501 - 13.000....................... 559 18,533,546.60 17.56
13.001 - 13.500....................... 357 12,472,431.08 11.82
13.501 - 14.000....................... 517 17,121,165.05 16.22
14.001 - 14.500....................... 292 9,747,495.01 9.24
14.501 - 15.000....................... 347 10,827,041.93 10.26
15.001 - 15.500....................... 189 6,015,578.05 5.70
15.501 - 16.000....................... 151 4,648,904.12 4.40
16.001 - 16.500....................... 64 2,057,734.82 1.95
16.501 - 17.000....................... 51 1,597,681.42 1.51
17.001 - 17.500....................... 46 1,488,655.22 1.41
17.501 - 18.000....................... 22 763,923.65 0.72
18.001 - 18.500....................... 9 294,067.03 0.28
18.501 - 19.000....................... 5 124,100.72 0.12
19.001 - 19.500...................... 5 143,888.96 0.14
----- --------------- ------
Total........................ 3,224 $105,549,157.73 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Home
Loans will be approximately 13.745% per annum.
S-17
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE HOME LOANS
PERCENTAGE OF
CUT-OFF DATE
ORIGINAL COMBINED NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN-TO-VALUE RATIO(%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------------- ---------- ------------------ -----------------
<S> <C> <C> <C>
30.01 - 35.00............... 1 $ 36,500.00 0.03%
40.01 - 45.00............... 2 64,519.75 0.06
55.01 - 60.00............... 2 87,728.18 0.08
60.01 - 65.00............... 1 44,605.02 0.04
65.01 - 70.00............... 3 64,686.26 0.06
70.01 - 75.00............... 3 73,404.96 0.07
75.01 - 80.00............... 3 94,603.06 0.09
80.01 - 85.00............... 15 472,839.53 0.45
85.01 - 90.00............... 11 294,330.27 0.28
90.01 - 95.00............... 40 1,092,055.85 1.03
95.01 - 100.00.............. 130 3,344,445.62 3.17
100.01 - 105.00.............. 294 8,076,068.57 7.65
105.01 - 110.00.............. 462 13,067,658.73 12.38
110.01 - 115.00.............. 558 17,730,042.68 16.80
115.01 - 120.00.............. 525 17,834,123.50 16.90
120.01 - 125.00.............. 1,159 42,593,306.61 40.35
125.01 - 130.00.............. 15 578,239.14 0.55
------ --------------- ------
Total.................... 3,224 $105,549,157.73 100.00%
====== =============== ======
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios at origination of
the Home Loans were approximately 34.13% and 125.65%, respectively, and the
weighted average Combined Loan-to-Value Ratio at origination of the Home Loans
was approximately 115.59%.
S-18
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES RELATED TO THE HOME LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------- ------------------- -----------------
<S> <C> <C> <C>
Alabama............................ 85 $ 2,666,545.66 2.53%
Arizona............................ 170 5,421,358,.48 5.14
California......................... 543 16,883,729.95 16.00
Colorado........................... 174 5,802,715.16 5.50
Florida............................ 131 4,398,621.36 4.17
Georgia............................ 124 4,268,000.61 4.04
Illinois........................... 103 3,642,540.17 3.45
Indiana............................ 321 9,981,279.25 9.46
Maryland........................... 108 3,752,496.72 3.56
Michigan........................... 111 3,841,959.16 3.64
New Jersey......................... 101 3,449,242.69 3.27
North Carolina..................... 119 4,107,049.55 3.89
Pennsylvania....................... 165 5,342,581.07 5.06
Utah............................... 129 4,165,975.68 3.95
Virginia........................... 129 4,606,418.39 4.36
Other(1)........................... 711 23,218,643.83 22.00
----- --------------- ------
Total.............................. 3,224 $105,549,157.73 100.00%
===== =============== ======
</TABLE>
- ---------
(1) "Other" includes states and the District of Columbia that contain Mortgaged
Properties for less than 2.00% of the Home Loan Pool.
No more than approximately 0.56% of the Home Loans will be secured by
Mortgaged Properties located in any one zip code.
S-19
<PAGE>
ORIGINAL TERM TO MATURITY OF THE HOME LOANS
PERCENTAGE OF
AGGREGATE
ORIGINAL TERM NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
TO MATURITY (IN MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ---------- ------------------- -----------------
60 - 72 ............ 25 $ 546,678.68 0.52%
73 - 84 ............ 13 324,602.14 0.31
85 - 96 ............ 6 168,292.65 0.16
97 - 108 ............ 3 151,155.66 0.14
109 - 120 ............ 233 6,339,325.14 6.01
121 - 132 ............ 6 173,189.10 0.16
133 - 144 ............ 4 172,486.53 0.16
145 - 156 ............ 1 40,510.09 0.04
169 - 180 ............ 1,608 49,709,094.67 47.10
181 - 192 ............ 30 1,065,554.50 1.01
193 - 204 ............ 2 44,043.18 0.04
229 - 240 ............ 268 8,830,290.07 8.37
241 - 252 ............ 2 82,844.56 0.08
289 - 300 ............ 1,014 37,528,022.14 35.56
349 - 360 ............ 9 373,068.62 0.35
------ -------------- -------
Total......... 3,224 $105,549,157.73 100.00%
====== =============== ======
As of the Cut-off Date, the weighted average original term to maturity of
the Home Loans is approximately 223.46 months.
S-20
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY OF THE HOME LOANS
PERCENTAGE OF
AGGREGATE
REMAINING TERM NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
TO MATURITY (IN MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ---------- ------------------- -----------------
<S> <C> <C> <C>
Less than 60............................. 25 $ 546,678.68 0.52%
61 - 72............................. 2 44,554.54 0.04
73 - 84............................. 13 291,044.46 0.28
85 - 96............................. 13 298,980.34 0.28
97 - 108............................. 18 525,462.18 0.50
109 - 120............................. 215 5,996,523.17 5.68
133 - 144............................. 27 595,362.59 0.56
145 - 156............................. 69 1,322,550.03 1.25
157 - 168............................. 110 2,912,206.73 2.76
169 - 180............................. 1,438 46,173,896.30 43.75
193 - 204............................. 1 27,673.32 0.03
205 - 216............................. 18 484,589.80 0.46
217 - 228............................. 42 1,130,139.31 1.07
229 - 240............................. 210 7,298,405.52 6.91
265 - 276............................. 1 31,852.70 0.03
277 - 288............................. 19 638,301.11 0.60
289 - 300............................. 994 36,857,868.33 34.92
337 - 348............................. 1 44,924.61 0.04
349 - 360............................. 8 328,144.01 0.31
------- --------------- ------
Total...................................... 3,224 $105,549,157.73 100.00%
====== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to maturity of
the Home Loans is approximately 218.10 months.
MORTGAGED PROPERTY TYPES OF THE HOME LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
TYPE OF PROPERTY HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- ---------- ------------------ -----------------
Single Family............ 3,037 $ 99,892,990.08 94.64%
PUD...................... 61 2,340,578.57 2.22
Condominium.............. 58 1,450,997.50 1.37
Townhouse................ 38 1,146,558.08 1.09
2-4 Family............... 18 502,254.25 0.48
Manufactured Housing..... 11 196,025.13 0.19
Mobile Home.............. 1 19,754.12 0.02
------ --------------- --------
Total........... 3,224 $105,549,157.73 100.00%
====== =============== ======
S-21
<PAGE>
CREDIT BUREAU RISK SCORES OF THE HOME LOANS
PERCENTAGE OF
AGGREGATE
CREDIT BUREAU NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
RISK SCORE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ---------- ------------------ -----------------
Less than 599.............. 54 $1,478,877.68 1.40%
600 - 609................ 14 500,626.02 0.47
610 - 619................ 27 764,942.48 0.72
620 - 629................. 127 3,906,142.10 3.70
630 - 639................. 185 5,319,503.06 5.04
640 - 649................. 353 11,235,131.82 10.64
650 - 659................. 343 10,835,811.17 10.27
660 - 669................. 376 12, 574,721.47 11.91
670 - 679................. 323 11,480,751.32 10.88
680 - 689................. 374 12,411,024.45 11.76
690 - 699................. 282 9,431,508.89 8.94
700 - 719................. 366 12,814,097.54 12.14
720 - 739................. 219 7,406,456.48 7.02
740 - 759................. 116 3,657,832.10 3.47
760 - 779................. 50 1,208,492.37 1.14
780 - 799................. 14 498,446.87 0.47
800 - 805................. 1 24,791.91 0.02
------ --------------- ------
Total............... 3,224 $105,549,157.73 100.00%
====== =============== ======
As of the Cut-off Date, the weighted average Credit Bureau Risk Score of
the Home Loans is approximately 676.83.
S-22
<PAGE>
DEBT-TO-INCOME RATIOS OF THE HOME LOANS
PERCENTAGE OF
CUT-OFF DATE
DEBT-TO-INCOME NUMBER OF AGGREGATE UNPAID AGGREGATE
RATIO (%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ---------- ------------------ -----------------
1.00 - 5.00.......... 2 $ 78,313.75 0.07%
5.01 - 10.00......... 1 22,428.81 0.02
10.01 - 15.00......... 10 271,340.07 0.26
15.01 - 20.00......... 44 1,334,254.30 1.26
20.01 - 25.00......... 123 3,618,183.76 3.43
25.01 - 30.00......... 314 9,646,122.12 9.14
30.01 - 35.00......... 518 16,295,035.74 15.44
35.01 - 40.00......... 835 27,018,612.49 25.60
40.01 - 45.00......... 985 33,956,945.61 32.17
45.01 - 50.00......... 359 12,331,156.40 11.68
50.01 - 55.00......... 24 714,538.69 0.68
55.01 - 60.00......... 4 77,794.07 0.07
60.01 - 65.00......... 3 65,330.07 0.06
70.01 - 75.00......... 1 74,095.65 0.07
85.01 - 86.94......... 1 45,006.20 0.04
----- --------------- -------
Total............ 3,224 $105,549,157.73 100.00%
====== =============== ======
As of the Cut-off Date, the weighted average debt-to-income ratio of
the Home Loans is approximately 38.59%.
UNDERWRITING
Approximately 33.89% of the Home Loans were originated directly by the
Seller or an affiliate thereof in accordance with the standards for the Seller
described in Appendix A attached hereto. Approximately 45.61% of the Home Loans
were originated by HomeAmerica, Inc. ("HomeAmerica"), a 100%-owned subsidiary of
Southern Pacific, which has different underwriting standards also included in
Appendix A attached hereto. Approximately 15.17% of the Home Loans were acquired
in bulk purchases from Emergent Mortgage Corporation ("Emergent"), in accordance
with underwriting standards also included in Appendix A attached hereto.
Approximately 5.33% of the Home Loans were acquired in bulk purchases from
third-party originators other than Emergent (such originators, along with
HomeAmerica, Emergent and the Seller in its capacity as originator,
collectively, the "Originators") and have been underwritten by the Seller to
Emergent's underwriting standards. In addition, see "The Mortgage
Pools-Underwriting Standards" in the Prospectus.
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 Home Loan Pool--Underwriting" and Appendix A to
this Prospectus Supplement. SPFC began originating and acquiring mortgage loans
as of May 1, 1995. SPFC is a publicly-traded company based in Lake Oswego,
Oregon, with assets as of March 31, 1998 in excess of $648 million.
S-23
<PAGE>
During the quarter ending March 31, 1998, SPFC originated or purchased
8,131 loans, with a principal balance of approximately $647 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.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SELLER
SPFC has limited historical delinquency and default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Home Loans underwritten pursuant to the Seller's underwriting
standards described herein. The Seller began originating and acquiring mortgage
loans comparable to the Home Loans during the early fall of 1997. Accordingly,
there is limited historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of mortgage loans similar to the Home Loans.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Loan Pool and
the Mortgaged Properties is based upon the Home Loan Pool as constituted at the
close of business on the Cut-off Date. The Company believes that the information
set forth herein will be substantially representative of the characteristics of
the Home Loan Pool as it will be constituted at the time the Notes are issued
although the range of Home Loan Rates and maturities and certain other
characteristics of the Home Loans in the Home Loan 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 Home Loans
are removed from or added to the Home Loan 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
The Issuer is a business trust formed under the laws of the State of
Delaware pursuant a Trust Agreement to be dated as of June 8, 1998 (as amended
and restated by the Amended and Restated Trust Agreement dated June 25, 1998,
the "Trust Agreement") between the Company and Wilmington Trust Company 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 and holding the Home
Loans and the other assets of the Trust and proceeds therefrom, (ii) issuing the
Notes and 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 Home Loans and certain
related assets.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at the address listed below.
S-24
<PAGE>
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located at 1100 North Market Street, Wilmington, Delaware 19890. The
Owner Trustee will receive a fee on each Payment Date at a rate equal to 0.0017%
per annum on the aggregate Principal Balance of the Home Loans.
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 under
the Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in 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 INDENTURE TRUSTEE
Norwest Bank Minnesota, N.A., will act as Indenture Trustee with
respect to the Indenture. The Indenture Trustee will receive a fee on each
Payment Date at a rate equal to 0.0075% per annum (the "Indenture Trustee Fee
Rate") on the aggregate Principal Balance of the Home Loans. The Indenture
Trustee will provide to a prospective or actual Noteholder without charge, upon
written request, a copy of the Indenture. Requests should be addressed to the
Indenture Trustee at Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479, Attention: Corporate Trust Services (Southern Pacific CMN Trust Series
1998-H1).
DESCRIPTION OF THE SECURITIES
GENERAL
The Series 1998-H1 Collateralized Asset-Backed Notes will include the
following nine classes (the "Notes"): Class A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class A-4 Notes, Class A-5 Notes and Class A-6 IO Notes
(collectively, the "Senior Notes"); (ii) Class M-1 Notes and Class M-2 Notes
(together, the "Class M Notes"); (iii) Class B-1 Notes (the "Class B Notes"; and
together with the Class M Notes, the "Subordinate Notes"). The Series 1998-H1
Collateralized Asset-Backed Certificates will include the Class B-2 Certificates
and Class X Certificates (the "Certificates"). Only the Notes (the "Offered
Notes") are offered hereby.
The Notes will represent obligations of the Southern Pacific CMN Trust
Series 1998-H1 (the "Issuer") which will be formed pursuant to a Trust Agreement
to be dated as of June 8, 1998 (as amended and restated by the Amended and
Restated Trust Agreement dated June 25, 1998, the "Trust Agreement") between
Southern Pacific Secured Assets Corp. (the "Company") and Wilmington Trust
Company, as owner trustee (the "Owner Trustee"). The Notes will be issued
pursuant to an Indenture to be dated as of June 25, 1998 (the "Indenture"),
between the Issuer and Norwest Bank Minnesota, N.A., as indenture trustee (the
"Indenture Trustee").
The Notes will be secured by the pledge by the Issuer of its assets to
the Indenture Trustee pursuant to the Indenture which will consist of the
following (such assets, collectively, the "Trust Fund"): (i) the Home Loans;
(ii) collections in respect of principal and interest of the Home Loans received
after the Cut-off Date (other than interest payments due before but received
after the Cut-off Date); (iii) the amounts on deposit in any Collection Account
(as defined in the Prospectus), including the account in which amounts are
deposited prior to payment to the Noteholders (the "Payment Account"), including
net earnings thereon; (iv) an assignment of the Company's rights under the Home
Loan Purchase Agreement (as defined herein) and the Servicing Agreement; and (v)
proceeds of the foregoing.
S-25
<PAGE>
The Senior Notes (other than the Interest Only Notes) will be issued
in book-entry form in minimum denominations of $25,000 and integral multiples of
$1 in excess thereof. The Interest Only Notes will be issued in book-entry form
in minimum denominations representing initial Notional Amounts of $2,000,000 and
integral multiples of $1 in excess thereof. The Class M-1 Notes will be issued
in book-entry form in minimum denominations of $25,000 and integral multiples of
$1,000 in excess thereof. The Class M-2 Notes and Class B-1 Notes will be issued
in book-entry form in minimum denominations of $250,000 and integral multiples
of $1,000 in excess thereof. See "--Book-Entry Notes" below.
BOOK-ENTRY NOTES
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 Book-Entry Notes 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 Notes 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 Notes are issued for the
related Book-Entry Notes, it is anticipated that the only registered Noteholder
of such Book-Entry Notes will be Cede & Co. ("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 Notes among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Notes. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Notes 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 Notes
evidencing their interests in the Book-Entry Notes, 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 Notes.
None of the Company, the Master Servicer, the Owner Trustee 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 Notes held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
DEFINITIVE NOTES. Definitive Notes 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 Notes."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Notes," the
Indenture Trustee is required to notify, through DTC, Participants who have
ownership of Book-Entry Notes as indicated on the records of DTC of the
availability of Definitive Notes for their Book-Entry Notes. Upon surrender by
DTC of the definitive Notes representing the Book-Entry Notes and upon receipt
of instructions from DTC for re-registration, the Indenture Trustee will reissue
the Book-Entry Notes as Definitive Notes issued in the respective principal
amounts owned by individual Beneficial Owners, and thereafter the Indenture
Trustee will recognize the holders of such Definitive Notes as Noteholders under
the Indenture.
For additional information regarding DTC and the Book-Entry Notes, see
"Description of the Securities--Form of Notes" in the Prospectus.
S-26
<PAGE>
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the 25th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in July 1998. 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 Notes, on the Record Date. See "Description of the
Securities--Payments" in the Prospectus. Payments will be made by check or money
order mailed (or upon the request, at least five Business Days prior to the
related Record Date, of a Holder owning Notes having denominations aggregating
at least $5,000,000, by wire transfer or otherwise) to the address of the person
entitled thereto (which, in the case of Book-Entry Notes, will be DTC or its
nominee) as it appears on the Security Register in amounts calculated as
described herein as of 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 New York City,
Delaware, California or in the city in which the corporate trust offices of the
Indenture Trustee are located, are required or authorized by law to be closed.
INTEREST REMITTANCE AMOUNT AND PRINCIPAL REMITTANCE AMOUNT
The "Interest Remittance Amount" for any Payment Date is equal to (i)
the portion allocable to interest of all scheduled monthly payments on the Home
Loans received or Advanced (as defined herein) during the related Collection
Period, after deduction of the related servicing fees and any subservicing fees
(collectively, the "Servicing Fees") and the related fees of the Indenture
Trustee and the Owner Trustee and (ii) certain unscheduled collections,
including Liquidation Proceeds and proceeds from repurchases of (and certain
amounts received in connection with any substitutions for) the Home Loans,
received during the related Collection Period, to the extent such amounts are
allocable to interest.
The "Principal Remittance Amount" for any Payment Date is equal to the sum
of the following:
(i) the principal portion of all monthly payments on the Home
Loans received on the Home Loans during the preceding Collection Period;
(ii) the principal portion of all proceeds of the repurchase of a
Home Loan (or, in the case of a substitution, certain amounts representing
a principal adjustment) pursuant to the Servicing Agreement during the
preceding Collection Period; and
(iii) the principal portion of all other unscheduled collections
received with respect to the Home Loans during the preceding Collection
Period (including, without limitation, full and partial Principal
Prepayments made by the respective Mortgagors and Liquidation Proceeds).
With respect to any Payment Date and the Home Loans, the "Collection
Period" is the calendar month preceding the month of such Payment Date.
INTEREST DISTRIBUTIONS
On each Payment Date, the Paying Agent shall make the following
distributions, to the extent of the Interest Remittance Amount:
(i) first, to the Senior Noteholders, an amount equal to the
Accrued Note Interest (as defined below) thereon with respect to each class
of Senior Notes for such Payment Date, plus any Unpaid Interest Shortfall
(as defined below) thereon, on a pro rata basis;
(ii) second, from the balance, if any, remaining of the Interest
Remittance Amount after the distribution described in clause (i) above, to
the Class M-1 Noteholders, an amount equal to the Accrued Note
Interest thereon for such Payment Date;
S-27
<PAGE>
(iii) third, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) and (ii)
above, to the Class M-2 Noteholders an amount equal to the Accrued
Note Interest thereon for such Payment Date;
(iv) fourth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(iii) above, to the Class B-1 Noteholders an amount equal to the
Accrued Note Interest thereon for such Payment Date;
(v) fifth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(iv) above, to pay any Unpaid Interest Shortfall on the Class M-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(vi) sixth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(v) above, to pay any Unpaid Interest Shortfall on the Class M-2 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(vii) seventh, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(vi) above, to pay any Unpaid Interest Shortfall on the Class B-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(viii) eighth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(vii) above, to the Class B-2 Certificates an amount equal to the
Accrued Certificate Interest thereon for such Payment Date; and
(ix) ninth, any amount remaining (the "Net Monthly Excess Interest
Amount") shall be included in the Net Monthly Excess Cash Flow as described
in "--Net Monthly Excess Cash Flow Distributions" below and applied as
described therein.
"Accrued Note Interest" (with respect to the Notes) or "Accrued Certificate
Interest" (with respect to the Class B-2 Certificates) on any Payment Date will
be equal to interest accrued for the related Accrual Period on (i) in the case
of the Offered Notes (other than the Interest Only Notes), the related Note
Principal Balance thereof, (ii) in the case of the Interest Only Notes, on the
Notional Amount thereof, or (iii) in the case of the Class B-2 Certificate, the
Certificate Principal Balance thereof, in each case at the related Note Interest
Rate or Certificate Interest Rate, as applicable, for such Payment Date.
The "Note Interest Rate" for each class of Offered Notes (other than the
Class A-1 Notes and the Interest Only Notes) will be the fixed rate set forth on
the cover hereof. The Note Interest Rate for the Class A-1 Notes for an Accrual
Period will be a floating rate equal to the lesser of (i) the sum of (a) LIBOR,
determined as specified herein, as of the second LIBOR Business Day prior to the
first day of such Accrual Period (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Accrual Period) plus (b) 0.09% per annum
and (ii) 12.00% per annum. The Note Interest Rate on the Interest Only Notes
will equal 0.50% per annum for the first 30 Payment Dates, and 0.00% thereafter.
Interest payments will be made on the Class B-2 Certificate on each Payment Date
at the related Certificate Interest Rate. The "Certificate Interest Rate" for
the Class B-2 Certificate will be 11.01% per annum.
The "Accrual Period" with respect to any Payment Date will be (i) in the
case of the Class A-1 Notes, the period from and including the Payment Date in
the calendar month preceding the month in which the related Payment Date occurs
(or, in the case of the first Payment Date, from and including on the Closing
Date) to but excluding the related Payment Date and (ii) in the case of the
Offered Notes other than the Class A-1 Notes, the calendar month preceding the
month in which the related Payment Date occurs. Interest on the Class A-1 Notes
will be based on the actual number of days in the related Accrual Period and a
360-day year. Interest on the Offered Notes other than the Class A-1 Notes will
be based on a 30-day month and a 360-day year.
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The "Notional Amount" of the Interest Only Notes as of any Payment Date
will be equal to approximately $105,549,158. References herein to the Notional
Amount are used solely for certain calculations and do not represent the right
of the Interest Only Notes to receive distributions allocable to principal.
On each Payment Date, LIBOR shall be established by the Indenture Trustee
and as to any Accrual 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 Accrual 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 the
Indenture Trustee after consultation with the Master Servicer) 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
of the Class A-1 Notes. 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 an amount approximately equal to the Note Principal Balance of the
Class A-1 Notes. 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 city of
London, England are required or authorized by law to be closed.
The establishment of LIBOR as to each Accrual Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Class A-1 Notes for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
If on any Payment Date the Interest Remittance Amount is insufficient to
pay Accrued Note Interest on any class of Offered Notes, the shortfall will be
allocated through the priority of payment set forth above; provided, however,
that the aggregate amount of such interest shortfalls allocable to the Senior
Notes will be allocated first to the Senior Notes (other than the Interest Only
Notes) on a pro rata basis, based on the respective amount of Accrued Note
Interest thereon, and then to the Interest Only Notes. Such shortfalls could
occur, for example, if delinquencies on the Home Loans were exceptionally high
and were concentrated in a particular month and the Master Servicer did not make
Advances with respect to such Home Loans. In addition, such shortfalls could
occur if Prepayment Interest Shortfalls or Relief Act Shortfalls were
particularly high in a particular month. The "Prepayment Interest Shortfall" for
any Payment Date is equal to the aggregate shortfall, if any, in collections of
interest (adjusted to the related Home Loan Rates less the sum of the Servicing
Fee Rate and Indenture Trustee Fee Rate) resulting from Mortgagor prepayments on
the Home Loans during the related Collection Period. Such shortfalls will result
because interest on prepayments in full is paid only to the date of prepayment,
and because no interest is paid on prepayments in part, as such prepayments in
part are applied to reduce the outstanding principal balance of the Home Loans
as of the Due Date in the month of prepayment. "Relief Act Shortfalls" are
interest shortfalls due to the application of the Relief Act or similar
legislation or regulations. Accrued Note Interest and Accrued Certificate
Interest remaining unpaid as to any class of the Offered Notes and the Class B-2
Certificate, respectively, as a result of any such shortfalls will be carried
forward and will bear interest at the related Note Interest Rate or Certificate
Interest Rate, as applicable, and be payable on future Payment Dates to the
extent of funds available therefor (such amount, including interest thereon, as
of any Payment Date, the "Unpaid Interest Shortfall"). Such amounts payable to
the Notes and the Class B-2 Certificate will be paid concurrently with Accrued
Note Interest and Accrued Certificate Interest thereon and, to the extent
remaining unpaid, from the Net Monthly Excess Cash Flow as described in "--Net
Monthly Excess Cash Flow Distributions" below.
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If on any Payment Date the Interest Remittance Amount is insufficient to
pay Accrued Note Interest on any class of Notes, the shortfall will be allocated
through the priority of payment set forth above; provided, however, that the
aggregate amount of such interest shortfalls allocable to the Senior Notes will
be allocated on a pro rata basis, based on the respective amount of Accrued Note
Interest thereon. Such shortfalls could occur, for example, if delinquencies on
the Home Loans were exceptionally high, were not covered by Advances and were
concentrated in a particular month. In addition, such shortfalls could occur if
Prepayment Interest Shortfalls or shortfalls due to the Relief Act were
particularly high in a particular month. Any such shortfalls will be carried
forward and will bear interest at the related Note Interest Rate (such amount,
including interest thereon, as of any Payment Date, the "Unpaid Interest
Shortfall") and be payable in the order described herein on future Payment Dates
from the Net Monthly Excess Cash Flow to the extent of funds available therefor.
The "Prepayment Interest Shortfall" for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest (less the related
Servicing Fees) resulting from Mortgagor prepayments on the Home Loans during
the related Collection Period. Such shortfalls will result because interest on
prepayments in full is paid only to the date of prepayment, and because no
interest is paid on prepayments in part, as such prepayments in part are applied
to reduce the outstanding principal balance of the Home Loans as of the Due Date
in the month of prepayment. However, with respect to any Payment Date, any
Prepayment Interest Shortfalls resulting from prepayments in full 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 Fees for such Payment Date. Prepayment Interest Shortfalls resulting
from partial prepayments will not be offset by the Master Servicer from the
Servicing Fees or otherwise. No assurance can be given that the Servicing Fees
available to cover Prepayment Interest Shortfalls will be sufficient therefor.
As described herein, Accrued Note Interest on each class of Notes is based
on the Note Principal Balances thereof immediately prior to the related Payment
Date. The "Note Principal Balance" of any class of Senior Notes means the
initial Note Principal Balance thereof as reduced by all amounts actually
distributed to the holders of such Notes on all prior Payment Dates on account
of principal. The Note Principal Balance of any class of Subordinate Notes means
the initial Note Principal Balance thereof as reduced by the sum of (x) all
amounts actually distributed to the holders of such Notes on all prior Payment
Dates on account of principal and (y) the aggregate, cumulative amount of
Realized Losses allocated thereto (upon which interest will no longer accrue) on
all prior Payment Dates. The Certificate Principal Balance of the Class B-2
Certificates means the initial Certificate Principal Balance thereof as reduced
by the sum of (x) all amounts actually distributed to the holders of the Class
B-2 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Realized Losses allocated thereto (upon which
interest will no longer accrue) on all prior Payment Dates. The initial
Certificate Principal Balance of the Class B-2 Certificates is $5,541,000.
The "Principal Balance" of any Home Loan as of any date of determination is
equal to the principal balance thereof as of the Cut-off Date, reduced by all
amounts allocable to principal that have been received by the Master Servicer
from the related Mortgagor with respect to such Home Loan; provided, however,
that the Principal Balance of any Home Loan that is 180 days or more delinquent
shall be zero.
PRINCIPAL DISTRIBUTIONS
The "Principal Distribution Amount" means, as of any Payment Date, the sum
of (i) the Principal Remittance Amount, minus, on any Payment Date occurring on
or after the Stepdown Date (as defined herein), the Overcollateralization
Reduction Amount (as defined herein), if any, and (ii) the Extra Principal
Distribution Amount (funded as described below under "--Net Monthly Excess Cash
Flow Distributions"), if any, for such Payment Date. On each Payment Date prior
to the Stepdown Date, the Principal Distribution Amount will be distributed to
the Notes (other than the Interest Only Notes) and the Class B-2 Certificates as
follows:
(i) first, to the Senior Notes, in the manner and priority
described in the seventh following paragraph, until the Note Principal
Balances of the Senior Notes have been reduced to zero;
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(ii) second, the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i) above
shall be distributed to the Class M-1 Notes, Class M-2 Notes and Class B-1
Notes, in that order, in each case until the Note Principal Balance has
been reduced to zero;
(iii) third, the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clauses (i) and
(ii) above shall be distributed to the Class B-2 Certificates, until the
Certificate Principal Balance has been reduced to zero; and
(iv) fourth, any amount remaining shall be included in the Net
Monthly Excess Cash Flow as described in "--Net Monthly Excess Cash Flow
Distributions" below and applied as described therein (without
regard to clause (b) thereof).
On each Payment Date on or after the Stepdown Date, the Principal
Distribution Amount will be distributed to the Notes (other than the Interest
Only Notes) as follows:
(i) first, to the Senior Notes, in the manner and priority as
described in the sixth following paragraph, until the Note Principal
Balances of the Senior Notes have been reduced to an amount equal to (x)
the Pool Balance at the end of the related Collection Period minus (y) the
greater of (a) 67.00% of the Pool Balance at the end of the related
Collection Period plus the Required Overcollateralization Amount for such
Payment Date (calculated without giving effect to clause (z) in the
definition thereof) and (b) approximately $527,746;
(ii) second, from the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i) above,
to the Class M-1 Notes, until the sum of the Note Principal Balance of the
Senior Notes and the Class M-1 Notes has been reduced to an amount equal to
(x) the Pool Balance at the end of the related Collection Period minus (y)
the greater of (a) 47.00% of the Pool Balance at the end of the related
Collection Period plus the Required Overcollateralization Amount for such
Payment Date (calculated without giving effect to clause (z) in the
definition thereof) and (b) approximately $527,746;
(iii) third, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i) and
(ii) above, to the Class M-2 Notes, until the sum of the Note Principal
Balance of the Senior Notes and Class M Notes has been reduced to an amount
equal to (x) the Pool Balance at the end of the related Collection Period
as of the last day of the related Collection Period minus (y) the greater
of (a) 32.00% of the Pool Balance at the end of the related Collection
Period plus the Required Overcollateralization Amount for such Payment Date
(calculated without giving effect to clause (z) in the definition thereof)
and (b) $527,746;
(iv) fourth, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iii) above, to the Class B-1 Notes, until the sum of the Note
Principal Balance of the Senior Notes and the Subordinate Notes has been
reduced to an amount equal to (x) the Pool Balance at the end of the
related Collection Period minus (y) the greater of (a) 10.50% of the Pool
Balance at the end of the related Collection Period plus the Required
Overcollateralization Amount for such Payment Date (calculated without
giving effect to clause (z) in the definition thereof) and (b) $527,746;
(v) fifth, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iv) above, to the Class B-2 Certificates, until the aggregate Note
Principal Balance of the Senior Notes and Subordinate Notes and the
Certificate Principal Balance of the Class B-2 Certificates has been
reduced to an amount equal to (x) the Pool Balance at the end of the
related Collection Period minus the Required Overcollateralization Amount
for such Payment Date;
(vi) sixth, any amount remaining (the "Net Monthly Excess
Principal Amount") shall be included in the Net Monthly Excess Cash Flow as
described in "--Net Monthly Excess Cash Flow Distributions" below and
applied as described therein (without regard to clause (b) thereof).
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The "Stepdown Date" means the first Payment Date occurring after June 2001
as to which all of the following conditions exist: (x) the aggregate Principal
Balance of the Home Loans has been reduced to 50.00% of the Cut-off Date
Balance, (y) the Net Delinquency Amount is less than 4.50% of the Cut-off Date
Balance and (z) the aggregate Note Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Payment Date) will be able
to be reduced on such Payment Date (such determination to be made by the
Indenture Trustee prior to making actual distributions on such Payment Date) to
an amount equal to the excess, if any, of (i) the aggregate outstanding
Principal Balance of the Home Loans as of the end of the preceding Collection
Period over (ii) the greater of (a) approximately 67.00% of the Pool Balance at
the end of the related Collection Period plus the Overcollateralization Target
Amount for such Payment Date (calculated without giving effect to clause (z) in
the definition thereof) and (b) $527,746.
The "Net Delinquency Amount" means with respect to any Payment Date, the
excess, if any, of (x) the product of 2.25 and the Six-Month Rolling Delinquency
Average over (y) the aggregate Net Monthly Excess Interest Amount
for the three preceding Payment Dates.
The "Six-Month Rolling Delinquency Average" means with respect to each
Payment Date, the average of the applicable Sixty-Day Delinquency Amounts for
each of the six immediately preceding Collection Periods, where the Sixty-Day
Delinquency Amount for any Collection Period is the aggregate Principal Balance
of the Home Loans that are 60 or more days delinquent in payment of principal
and interest as of the end of the related Collection Period (including Home
Loans in foreclosure and Home Loans which are REO Home Loans).
"Extra Principal Distribution Amount" means, as of any Payment Date, the
lesser of (x) the Net Monthly Excess Interest Amount for such Payment Date and
(y) the excess, if any, of (i) the Required Overcollateralization Amount for
such Payment Date over (ii) the Overcollateralization Amount (calculated for
this purpose after taking into account the reduction on such Payment Date of the
Note Principal Balances of all Classes of Notes resulting from the distribution
of the Principal Remittance Amount) for such Payment Date.
In no event will any Principal Distribution Amount paid with respect to any
Payment Date and any class of Notes be less than zero or greater than the then
outstanding Note Principal Balance of such Note.
Distributions of the Principal Distribution Amount payable to the Senior
Notes on each Payment Date (such distribution, the "Senior Principal
Distribution Amount") will be made as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below), the Senior Principal Distribution Amount shall be distributed to
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Notes, in that
order, in each case in reduction of the Note Principal Balance thereof, until
such Note Principal Balance has been reduced to zero.
(b) On or after the occurrence of the Credit Support Depletion Date, all
priorities relating to distributions as described above in respect of principal
among the various classes of Senior Notes will be disregarded, and the Senior
Principal Distribution Amount will be distributed to all classes of Senior Notes
pro rata in accordance with their respective outstanding Note Principal
Balances.
The "Credit Support Depletion Date" is the first Payment Date on which the
Overcollateralization Amount and the Note Principal Balances of the Subordinate
Notes has been reduced to zero.
NET MONTHLY EXCESS CASH FLOW DISTRIBUTIONS
On any Payment Date, the sum of the Net Monthly Excess Interest Amount, the
Net Monthly Excess Principal Amount and the Overcollateralization Reduction
Amount is the "Net Monthly Excess Cash Flow" for such Payment Date.
On any Payment Date, the Net Monthly Excess Cash Flow will be applied in
the following order of priority on such Payment Date:
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(a) first, to pay any Unpaid Interest Shortfall on the Senior Notes on a
pro rata basis until such Unpaid Interest
Shortfall has been reduced to zero;
(b) second, to fund the Extra Principal Distribution Amount for such
Payment Date;
(c) third, to pay any Unpaid Interest Shortfall on the Class M-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(d) fourth, to reimburse the Class M-1 Notes for Realized Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(e) fifth, to pay any Unpaid Interest Shortfall on the Class M-2 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(f) sixth, to reimburse the Class M-2 Notes for Realized Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(g) seventh, to pay any Unpaid Interest Shortfall on the Class B-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(h) eighth, to reimburse the Class B-1 Notes for Realized Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(i) ninth, to pay any Unpaid Interest Shortfall on the Class B-2
Certificates until such Unpaid Interest Shortfall has been reduced to zero;
(j) tenth, to reimburse the Class B-2 Certificates for Realized Losses
previously allocated thereto as described below under "-Allocation of
Losses; Subordination," until fully reimbursed; and
(k) eleventh, any remaining amounts will be distributed to the Class X
Certificates.
OVERCOLLATERALIZATION PROVISIONS
The Overcollateralization Amount will initially be equal to approximately
$264,158 (0.25% of the Cut-off Date Balance) and will be increased by
distributions of the Extra Principal Distribution Amount, if any, to the Notes.
On each Payment Date, the Extra Principal Distribution Amount will be used to
increase the Overcollateralization Amount, until such amount is equal to the
Required Overcollateralization Amount. With respect to any Payment Date, the
excess, if any, of (a) the aggregate Principal Balance of the Home Loans (the
"Pool Balance") at the end of the related Collection Period over (b) the sum of
the aggregate Note Principal Balance of the Notes and the Certificate Principal
Balance of the Class B-2 Certificates (the "Security Balance") as of such date
(after taking into account the payment to the Notes of the Principal Remittance
Amount) is the "Overcollateralization Amount" as of such Payment Date. The
Indenture requires that the Net Monthly Excess Cash Flow, to the extent
available therefor as described above, will be applied as an accelerated payment
of principal on the Notes to the extent that the Required Overcollateralization
Amount exceeds the Overcollateralization Amount as of such Payment Date. The
"Required Overcollateralization Amount" means as of any Payment Date (i) prior
to the Step-Down Date, the greater of (x) 4.50% of the Cut-off Date Balance and
(y) the Net Delinquency Amount for such Payment Date, and (ii) on or after the
Step-Down Date, the greatest of (x) 9.00% of the then current aggregate
Principal Balance of the Home Loans as of the end of the related Collection
Period, (y) the Net Delinquency Amount for such Payment Date and (z)
approximately $527,746. In addition, the Issuer and the Indenture Trustee may
amend the Indenture to change the formula for the Required Overcollateralization
Amount, so long as the Issuer obtains a letter from the Rating Agencies stating
that the ratings on the Notes will not be reduced thereby.
In the event that the Required Overcollateralization Amount is permitted to
decrease or "step down" on a Payment Date in the future, a portion of the
principal which would otherwise be distributed to the holders of the Notes on
such
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Payment Date shall not be distributed to the holders of the Notes on such
Payment Date. This has the effect of decelerating the amortization of the Notes
relative to the amortization of the Home Loans, and of reducing the
Overcollateralization Amount. With respect to any Payment Date, the excess, if
any, of (a) the Overcollateralization Amount on such Payment Date over (b) the
Required Overcollateralization Amount is the "Excess Overcollateralization
Amount" with respect to such Payment Date. If, on any Payment Date, the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on such Payment Date would be, greater than zero (I.E.,
the Overcollateralization Amount is or would be greater than the Required
Overcollateralization Amount), then any amounts relating to principal which
would otherwise be distributed to the holders of the Notes on such Payment Date
shall instead be distributed to the Notes as described under "--Net Monthly
Excess Cash Flow Distributions" herein; such amount being the
"Overcollateralization Reduction Amount" for such Payment Date.
ALLOCATION OF LOSSES; SUBORDINATION
On each Payment Date following the application of all amounts
distributable on such date, to the extent the Pool Balance at the end of the
related Collection Period is less than the Security Balance due to Realized
Losses on the Home Loans, the aggregate Note Principal Balance of the Notes and
the Certificate Principal Balance of the Class B-2 Certificates shall be reduced
as follows, until such deficiency is fully allocated: first, the Certificate
Principal Balance of the Class B-2 Certificates shall be reduced, until the
Certificate Principal Balance thereof has been reduced to zero; second, the Note
Principal Balance of the Class B-1 Notes shall be reduced, until the Note
Principal Balance thereof has been reduced to zero; third, the Note Principal
Balance of the Class M-2 Notes shall be reduced, until the Note Principal
Balance thereof has been reduced to zero; and fourth, the Note Principal Balance
of the Class M-1 Notes shall be reduced, until the Note Principal Balance
thereof has been reduced to zero. The Note Principal Balances of the Senior
Notes will not be so reduced and such Notes will continue to receive Accrued
Note Interest on their balance subject to available funds.
As used herein, "Subordination" refers to the provisions discussed above
for the sequential allocation of Realized Losses among the various classes of
Notes and also the subordination provided by the Overcollateralization Amount
(including overcollateralization created by the Net Monthly Excess Cash Flow)
inasmuch as Realized Losses are only allocated to the Class B-2 Certificates and
the Notes after the Overcollateralization Amount has been reduced to zero, as
well as all provisions effecting such allocations including the priorities for
distribution of cash flows in the amounts described herein.
With respect to any defaulted Home Loan that is finally liquidated, through
foreclosure sale, disposition of the related Mortgaged Property if acquired on
behalf of the Noteholders by deed in lieu of foreclosure, or otherwise, the
amount of loss realized, if any, will equal the portion of the Principal Balance
remaining, if any, plus interest thereon through the last day of the month in
which such Home Loan was finally liquidated, after application of all amounts
recovered (net of amounts reimbursable to the Master Servicer for Advances and
expenses, including attorneys' fees) towards interest and principal owing on the
Home Loan. The Master Servicer will treat any Home Loan that is 180 days or more
delinquent as having been finally liquidated; however, any amounts received
following such period shall be included in the Interest Remittance Amount and
the Principal Remittance Amount. The amount of any loss realized is referred to
herein as a "Realized Loss."
In order to maximize the likelihood of distribution in full of Accrued Note
Interest on the Senior Notes and of the Senior Principal Distribution Amount, on
each Payment Date, holders of the Senior Notes have a right to distributions of
the Interest Remittance Amount and the Principal Distribution Amount that is
prior to the rights of the holders of the Subordinate Notes, to the extent
necessary to satisfy the payment of Accrued Note Interest on, and the Senior
Principal Distribution Amount to, the Senior Notes. Similarly, holders of the
Class M Notes have a right to distributions that is prior to the rights of the
holders of the Class B-1 Notes and Class B-2 Certificates, and holders of the
Class M Notes with a higher payment priority have a right to distributions that
is prior to the rights of the holders of any Class M Notes with a lower payment
priority. In addition, the overcollateralization provisions of the Trust Fund
related to the Notes will also increase the likelihood of distribution of full
amounts of interest and principal to the Notes on each Payment Date.
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The priority of payment provisions herein will accelerate the amortization
of the Senior Notes relative to the actual amortization of the Home Loans. To
the extent that the Senior Notes are amortized faster than the Home Loans, in
the absence of offsetting Realized Losses, the percentage interest evidenced by
such Senior Notes in the Home Loans will be decreased, thereby increasing,
relative to the Note Principal Balances of the Subordinate Notes and the
Overcollateralization Amount, the subordination afforded the Senior Notes by the
Subordinate Notes and the Overcollateralization Amount.
The priority of payment provisions herein among the Subordinate Notes, as
described herein, also generally has the effect during certain periods, in the
absence of losses, of decreasing the percentage interest evidenced by any class
of related Subordinate Notes with a higher payment priority, thereby increasing,
relative to its Note Principal Balance, the Subordination afforded to such class
of Subordinate Notes by the Overcollateralization Amount (including
overcollateralization created by the Net Monthly Excess Cash Flow) and any class
of Subordinate Notes with a lower payment priority. However, investors in the
Subordinate Notes should be aware that on and after the Payment Date on which
the Overcollateralization Amount has been reduced to approximately $527,746 and
the Certificate Principal Balance of the Class B-2 Certificates has been reduced
to zero, the most subordinate class of Subordinate Notes then outstanding may
receive more than such class' pro rata share of the Principal Distribution
Amount for such Payment Date. In such case, the most subordinate class of
Subordinate Notes then outstanding may be retired prior to the most senior class
and will therefore not provide Subordination thereafter (although Subordination
will be provided by the Overcollateralization Amount).
ADVANCES
Prior to each Payment Date, the Master Servicer is required under the
Servicing Agreement to make Advances (out of its own funds, advances made by a
Subservicer, or funds held in the Collection Account (as described in the
Prospectus) for future payment or withdrawal) with respect to any payments of
interest (net of interest at the Servicing Fee Rate) which were due on such Home
Loans on the immediately preceding Due Date and which are 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 or
Liquidation Proceeds with respect to the Home Loan. The purpose of making such
Advances is to maintain a regular cash flow to the Noteholders, rather than to
guarantee or insure against losses. Any failure by the Master Servicer to make
an Advance as required under the Servicing Agreement will constitute an Event of
Default thereunder, in which case the Indenture Trustee, as successor Master
Servicer, will be obligated to make any such Advance, in accordance with the
terms of the Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections or Liquidation Proceeds from the Home 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 and Liquidation Proceeds may be reimbursed to the
Master Servicer out of any funds in the Collection Account prior to payments on
the Notes.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the Final Scheduled Payment Date, to
the extent of the related outstanding Note Principal Balance on such date. The
"Final Scheduled Payment Date" with respect to the Notes (other than the
Interest Only Notes) is January 25, 2029, and with respect to the Interest Only
Notes is December 25, 2000.
In addition, the Notes may be redeemed in whole, but not in part, by the
Issuer on any Payment Date on or after the Payment Date on which the Pool
Balance at the end of the related Collection Period is less than or equal to
10%
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of the Cut-off Date Balance. The purchase price will be at least equal to 100%
of the aggregate outstanding Note Principal Balance of the Notes and accrued and
unpaid interest thereon (including any Unpaid Interest Shortfalls) at the Note
Interest Rate through the date on which the Notes are redeemed in full together
with all amounts due and owing to the Indenture Trustee.
CERTAIN YIELD AND PREPAYMENT 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 Home Loans and
the allocation thereof. Such yield may be adversely affected by a higher or
lower than anticipated rate of principal payments on the Home Loans in the Trust
Fund. The rate of principal payments on such Home Loans will in turn be affected
by the amortization schedules of the Home Loans, the rate and timing of
principal prepayments thereon by the Mortgagors and liquidations of defaulted
Home Loans and purchases of Home Loans due to certain breaches of
representations and warranties. The timing of changes in the rate of
prepayments, liquidations and repurchases may, and the timing of 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 Home Loans
will depend on future events and on 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 timing of principal payments on the Notes.
Certain of the Home Loans may be prepaid in full or in part at any time
without penalty. The Home Loans generally 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 Home
Loan is not impaired by the assumption. The Master Servicer shall enforce any
due-on-sale clause contained in any Mortgage Note or Mortgage, to the extent
permitted under applicable law and governmental regulations; provided, however,
if the Master Servicer determines that it is reasonably likely that any
Mortgagor will bring, or if any Mortgagor does bring, legal action to declare
invalid or otherwise avoid enforcement of a due-on-sale clause contained in any
Mortgage Note or Mortgage, the Master Servicer shall not be required to enforce
the due-on-sale clause or to contest such action. The extent to which the Home
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 Notes and may result in
a prepayment experience on the Home Loans that differs from that on other
conventional mortgage loans. See "Maturity and Prepayment Considerations" in the
Prospectus. Prepayments, liquidations and purchases of the Home Loans will
result in payments to holders of the Notes of principal amounts which would
otherwise be distributed over the remaining terms of the Home 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 and servicing decisions.
The rate of defaults on the Home Loans will also affect the rate and timing
of principal payments on the Home Loans. In general, defaults on mortgage loans
are expected to occur with greater frequency in their early years. The rate of
default of mortgage loans secured by second liens is likely to be greater than
that of mortgage loans secured by first liens on comparable properties. The rate
of default on Home Loans with high Combined Loan-to-Value Ratios may be higher
than for other types of Home Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Home 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.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
differ in material respects from the Home Loans and such data may not be
reflective of conditions applicable to the Home Loans. No significant historical
prepayment data is generally available with respect to the types of Home Loans
included in the Home Loan Pool or similar types of loans. Because
S-36
<PAGE>
the Home Loans generally have smaller balances than residential mortgage loans
secured by first liens, the related borrower may have a lessened incentive to
refinance if interest rates decline. Furthermore, due to the high Combined
Loan-to-Value Ratios on the Home Loans, the related borrowers may have less
opportunity to refinance. In addition, the borrowers with respect to the Home
Loans may use the related proceeds for a variety of purposes, including
short-term financing, which may affect the rate of prepayment. The Originators
consider the underwriting policy under which the Home Loans are underwritten to
be analogous to credit lending, rather than equity lending, since its
underwriting decisions are based primarily on the borrower's credit history and
capacity to repay rather than on the potential value of the collateral upon
foreclosure. As a result, the Home Loans may exhibit prepayment characteristics
unrelated to those of the rest of the mortgage market and more related to the
prepayment characteristics of various types of unsecured lending.
Because the Home Loan Rates on the Home Loans and the Note Interest Rates
on the Offered Notes (other than the Class A-1 Notes) are fixed, such rates will
not change in response to changes in market interest rates. Accordingly, if
market interest rates or market yields for securities similar to the Offered
Notes were to rise, the market value of the Offered Notes may decline. In
addition, yield to investors in the Class A-1 Notes will be sensitive to
fluctuations in the level of LIBOR.
The yield to investors on each class of Subordinate Notes, and particularly
on such classes of Subordinate Notes with lower payment priorities, will be
extremely sensitive to losses due to defaults on the Home Loans (and the timing
thereof), to the extent such losses are not covered by the Overcollateralization
Amount (including overcollateralization created by the Net Monthly Excess Cash
Flow), or by any other class of Subordinate Notes having a lower payment
priority or by the Class B-2 Certificates, because the entire amount of such
losses that are covered by Subordination will be allocable to such class or
classes of Subordinate Notes as described herein. Furthermore, as described
herein, the timing of receipt of principal and interest by any class of
Subordinate Notes may be adversely affected by losses even if such class does
not ultimately bear such loss.
As described herein, during certain periods all or a disproportionately
large percentage of principal payments on the Home Loans will be allocated to
the Senior Notes and, during certain periods, no principal payments will be
distributed to the Subordinate Notes and the Class B-2 Certificates. Unless the
Note Principal Balances of the Senior Notes have been reduced to zero, the
Subordinate Notes and the Class B-2 Certificates will not be entitled to receive
distributions of principal until the Stepdown Date. To the extent that no
principal payments are distributed on the Subordinate Notes and the Class B-2
Certificates, the Subordination afforded the Senior Notes by the Subordinate
Notes and the Class B-2 Certificates (together with the Overcollateralization
Amount (including overcollateralization created by the Net Monthly Excess Cash
Flow)), in the absence of offsetting Realized Losses allocated thereto, will be
increased, and the weighted average lives of the Subordinate Notes will be
extended.
Investors in the Senior Notes should note that distributions of the Extra
Principal Distribution Amount to the Senior Notes will result in an accelerated
reduction of the Note Principal Balance thereof until the Overcollateralization
Amount is equal to the Required Overcollateralization Amount. Realized Losses,
to the extent resulting in a reduction of the Overcollateralization Amount, will
also result in an accelerated payment with respect to principal on the Senior
Notes.
In addition, investors in each class of Subordinate Notes should be aware
that on and after the Payment Date on which the Overcollateralization Amount has
been reduced to approximately $527,746 and the Certificate Principal Balance of
the Class B-2 Certificates has been reduced to zero, the most subordinate class
of Subordinate Notes then outstanding may receive more than such class' pro rata
share of the Principal Distribution Amount for such Payment Date.
The rate of default on Home Loans which are refinance or limited
documentation mortgage loans, and on Home Loans with high Loan-to-Value Ratios,
may be higher than for other types of Home Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Home 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
S-37
<PAGE>
be evidenced by, among other factors, increasing unemployment or falling
property values. See "Maturity and Prepayment Considerations" in the Prospectus.
The amount of interest receipts on the Home Loans available to pay interest
on the Notes will be reduced by any interest shortfalls to the extent not
covered by the Master Servicer as described herein. See "Yield Considerations"
in the Prospectus and "Description of the Securities--Interest Payments on the
Notes" herein for a discussion of the effect of principal prepayments on the
Home Loans on the yield to maturity of the Notes and certain possible shortfalls
in the collection of interest.
In addition, the yield to maturity of the Notes will depend on, among other
things, the price paid by the holders of the Notes and the then applicable Note
Interest Rate. The extent to which the yield to maturity of a Note 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 Note is purchased at a premium and
principal payments 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 Note is purchased at a
discount and principal payments thereon occur at a rate slower than that assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that assumed at the time of purchase. For additional considerations
relating to the yield on the Notes, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of payment to the investor
of each dollar distributed in reduction of principal of such security (assuming
no losses). The weighted average life of the Notes will be influenced by, among
other things, the rate at which principal of the Home 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 prepayment model used in this Prospectus
Supplement with respect to the Home Loans (the "Prepayment Assumption")
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans. A 100% Prepayment
Assumption assumes a constant prepayment rate of 0% 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 approximate 1.07% (precisely 15/14
multiplied by 1.00%) per annum in each month thereafter until the fifteenth
month. Beginning in the fifteenth month and in each month thereafter during the
life of the mortgage loans, a 100% Prepayment Assumption assumes a constant
prepayment rate of 15% per annum each month. As used in the table below, a 50%
Prepayment Assumption assumes prepayment rates equal to 50% of the Prepayment
Assumption. Correspondingly, a 150% Prepayment Assumption assumes prepayment
rates equal to 150% 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 Home Loans.
The tables set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Home Loans that are expected to be included in the Trust Funds as described
under "Description of the Home Loan Pool" herein and the performance thereof.
The tables assume, among other things, that: (i) the Home Loans consist of the
following five hypothetical mortgage pools (each, a "Hypothetical Pool"):
S-38
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING TERM TO
CUT-OFF DATE AMORTIZING TERM MATURITY
POOL NUMBER PRINCIPAL BALANCE HOME LOAN RATE (IN MONTHS) (IN MONTHS)
- ----------- ----------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
1 $ 1,190,729.13 14.4922% 77 69
2 6,725,510.86 14.0787 121 115
3 50,818,692.35 13.9409 180 174
4 8,913,134.63 13.1091 240 233
5 37,901,090.76 13.5492 300 297
</TABLE>
(ii) all scheduled principal payments on the Home Loans are timely received on
the first day of the preceding Collection Period, with the first Collection
Period for the Home Loans commencing on June 1, 1998; (iii) no delinquencies or
losses occur on the Home Loans; (iv) all scheduled payments of interest and
principal in respect of the Home Loans have been made through the Cut-off Date;
(v) all Home Loans prepay monthly at the specified percentages of the Prepayment
Assumption, no optional or other early termination of the Notes occurs (except
with respect to the calculation of the "Weighted Average Life-to-Call (Years)"
figures in the following tables); (vi) all prepayments in respect of the Home
Loans include 30 days' accrued interest thereon; (vii) the Notes are purchased
on June 25, 1998; (viii) each year will consist of twelve 30-day months; (ix)
cash payments are received by the holders of the Notes on the 25th day of each
month, commencing in July 1998; (x) the Required Overcollateralization Amount
will be as defined herein; (xi) One-Month LIBOR remains constant at 5.65625% per
annum; and (xii) the Note Interest Rate for each class of Notes (other than the
Class A-1 Notes) is as set forth on the cover page hereof; and (xii) the
Indenture Trustee Fee Rate is 0.0075% per annum and the Servicing Fee Rate is
0.75% per annum.
The actual characteristics and performance of the Home 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 Home Loans will prepay at a constant level
of the Prepayment Assumption until maturity or that all of the Home Loans will
prepay at the same level of the Prepayment Assumption. Moreover, the diverse
remaining terms to stated maturity of the Home Loans could produce slower or
faster principal payments than indicated in the table at the various constant
percentages of the Prepayment Assumption specified, even if the weighted average
remaining term to stated maturity of the Home Loans is as assumed. Any
difference between such assumptions and the actual characteristics and
performance of the Home Loans, or actual prepayment experience, will affect the
percentages of initial Note Principal Balance outstanding over time and the
weighted average life of the Notes. Subject to the foregoing discussion and
assumptions, the following table indicates the weighted average life of the
Notes, and sets forth the percentages of the initial Note Principal Balance of
the Notes that would be outstanding after each of the dates shown at various
percentages of the Prepayment Assumption.
S-39
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1 NOTES
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 77 56 46 36 15 0
June 25, 2000.............................................. 68 22 * 0 0 0
June 25, 2001.............................................. 59 0 0 0 0 0
June 25, 2002.............................................. 48 0 0 0 0 0
June 25, 2003.............................................. 36 0 0 0 0 0
June 25, 2004.............................................. 21 0 0 0 0 0
June 25, 2005.............................................. 6 0 0 0 0 0
June 25, 2006 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 3.7 1.3 1.0 0.8 0.7 0.6
Weighted Average Life-to-Call in Years(1)(2)............... 3.7 1.3 1.0 0.8 0.7 0.6
</TABLE>
* Indicates a number that is greater than zero but less than 0.5%.
- -------------------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-40
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-2 NOTES
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 84
June 25, 2000.............................................. 100 100 100 47 0 0
June 25, 2001.............................................. 100 76 0 0 0 0
June 25, 2002.............................................. 100 0 0 0 0 0
June 25, 2003.............................................. 100 0 0 0 0 0
June 25, 2004.............................................. 100 0 0 0 0 0
June 25, 2005.............................................. 100 0 0 0 0 0
June 25, 2006.............................................. 71 0 0 0 0 0
June 25, 2007.............................................. 20 0 0 0 0 0
June 25, 2008 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 8.5 3.4 2.5 2.0 1.5 1.2
Weighted Average Life-to-Call in Years(1)(2)............... 8.5 3.4 2.5 2.0 1.5 1.2
</TABLE>
- --------------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-41
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-3 NOTES
---------------
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 100
June 25, 2000.............................................. 100 100 100 100 62 0
June 25, 2001.............................................. 100 100 98 49 0 0
June 25, 2002.............................................. 100 100 36 0 0 0
June 25, 2003.............................................. 100 52 0 0 0 0
June 25, 2004.............................................. 100 6 0 0 0 0
June 25, 2005.............................................. 100 0 0 0 0 0
June 25, 2006.............................................. 100 0 0 0 0 0
June 25, 2007.............................................. 100 0 0 0 0 0
June 25, 2008.............................................. 77 0 0 0 0 0
June 25, 2009.............................................. 41 0 0 0 0 0
June 25, 2010 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 10.8 5.1 3.8 3.0 2.2 1.7
Weighted Average Life-to-Call in Years(1)(2)............... 10.8 5.1 3.8 3.0 2.2 1.7
</TABLE>
- ----------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-43
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-4 NOTES
---------------
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 100
June 25, 2000.............................................. 100 100 100 100 100 97
June 25, 2001.............................................. 100 100 100 100 39 0
June 25, 2002.............................................. 100 100 100 70 34 0
June 25, 2003.............................................. 100 100 71 48 12 0
June 25, 2004.............................................. 100 100 52 29 0 0
June 25, 2005.............................................. 100 64 35 13 0 0
June 25, 2006.............................................. 100 49 21 0 0 0
June 25, 2007.............................................. 100 35 7 0 0 0
June 25, 2008.............................................. 100 21 0 0 0 0
June 25, 2009.............................................. 100 10 0 0 0 0
June 25, 2010.............................................. 98 0 0 0 0 0
June 25, 2011.............................................. 59 0 0 0 0 0
June 25, 2012.............................................. 38 0 0 0 0 0
June 25, 2013.............................................. 24 0 0 0 0 0
June 25, 2014.............................................. 18 0 0 0 0 0
June 25, 2015.............................................. 12 0 0 0 0 0
June 25, 2016.............................................. 5 0 0 0 0 0
June 25, 2017 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 14.0 8.3 6.5 5.2 3.6 2.3
Weighted Average Life-to-Call in Years(1)(2)............... 14.0 8.3 6.5 5.2 3.6 2.3
</TABLE>
- ------------------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-43
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-5 NOTES
---------------
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 100
June 25, 2000.............................................. 100 100 100 100 100 100
June 25, 2001.............................................. 100 100 100 100 100 0
June 25, 2002.............................................. 100 100 100 100 100 0
June 25, 2003.............................................. 100 100 100 100 100 0
June 25, 2004.............................................. 100 100 100 100 90 0
June 25, 2005.............................................. 100 100 100 100 66 0
June 25, 2006.............................................. 100 100 100 99 49 0
June 25, 2007.............................................. 100 100 100 78 35 0
June 25, 2008.............................................. 100 100 93 61 25 0
June 25, 2009.............................................. 100 100 75 48 18 0
June 25, 2010.............................................. 100 97 60 36 12 0
June 25, 2011.............................................. 100 77 46 26 8 0
June 25, 2012.............................................. 100 58 33 18 5 0
June 25, 2013.............................................. 100 46 25 13 3 0
June 25, 2014.............................................. 100 39 21 11 1 0
June 25, 2015.............................................. 100 33 17 8 0 0
June 25, 2016.............................................. 100 28 13 6 0 0
June 25, 2017.............................................. 94 22 10 5 0 0
June 25, 2018.............................................. 81 18 8 3 0 0
June 25, 2019.............................................. 68 14 6 * 0 0
June 25, 2020.............................................. 53 10 4 0 0 0
June 25, 2021.............................................. 36 6 1 0 0 0
June 25, 2022.............................................. 16 1 0 0 0 0
June 25, 2023 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 22.0 16.0 13.7 11.7 8.7 2.7
Weighted Average Life-to-Call in Years(1)(2)............... 21.5 14.1 12.0 10.2 7.5 2.7
</TABLE>
- -------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-44
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS M-1 NOTES
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 100
June 25, 2000.............................................. 100 100 100 100 100 100
June 25, 2001.............................................. 100 100 100 100 100 78
June 25, 2002.............................................. 100 100 100 99 71 78
June 25, 2003.............................................. 100 100 100 81 53 72
June 25, 2004.............................................. 100 100 85 66 39 48
June 25, 2005.............................................. 100 95 72 54 29 32
June 25, 2006.............................................. 100 82 60 43 21 21
June 25, 2007.............................................. 100 71 50 34 15 14
June 25, 2008.............................................. 100 61 41 27 11 9
June 25, 2009.............................................. 100 51 33 21 8 6
June 25, 2010.............................................. 100 42 26 16 5 3
June 25, 2011.............................................. 90 34 20 12 4 0
June 25, 2012.............................................. 74 25 14 8 2 0
June 25, 2013.............................................. 62 20 11 6 1 0
June 25, 2014.............................................. 58 17 9 5 0 0
June 25, 2015.............................................. 53 15 7 4 0 0
June 25, 2016.............................................. 48 12 6 3 0 0
June 25, 2017.............................................. 41 10 4 2 0 0
June 25, 2018.............................................. 35 8 3 1 0 0
June 25, 2019.............................................. 30 6 3 0 0 0
June 25, 2020.............................................. 23 4 2 0 0 0
June 25, 2021.............................................. 16 3 0 0 0 0
June 25, 2022.............................................. 7 0 0 0 0 0
June 25, 2023 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 17.9 12.1 10.0 8.3 6.1 6.2
Weighted Average Life-to-Call in Years(1)(2)............... 17.7 11.2 9.3 7.7 5.6 5.3
</TABLE>
- ------------------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-45
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS M-2 NOTES
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 100
June 25, 2000.............................................. 100 100 100 100 100 100
June 25, 2001.............................................. 100 100 100 100 100 100
June 25, 2002.............................................. 100 100 100 99 71 88
June 25, 2003.............................................. 100 100 100 81 53 33
June 25, 2004.............................................. 100 100 85 66 39 22
June 25, 2005.............................................. 100 95 72 54 29 15
June 25, 2006.............................................. 100 82 60 43 21 10
June 25, 2007.............................................. 100 71 50 34 15 6
June 25, 2008.............................................. 100 61 41 27 11 4
June 25, 2009.............................................. 100 51 33 21 8 3
June 25, 2010.............................................. 100 42 26 16 5 0
June 25, 2011.............................................. 90 34 20 12 4 0
June 25, 2012.............................................. 74 25 14 8 2 0
June 25, 2013.............................................. 62 20 11 6 0 0
June 25, 2014.............................................. 58 17 9 5 0 0
June 25, 2015.............................................. 53 15 7 4 0 0
June 25, 2016.............................................. 48 12 6 3 0 0
June 25, 2017.............................................. 41 10 4 1 0 0
June 25, 2018.............................................. 35 8 3 0 0 0
June 25, 2019.............................................. 30 6 3 0 0 0
June 25, 2020.............................................. 23 4 0 0 0 0
June 25, 2021.............................................. 16 3 0 0 0 0
June 25, 2022.............................................. 7 0 0 0 0 0
June 25, 2023 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 17.9 12.1 10.0 8.3 6.1 5.3
Weighted Average Life-to-Call in Years(1)(2)............... 17.7 11.2 9.3 7.7 5.6 4.9
</TABLE>
- ---------------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
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<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS B-1 NOTES
---------------
PAYMENT DATE 0% 50% 75% 100% 150% 200%
- ------------ -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100
June 25, 1999.............................................. 100 100 100 100 100 100
June 25, 2000.............................................. 100 100 100 100 100 100
June 25, 2001.............................................. 100 100 100 100 100 100
June 25, 2002.............................................. 100 100 100 99 71 49
June 25, 2003.............................................. 100 100 100 81 53 33
June 25, 2004.............................................. 100 100 85 66 39 22
June 25, 2005.............................................. 100 95 72 54 29 15
June 25, 2006.............................................. 100 82 60 43 21 10
June 25, 2007.............................................. 100 71 50 34 15 6
June 25, 2008.............................................. 100 61 41 27 11 3
June 25, 2009.............................................. 100 51 33 21 8 *
June 25, 2010.............................................. 100 42 26 16 5 0
June 25, 2011.............................................. 90 34 20 12 2 0
June 25, 2012.............................................. 74 25 14 8 0 0
June 25, 2013.............................................. 62 20 11 6 0 0
June 25, 2014.............................................. 58 17 9 4 0 0
June 25, 2015.............................................. 53 15 7 2 0 0
June 25, 2016.............................................. 48 12 6 1 0 0
June 25, 2017.............................................. 41 10 4 0 0 0
June 25, 2018.............................................. 35 8 2 0 0 0
June 25, 2019.............................................. 30 6 * 0 0 0
June 25, 2020.............................................. 23 4 0 0 0 0
June 25, 2021.............................................. 16 * 0 0 0 0
June 25, 2022.............................................. 7 0 0 0 0 0
June 25, 2023 and thereafter............................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 17.9 12.1 9.9 8.3 6.0 4.9
Weighted Average Life-to-Call in Years(1)(2)............... 17.7 11.2 9.3 7.7 5.6 4.5
</TABLE>
* Indicates a number that is greater than zero but less than 0.5%.
- --------------------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the Pool Balance at the end of the related Collection Period
is less than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
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<PAGE>
INTEREST ONLY NOTE YIELD CONSIDERATIONS
Investors should note that the Interest Only Notes are only entitled to
distributions prior to the Payment Date in January 2001. The yield to investors
on the Interest Only Notes will be extremely sensitive to the rate and timing of
principal payments on the Home Loans (including prepayments, defaults and
liquidations) under certain extremely rapid rate of prepayment scenarios. In
addition, if prior to the Payment Date in January 2001, the Master Servicer or
the Company effects an optional termination of the Home Loans, the Interest Only
Notes will receive no further distributions. Investors in the Interest Only
Notes should fully consider the risk that an extremely rapid rate of prepayments
on the Home Loans could result in the failure of such investors to receive the
amounts payable under the Interest Only Notes.
For additional considerations relating to the yield on the Offered
Notes, see "Yield and Prepayment Considerations" in the Prospectus.
DESCRIPTION OF THE SERVICING AGREEMENT
GENERAL
For a description of the terms of the Servicing Agreement, dated as of
June 1, 1998 between the Issuer and the Master Servicer (the "Servicing
Agreement") see "The Agreements" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Home Loan is payable out of the interest
payments on such Home Loan. The "Servicing Fee Rate" in respect of each Home
Loan will be equal to 0.75% per annum of the outstanding principal balance of
such Home Loan. The Servicing Fee consists of (a) servicing compensation payable
to the Master Servicer in respect of its master servicing responsibilities and
(b) subservicing and other related compensation payable to any subservicer
(including such compensation paid to the Master Servicer as the direct servicer
of a Home Loan for which there is no Subservicer). The compensation paid to any
subservicer shall not be in excess of the Servicing Fee Rate. The Master
Servicer will be entitled to retain as additional servicing compensation any
prepayment penalties.
OPTIONAL PURCHASE OF DEFAULTED HOME LOANS
Pursuant to the Servicing Agreement, the Master Servicer will have the
option to purchase from the Trust Fund any Home Loan which is 90 days or more
delinquent at a purchase price equal to the Principal Balance thereof
plus accrued interest thereon.
THE MASTER SERVICER
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 Home
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 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 an
alternative mortgage servicer.
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
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<PAGE>
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.
MASTER SERVICER LOSS AND DELINQUENCY TEST
In the event the Master Servicer fails certain performance-based
triggers described in the Servicing Agreement regarding its loss and delinquency
experience with respect to the Home Loans, upon the request of Noteholders
representing not less than 50% of the Note Principal Balance of the Notes then
outstanding, the Master Servicer may be terminated and a replacement Master
Servicer may be designed by such Noteholders. The Indenture Trustee shall notify
the Noteholders if such triggers are failed.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER
Southern Pacific has been servicing mortgage loans of the type included
in the Trust Fund since January 1998. As a result, there is no material loss and
delinquency information available for Southern Pacific.
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 Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such defined
terms are thereby incorporated herein by reference. See "The Agreements" in the
Prospectus.
EVENTS OF DEFAULT
An "Event of Default" with respect to the Notes is defined in the
Indenture as follows: (a) the failure to pay on any Payment Date (but only to
the extent funds are available to make such payments as described under
"Description of the Securities") (i) Accrued Note Interest or Unpaid Interest
Shortfalls with respect to any class of Notes within five days of when such
payment was due and (ii) the Principal Distribution Amount with respect to any
class of Notes within five days of when such payment was due; (b) a default in
the observance of certain negative covenants in the Indenture; (c) a default in
the observance of any other covenant of the Indenture, and the continuation of
any such default for a period of thirty days after notice to the Issuer by the
Indenture Trustee, or by the Holders of at least 25% of the Note Principal
Balance of the Notes; (d) any representation or warranty made by the Issuer in
the Indenture or in any Note or other writing delivered pursuant thereto having
been incorrect in a material respect as of the time made, and the circumstance
in respect of which such representation or warranty is incorrect not having been
cured within thirty days after notice thereof is given to the Issuer by the
Indenture Trustee, or by Noteholders representing at least 25% of the Note
Principal Balance of the Notes; (e) certain events of bankruptcy, insolvency,
receivership or reorganization of the Issuer; or (f) the failure by the Issuer
on the related Final Scheduled Payment Date to reduce the Note Principal Balance
of any class of the Notes to zero. Prior to the Final Scheduled Payment Date,
the failure to pay interest or principal on any class of Notes generally will
not result in an Event of Default.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect
to the Notes, the Indenture Trustee may, and on request of Noteholders
representing not less than 50% of the aggregate Note Principal Balance of the
Senior Notes then outstanding, or if the aggregate Note Principal Balance of the
Senior Notes has been reduced to zero, Noteholders representing not less than
50% of the Note Principal Balance of the most senior Notes then outstanding (the
"Controlling Noteholders") shall, declare the principal of the Notes to be
immediately due and payable. Such declaration may under certain circumstances be
rescinded by Noteholders representing more than 50% of the aggregate Note
Principal Balance of the Notes.
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<PAGE>
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may, in its discretion (provided that the
Controlling Noteholders have not directed the Indenture Trustee to sell the
assets included in the Trust Fund), refrain from selling such assets and
continue to apply all amounts received on such assets to payments due on the
Notes in accordance with their terms, notwithstanding the acceleration of the
maturity of such Notes. The Indenture Trustee, however, must sell the assets
included in the Trust Fund if collections in respect of such assets are
determined to be insufficient to pay certain expenses payable under the
Indenture and to make all scheduled payments on the Notes, in which case
payments will be made on the Notes in the same manner as described in the next
sentence with regard to instances in which such assets are sold. In addition,
upon an Event of Default the Indenture Trustee may sell the assets included in
the Trust Fund, in which event the collections on, or the proceeds from the sale
of, such assets will be applied as provided below: (i) to the payment of the
fees of the Indenture Trustee which have not been previously paid; (ii) to the
Noteholders and Class B-2 Certificateholders, the amount of interest then due
and unpaid on the Notes, first to the Senior Notes without preference or
priority of any kind, second to the Class M-1 Notes, third to the Class M-2
Notes, fourth, to the Class B-1 Notes and fifth, to the Class B-2 Certificates;
(iii) to the Noteholders and the Class B-2 Certificateholders, the amount of
principal then due and unpaid on the Notes, first to the Senior Notes without
preference or priority of any kind, second to the Class M-1 Notes, third to the
Class M-2 Notes, fourth, to the Class B-1 Notes and fifth, to the Class B-2
Certificates; and (iv) to the Class X Certificates.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Noteholders, unless such Noteholders shall have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Controlling Noteholders shall have
the right to direct the time, method, and place of conducting any proceeding or
any remedy available to the Indenture Trustee or exercising any trust or power
conferred on the Indenture Trustee with respect to such Notes; and the
Controlling Noteholders of the Notes may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of the holder of each outstanding Note
affected thereby.
LIMITATION ON SUITS
No Noteholder will have any right to institute any proceedings with
respect to the Indenture unless (1) such Noteholder has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (2)
Noteholders representing not less than 25% of the Note Principal Balance of the
Notes have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as Indenture
Trustee; (3) such Noteholders have offered to the Indenture Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice, request and offer of indemnity the Indenture Trustee has failed to
institute any such proceedings; and (5) no direction inconsistent with such
written request has been given to the Indenture Trustee during such 60-day
period by the Noteholders representing a majority of the Note Principal Balance
of the 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, by an
indenture supplemental to the Indenture, 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
Securities 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 and
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<PAGE>
(vii) the Issuer has delivered to the Indenture Trustee an officer's certificate
and an Opinion of Counsel each statingthat such consolidation or merger and such
supplemental indenture comply with the Indenture and that all conditions
precedent, as provided in the Indenture, relating to such transaction have been
complied with. 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 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 the holders of a majority of the outstanding Notes,
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 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 Depositor 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 or 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, without obtaining the consent of the Noteholders, for the purpose
of, among other things, curing any ambiguity or correcting or supplementing any
provision in the Indenture that may be inconsistent with any other provision
therein, or issuing any additional class of notes subordinate to the interests
of the Noteholders. In addition, the Issuer and the Indenture Trustee may amend
the Indenture to change the formula for the Required Overcollateralization
Amount, so long as the Issuer obtains a letter from the Rating Agencies stating
that the ratings on the Notes will not be reduced thereby.
No supplement or modification of the Indenture shall affect the rights
of the Certificates without the consent of the holder thereof.
THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time, in which event the Issuer
will be obligated to appoint a successor Indenture Trustee. In addition, the
Indenture Trustee may be required to resign in case of an Event of Default. The
Indenture Trustee also may be removed at any time by Noteholders representing a
majority of the Note Principal Balance of the Notes, if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture or if the
Indenture Trustee becomes incapable of acting, bankrupt, insolvent or if a
receiver or public officer takes charge of the Indenture Trustee or its
property. Any resignation or removal of the Indenture Trustee and appointment
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<PAGE>
of a successor Indenture Trustee will not become effective until acceptance of
the appointment by the successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes will be characterized as
indebtedness and not as representing an ownership interest in the Trust Fund or
an equity interest in the Issuer or the Company. In addition, for federal income
tax purposes, the Issuer will not be (i) classified as an association taxable as
a corporation for federal income tax purposes, (ii) a taxable mortgage pool as
defined in Section 7701(i) of the Code, or (iii) a "publicly traded partnership"
as defined in Treasury Regulation Section 1.7704-1. The Notes (other than the
Interest Only Notes) will not, and the Interest Only Notes will, be treated as
having been issued with "original issue discount" (as defined in the
Prospectus). The prepayment assumption that will be used in determining the rate
of amortization of 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 Home Loans will prepay at a rate equal to 100% of the
Prepayment Assumption. No representation is made that the Home Loans will prepay
at those rates or at any other rate. See "Federal Income Tax Consequences" 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 Interest Only Notes should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
securities such as the Interest Only Notes. Prospective purchasers of the
Interest Only Notes are advised to consult their tax advisors concerning the tax
treatment of such Notes.
If the method of computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to any
Noteholder, the amount of original issue discount allocable to such period would
be zero, and such Noteholder will be permitted to offset such amounts only
against the respective future income (if any) from such Note. Although
uncertain, a Noteholder may be permitted to deduct a loss to the extent that his
or her respective remaining basis in such Note exceeds the maximum amount of
future payments to which such Noteholder is entitled, assuming no further
prepayments of the Home Loans. Although the matter is not free from doubt, any
such loss might be treated as a capital loss.
The OID Regulations in some circumstances permit 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 Interest Only
Notes may be able to select a method for recognizing original issue discount
that differs from that used in preparing reports to Noteholders and the IRS.
Prospective purchasers of Interest Only Notes are advised to consult their tax
advisors concerning the tax treatment of such Notes in this regard.
The Notes will NOT be treated as assets described in Section
7701(a)(19)(C) of the Code or "real estate assets" under Section 856(c)(4)(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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated June 23, 1998 (the "Underwriting Agreement"), among Greenwich
Capital, Inc. (the "Underwriter"), the Company and Southern Pacific, the
Underwriter has agreed to purchase and the Company has agreed to sell to the
Underwriter the Offered Notes.
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<PAGE>
It is expected that delivery of the Offered Notes will be made only in
book-entry form through the Same Day Funds Settlement System of DTC, on or about
June 25, 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 Offered Notes 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 Offered Notes 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 Offered Notes, before deducting expenses payable by
the Company, will be approximately 100.99% of the aggregate initial Note
Principal Balance of the Offered Notes plus accrued interest on the Offered
Notes (other than the Class A-1 Notes) from June 1, 1998. The Underwriter may
effect such transactions by selling the Offered 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 Offered 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
Offered Notes may be deemed to be underwriters and any profit on the resale of
the Offered Notes 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.
There can be no assurance that a secondary market for the Offered Notes
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Offered Notes will be the
monthly statements discussed in the Prospectus under "Description of the
Securities--Reports to Securityholders," which will include information as to
the outstanding principal balance of the Offered Notes. There can be no
assurance that any additional information regarding the Offered Notes will be
available through any other source. In addition, the Company is not aware of any
source through which price information about the Offered Notes will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Notes may adversely affect the liquidity of the Offered Notes, even
if a secondary market for the Offered Notes becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Notes will be passed upon for the
Company and the Seller by Thacher Proffitt & Wood, New York, New York and for
the Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition of the issuance of the Senior Notes (other than the
Interest Only Notes) that they be rated "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies ("S&P") and Fitch IBCA, Inc.
("Fitch"). It is a condition to the issuance of the Interest Only Notes that
they be rated not lower than "AAAr" by S&P and "AAA" by Fitch. It is a condition
to the issuance of the Class M-1 Notes that they be rated not lower than "AA" by
S&P and Fitch. It is a condition to the issuance of the Class M-2 Notes that
they be rated not lower than "A" by S&P and Fitch. It is a condition to the
issuance of the Class B-1 Notes that they be rated not lower than "BBB-" by S&P
and "BBB" by Fitch.
The rating process of S&P addresses the structural and legal aspects
associated with the Offered Notes, including the nature of the underlying
mortgage loans. The ratings assigned to the Offered Notes do not represent
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any assessment of the likelihood or rate of principal prepayments. The ratings
do not address the possibility that Offered Noteholders might suffer a lower
than anticipated yield. The ratings do not address the likelihood that Offered
Noteholders will be paid any Prepayment Interest Shortfalls or Relief Act
Shortfalls.
The "r" of the "AAAr" rating of the Interest Only Notes by Standard &
Poor's is attached to highlight derivative, hybrid, and certain other
obligations that Standard & Poor's 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.
Fitch's ratings on mortgage pass-through notes address the likelihood
of the receipt by Offered Noteholders of payments required under the Indenture.
Fitch's ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Offered Notes, and the extent
to which the payment stream in the mortgage pool is adequate to make payments
required under the Offered Notes. Fitch's rating on the Offered Notes 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 Offered Notes by any
rating agency other than S&P and Fitch. However, there can be no assurance as to
whether any other rating agency will rate the Offered Notes, or, if it does,
what rating would be assigned by any such other rating agency. A rating on the
Offered Notes by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Offered Notes by S&P and Fitch.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Notes are subsequently lowered for any reason,
no person or entity is obligated to provide any additional support or credit
enhancement with respect to the Offered Notes.
LEGAL INVESTMENT
The Offered Notes will not constitute "mortgage related securities" for
purposes of SMMEA. See "Legal Investment" in the Prospectus.
The Company makes no representations as to the proper characterization
of the Offered Notes for legal investment or other purposes, or as to the
ability of particular investors to purchase the Offered Notes under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of the Offered Notes.
Accordingly,
all institutions whose investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their legal advisors in determining whether and
to what extent the Offered Notes constitute a legal investment or are subject to
investment, capital or other
restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code impose certain requirements on employee benefit plans and
certain other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts of insurance
companies in which such plans or arrangements are invested (all of which are
hereinafter referred to as a "Plan") and on persons who are fiduciaries with
respect to such Plans. ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning of
the Code; "Disqualified Persons") and "parties in interest" (within the meaning
of ERISA; "Parties in Interest") who have
S-54
<PAGE>
certain specified relationships to the Plan, including (but not limited to) the
direct or indirect extension of credit between a Plan and a Party in Interest.
Accordingly, prior to making an investment in the Offered Notes, investing Plans
should determine whether the Issuer, the Company, the Seller, the Trust Fund,
the Owner Trustee, the Indenture Trustee, the Underwriter, any other
underwriter, the Master Servicer, the Subservicers, any other servicer, any
administrator, any provider of credit support, or any insurer or any of their
affiliates is a Party in Interest or Disqualified Person with respect to such
Plan and, if so, whether such transaction is subject to one or more statutory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in securities may cause the assets included in the Trust Fund to be deemed "Plan
Assets" of such Plan, and any person with certain specified relationships to the
Trust Fund to be deemed a Party in Interest or Disqualified Person. The U.S.
Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R. Section
2510.3-101 (the "Plan Asset 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 Section 4975 of the Code.
Under the Plan Asset 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. The Plan Asset 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." Although not entirely free from
doubt, it is believed that, as of the date hereof, the Offered Notes will be
treated as debt obligations without significant equity features for the purposes
of the Plan Asset Regulations. Because of the factual nature of certain of the
above-described provisions of ERISA, the Code and the Plan Asset Regulations,
Plans or persons investing Plan Assets should carefully consider whether such an
investment might constitute or give rise to a prohibited transaction under ERISA
or the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Offered Notes should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
such Offered Notes.
S-55
<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 Notes
offered hereby to anyone in any jurisdiction in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make any such offer or solicitation. Neither the delivery of this
Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary.............................................. S- 3
Risk Factors......................................... S-13
Description of the Home Loan Pool.................... S-14
The Issuer........................................... S-35
The Owner Trustee.................................... S-35
The Indenture Trustee................................ S-36
Description of the Securities........................ S-37
Certain Yield and Prepayment Considerations.......... S-46
Description of the Servicing Agreement............... S-53
The Indenture........................................ S-55
Federal Income Tax Consequences...................... S-58
Method of Distribution............................... S-58
Legal Opinions....................................... S-59
Ratings.............................................. S-59
Legal Investment..................................... S-60
ERISA Considerations................................. S-60
Appendix A--Underwriting Guidelines Applicable
to the Home Loans............................... A-1
Prospectus
Summary of Prospectus ............................... 4
Risk Factors......................................... 12
The Mortgage Pools................................... 15
Servicing of Home Loans.............................. 25
Description of the Notes............................. 31
Description of Credit Enhancement.................... 44
Purchase Obligations................................. 52
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................... 52
The Company.......................................... 55
The Agreements....................................... 55
Yield Considerations................................. 62
Maturity and Prepayment Considerations............... 64
Certain Legal Aspects of Mortgage Loans.............. 65
Certain Federal Income Tax Consequences.............. 78
State and Other Tax Consequences..................... 101
ERISA Considerations................................. 102
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
================================================================================
================================================================================
SOUTHERN PACIFIC SECURED ASSETS CORP.
SOUTHERN PACIFIC CMN TRUST
SERIES 1998-H1
$99,774,000
COLLATERALIZED ASSET-BACKED NOTES,
SERIES 1998-H1
PROSPECTUS SUPPLEMENT
-----------------------
June 23, 1998
Greenwich Capital
<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 2nd
Mortgages 125% Program. The 2nd Mortgages 125% Program is the "Non-Conforming
Credit Program" applicable to residential second lien 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 2nd Mortgages 125% Program
were underwritten in accordance with the underwriting criteria of SPFC. SPFC
began underwriting mortgage loans in accordance with such standards in June,
1997.
SPFC's underwriting standards under the 2nd Mortgages 125% 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. SPFC's primary consideration in underwriting a mortgage
loan under this program is the mortgagor's credit bureau risk score; other
factors include mortgagor's employment stability, income/cash flow and
debt-to-income ratio, the value of the mortgaged property relative to the amount
of the mortgage loan and the lien position of the SPFC loan. SPFC will not
permit a junior lien already in position to subordinate to the SPFC lien, except
under two situations. If the junior lien is from a city, state, municipality, or
government agency of any kind or if the junior lien is a UCC instrument, it may
be subordinate to the SPFC lien. All liens are taken into consideration when
calculating the combined loan-to-value ratio (the "CLTV"). In addition, SPFC
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 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 2nd Mortgages 125% Program
were underwritten pursuant to the "Non-Conforming Full Documentation,"
"Non-Conforming Lite Documentation" and "NonConforming Stated Income"
residential loan programs and are offered for Home Improvements, Debt
Consolidation and Cash Out. 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.
For a Home Improvement loan a minimum of 40% of the gross loan amount
must be used for home improvement. The remaining percentage of the gross loan
amount may be used for the combination of debt consolidation, closing costs, and
allowable cash out. For a Debt Consolidation Loan there is no minimum percentage
requirement for home improvements. The entire loan amount may be used for the
combination of debt consolidation, closing costs and allowable cash out. The
allowable cash out for a Home Improvement Loan or a Debt Consolidation Loan is
determined by the borrower's credit grade. Moreover, the debt consolidation
portion of the Home Improvement loan proceeds and the Debt Consolidation loan
proceeds may not be used for the down payment to purchase a property, although
it may be used to
A-1
<PAGE>
purchase an asset, provided a copy of the purchase contract is in the mortgage
loan file. The amount of allowable cash out for both the Home Improvement loan
and the Debt Consolidation loan is determined by the borrower's credit grade.
For Cash Out loans, individual credit grades are the sole criteria for
determining eligibility. For each of these loan types, 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.
For all loan types the sum of the following costs must be used in
totaling a borrower's debt: (i) the sum of principal and interest of the
borrower's first and second mortgage; (ii) hazard and flood insurance premiums,
real estate property taxes, homeowner's association fees or dues; (iii)
installment and revolving debt based on the monthly payment as it appears on the
borrower's credit report or 3% of the balance when the balance is greater than
$1,000 and 5% of the balance if the balance is less than $1,000; (iv) child
support and alimony/ paternity payments; and (v) negative cash flow from rental
property. SPFC's Underwriting Guidelines provide for the classification of each
borrower into one of the following five special classifications: the
self-employed borrower, the first time borrower, the relocation borrower, the
limited credit history borrower and the resident alien borrower. A first time
borrower is a borrower without the most recent six months of mortgage history
with an institutional lender. A limited history borrower is one that has more
than twelve recent months of satisfactory mortgage payment history with an
institutional lender, but does not meet the minimum credit history requirements.
The maximum loan amount and the maximum debt-to-income ratio for a first time
borrower and a limited history borrower is $25,000 and 40%, respectively, the
minimum credit score requirement is 640 and there may not be any late mortgage
payments in the loan history for either type of borrower. A relocation borrower
is a borrower without the most recent 6 months of required mortgage history with
an institutional lender, but does have at least sixteen months of mortgage
history within the most recent twenty-four month period. The maximum loan amount
is limited by the borrowers credit grade. A Resident Alien borrower must be a
legal, permanent resident alien and a copy of the applicant's green card and
social security card is required. The maximum is $25,000, a minimum credit score
of 660 is required and the maximum debt-to- income ratio is 40%. A history of
any late mortgage payments is not permitted for a Resident Alien borrower and
loan requests for non-US citizens are only eligible under the full income
documentation program, and the borrowers must provide a minimum of 2 years of
employment with the same employer and employment must have been in the United
States for the past three years. Self-employed resident aliens are not eligible.
First Time and Limited Credit History borrowers with a history of bankruptcy or
Consumer Credit Counseling Services ("CCCS") will not qualify for a mortgage
loan, per SPFC's underwriting guidelines. Additionally, for any type of
borrower, if the primary wage earner is self-employed the maximum loan amount
may not exceed $50,000 and may be further restricted by credit grade.
SPFC's criteria requires 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 loan type. Under the Non-Conforming Stated Income program,
borrowers may be qualified 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
A-2
<PAGE>
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, a minimum credit score of 700
is required. The existing mortgage obligation must be current with no 30-day
late payments in the last 3 months, no more than one 30-day late payment in the
last 12 months, two 30-day late payments in the last 24 months and no 60-day
late payments are permitted throughout the history of the existing mortgage.
SPFC does not require the borrower to meet specific non-mortgage derogatory
criteria because an overall repayment history is already represented by the
credit score requirement of 700. However, a borrower with a credit history that
includes forbearance's, repossessions, unpaid charge-offs and/or settled/short
pay accounts with aggregate losses greater than $1,000 is unacceptable. All
items affecting title must be paid off and loan funds may be used to pay the
item in full. If the lien was paid outside of the loan, a release of lien is
required to be certain that SPFC's lien position is not in jeopardy. If the
aggregate balance of all unpaid collections, judgements, and/or liens not
affecting title totals more than $1,000 these types of accounts must be paid off
in full; with the loan funds if necessary. If a collection account was paid off
prior to the date on the credit report submitted with the loan application, SPFC
will accept a verbal verification ascertaining this to be true, however a
paydown or a partial payment to the account to bring the balance down below
$1,000 is not permitted. A prior bankruptcy/CCCS is not permitted within the
last three years. If the borrower is self-employed, a minimum of three years in
business is required. The maximum debt-to-income ratio is 50% for mortgage loans
of $50,000 or less and 45% for mortgage loans greater than $50,000. The CLTV has
no impact on the mortgage loan grade. The mortgage loan maximum is $100,000 with
a $35,000 maximum cash out limit.
"A" RISK. Under the "A" risk category, a minimum credit score of 680 is
required. The existing mortgage obligation must be current with no 30-day late
payments in the last 3 months, no more than one 30-day late payments in the last
12 months, two 30-day late payments in the last 24 months and no 60-day late
payments are permitted throughout the history of the existing mortgage. SPFC
does not require the borrower to meet specific non-mortgage derogatory criteria
because an overall repayment history is already represented by the credit score
requirement of 680. However, a borrower with a credit history that includes
forbearance's, repossessions, unpaid charge-offs and/or settled/short pay
accounts with aggregate losses greater than $1,000 is unacceptable. All items
affecting title must be paid off and loan funds may be used to pay the item in
full. If the lien was paid outside of the loan, a release of lien is required to
be certain that SPFC's lien position is not in jeopardy. If the aggregate
balance of all unpaid collections, judgements, and/or liens not affecting title
totals more than $1,000 these types of accounts must be paid off in full; with
the loan funds if necessary. If a collection account was paid off prior to the
date on the credit report submitted with the loan application, SPFC will accept
a verbal verification ascertaining this to be true, however a paydown or a
partial payment to the account to bring the balance down below $1,000 is not
permitted. A prior bankruptcy/CCCS is not permitted within the last three years.
If the borrower is self-employed, a minimum of three years in business is
required. The maximum debt-to-income ratio is 50% for mortgage loans of $35,000
or less and 45% for mortgage loans greater than $35,000. The CLTV has no impact
on the mortgage loan grade. The mortgage loan maximum is $75,000 with a $25,000
maximum cash out limit.
A-3
<PAGE>
"B+" RISK. Under the "B+" risk category, a minimum credit score of 660
is required. The existing mortgage obligation must be current with no 30-day
late payments in the last 3 months, no more than one 30-day late payments in the
last 12 months, two 30-day late payments in the last 24 months and no 60-day
late payments are permitted throughout the history of the existing mortgage.
SPFC will not permit more than two non-mortgage debts to rate 60 or more days
delinquent in the past 12 months or more than one non-mortgage debt to be
greater than 90 days delinquent within the last 12 months. This includes
charge-offs. A borrower with a credit history that includes forbearance's,
repossessions, unpaid charge-offs and/or settled/short pay accounts with
aggregate losses greater than $1,000 is unacceptable. All items affecting title
must be paid off and loan funds may be used to pay the item in full. If the lien
was paid outside of the loan, a release of lien is required to be certain that
SPFC's lien position is not in jeopardy. If the aggregate balance of all unpaid
collections, judgements, and/or liens not affecting title totals more than
$1,000 these types of accounts must be paid off in full; with the loan funds if
necessary. If a collection account was paid off prior to the date on the credit
report submitted with the loan application, SPFC will accept a verbal
verification ascertaining this to be true, however a paydown or a partial
payment to the account to bring the balance down below $1,000 is not permitted.
A prior bankruptcy/CCCS is not permitted within the last three years. If the
borrower is self-employed, a minimum of three years in business is required. The
maximum debt-to-income ratio is 45% for mortgage loans of $50,000 or less and
40% for mortgage loans greater than $50,000. The CLTV has no impact on the
mortgage loan grade. The mortgage loan maximum is $65,000 with a $15,000 maximum
cash out limit.
"B" RISK. Under the "B" risk category, a minimum credit score of 640 is
required. The existing mortgage obligation must be current with no 30-day late
payments in the last 3 months, no more than one 30-day late payments in the last
12 months, two 30-day late payments in the last 24 months and no 60-day late
payments are permitted throughout the history of the existing mortgage. SPFC
will not permit more than two non-mortgage debts to rate 60 or more days
delinquent in the past 12 months or more than one non-mortgage debt to be
greater than 90 days delinquent within the last 12 months. This includes
charge-offs. A borrower with a credit history that includes forbearance's,
repossessions, unpaid charge-offs and/or settled/short pay accounts with
aggregate losses greater than $1,000 is unacceptable. All items affecting title
must be paid off and loan funds may be used to pay the item in full. If the lien
was paid outside of the loan, a release of lien is required to be certain that
SPFC's lien position is not in jeopardy. If the aggregate balance of all unpaid
collections, judgements, and/or liens not affecting title totals more than
$1,000 these types of accounts must be paid off in full; with the loan funds if
necessary. If a collection account was paid off prior to the date on the credit
report submitted with the loan application, SPFC will accept a verbal
verification ascertaining this to be true, however a paydown or a partial
payment to the account to bring the balance down below $1,000 is not permitted.
A prior bankruptcy/CCCS is not permitted within the last three years. If the
borrower is self-employed, a minimum of three years in business is required. The
maximum debt-to-income ratio is 45% for mortgage loans of $35,000 or less and
40% for mortgage loans greater than $35,000 and less $50,000. Loans greater than
$45,000 are not permitted and there is a $5,000 maximum cash out limit. The CLTV
has no impact on the mortgage loan grade.
"C+" RISK. Under the "C+" risk category, a minimum credit score of 630
is required. The existing mortgage obligation must be current with no 30-day
late payments in the last 3 months, no more than one 30-day late payments in the
last 12 months, two 30-day late payments in the last 24 months and no 60-day
late payments are permitted throughout the history of the existing mortgage.
SPFC will not permit any non-mortgage debts to rate 60 or more days delinquent
in the past 12 months. This includes charge-offs. A prior history of any unpaid
collection account, charge-offs, settled/short pay accounts, forbearance's,
repossessions, judgements, and/or liens are not permitted. A prior
bankruptcy/CCCS is not permitted. Self-employed borrowers are not permitted.
First Time borrowers, Relocation Borrowers and
A-4
<PAGE>
Limited History borrowers are not permitted. The maximum debt-to-income ratio is
40% for mortgage loans of $35,000 or less and 40% for mortgage loans greater
than $35,000 and less $50,000. Loans greater than $30,000 are not permitted and
there is a $1,000 maximum cash out limit. The CLTV has no impact on the mortgage
loan grade.
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 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: good
maintenance; a maximum of one 30-day late payment on all debts 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.
HOME AMERICA FINANCIAL SERVICES, INC.
The Mortgage Loans originated by Home America Financial Services, Inc.
("HAFSI") or purchased by HAFSI from correspondents pursuant to a standardized
Correspondent/Wholesale Purchase Agreement were underwritten pursuant to the
HomePlus and Home 125 loan grading underwriting guidelines of HAFSI. HAFSI began
underwriting mortgage loans in accordance with such standards in September,
1997.
HAFSI's underwriting standards under the HomePlus and Home 125 Programs
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. HAFSI's primary consideration in underwriting
a mortgage loan is the mortgagor's credit score; other factors include
employment stability, income/cash flow and debt-to-income ratio, the value of
the mortgaged property relative to the amount of the mortgage loan and the lien
position of the HAFSI loan. For mortgage loans less than $35,000, HAFSI uses the
stated value of the Mortgagor in his or her application. HAFSI will not permit a
junior lien already in position to subordinate to the HAFSI lien, except under
two situations. If the junior lien is from a city, state, municipality, or
government agency of any kind or if the junior lien is a UCC instrument, it may
subordinate to the HAFSI lien. Otherwise, any junior lien already in position
must be paid off. All liens are taken into consideration when calculating the
CLTV. In addition, HAFSI 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 fixed
rate loans, and generally bear higher rates of interest than mortgage loans that
are originated in accordance with FNMA and FHLMC standards.
Under the HomePlus and Home 125 Programs, HAFSI 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 HAFSI's
standards. For all loan types the sum of the following costs must be used in
totaling a borrower's debt: (i) the sum of principal and interest of the
borrower's first and second mortgage; (ii) hazard and flood insurance premiums,
real estate property taxes, homeowner's association fees or dues; (iii)
installment debt based on the monthly payment as it appears on the borrower's
credit report and revolving debt based on the monthly payment as it appears on
the
A-5
<PAGE>
borrower's credit report or 3% of the balance when the balance is greater than
$1,000 and 5% of the balance if the balance is less than $1,000; (iv) child
support and alimony/paternity payments; (v) any lien that has met the parameters
for subordinating the HAFSI lien; and (vi) negative cash flow from rental
property. HAFSI's Underwriting Guidelines provide for the classification of each
borrower into one of the following five special classifications; the
self-employed borrower, the first time borrower, the relocation borrower, the
limited credit history borrower and the resident alien borrower. A first time
borrower is a borrower without the most recent six months of mortgage history
with an institutional lender. A limited history borrower is one that has more
than twelve recent months of satisfactory mortgage payment history with an
institutional lender, but does not meet the minimum credit history requirements.
The maximum loan amount and the maximum debt-to-income ratio for a first time
borrower and a limited history borrower is $25,000 and 40%, respectively, the
minimum credit score requirement is 640 and there may not be any late mortgage
payments in the loan history for either type of borrower. If the limited credit
history borrower or the first time borrower has had a bankruptcy or been through
Consumer Credit Counseling Service ("CCCS") any time in their respective credit
histories, they will not qualify. A relocation borrower is a borrower without
the most recent 6 months of required mortgage history with an institutional
lender, but does have at least sixteen months of mortgage history within the
most recent twenty-four month period. The maximum loan amount is limited by the
borrowers credit grade. The maximum debt-to-income ratio is 40% and the minimum
credit score is 640. There cannot be any late mortgage payments in the previous
loan history. A Resident Alien borrower must be a legal, permanent resident
alien and a copy of the applicant's green card and social security card is
required. The maximum is $25,000, a minimum credit score of 660 is required and
the maximum debt-to-income ratio is 40%. Cash out loans are not permitted. A
history of any late mortgage payments is not permitted for a Resident Alien
borrower and loan requests for non-US citizens are only eligible under the full
income documentation program, and the borrowers must provide a minimum of 2
years of employment with the same employer and employment must have been in the
United States for the past three years. Self-employed resident aliens are not
eligible. Documentation for income verification must include most current pay
stubs, 2 years of W-2's and the borrower's most recent federal income tax
return.
HAFSI's criteria requires 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 loan type. Under the Non-Conforming Stated Income program,
borrowers may be qualified 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, HAFSI 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.
HAFSI 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, a minimum credit score of 700
is required. The existing mortgage obligation must be current with no 30-day
late payments in the last 3 months, one 30-day late payment in the last 12
months, two 30-day late payments in the last 24 months and no 60-day late
payments
A-6
<PAGE>
are permitted throughout the history of the existing mortgage. HAFSI does not
require the borrower to meet specific non-mortgage derogatory criteria because
an overall repayment history is already represented by the credit score
requirement of 700. However, a borrower with a credit history that includes
unpaid judgements greater than $1,000 must be paid at closing. Unpaid charge
offs greater than $1,000 are not permitted. Any unpaid derogatory balance less
than $10,000 is permitted. All items affecting title must be paid off and loan
funds may be used to pay the item in full. If the lien was paid outside of the
loan, a release of lien is required to be certain that HAFSI's lien position is
not in jeopardy. If the aggregate balance of all unpaid collections, judgements,
and/or liens not affecting title totals more than $1,000 these types of accounts
must be paid off in full; with the loan funds if necessary. If a collection
account was paid off prior to the date on the credit report submitted with the
loan application, HAFSI will accept a verbal verification ascertaining this to
be true, however a paydown or a partial payment to the account to bring the
balance down below $1,000 is not permitted. A prior bankruptcy/CCCS is not
permitted within the last three years. The maximum loan that a borrower with a
previous bankruptcy/CCCS can receive is $25,000 and his/her maximum
debt-to-income ratio is 40%. If the borrower is self-employed, a minimum of two
years in business is required, the maximum loan amount is $50,000 and the
debt-to-income ratio is 40%. The maximum debt-to-income ratio is 50% for
mortgage loans of $50,000 or less and 45% for mortgage loans greater than
$50,000. The maximum CLTV is %125. The mortgage loan maximum is $75,000 for a
mortgage loan secured by a single family residence, a planned urban development
or a townhouses and $25,000 for a mortgage loan secured by a condominium, a 2-4
unit property, a manufactured home or a prefabricated home.
"A" RISK. Under the "A" risk category, a minimum credit score of 680 is
required. The existing mortgage obligation must be current with no 30-day late
payments in the last 3 months, no more than one 30-day late payments in the last
12 months, two 30-day late payments in the last 24 months and no 60-day late
payments are permitted in the last 36 months. HAFSI does not require the
borrower to meet specific non-mortgage derogatory criteria because an overall
repayment history is already represented by the credit score requirement of 680.
However, a borrower with a credit history that includes forbearance's,
repossessions, unpaid charge-offs and/or settled/short pay accounts with
aggregate losses greater than $1,000 is unacceptable. Unpaid judgements greater
than $1,000 must be paid at the closing. All items affecting title must be paid
off and loan funds may be used to pay the item in full. If the lien was paid
outside of the loan, a release of lien is required to be certain that HAFSI's
lien position is not in jeopardy. If the aggregate balance of all unpaid
collections, judgements, and/or liens not affecting title totals more than
$1,000 these types of accounts must be paid off in full; with the loan funds if
necessary. If a collection account was paid off prior to the date on the credit
report submitted with the loan application, HAFSI will accept a verbal
verification ascertaining this to be true, however a paydown or a partial
payment to the account to bring the balance down below $1,000 is not permitted.
A prior bankruptcy/CCCS is not permitted within the last three years. The
maximum loan that a borrower with a previous bankruptcy/CCCS can receive is
$25,000 and his/her maximum debt-to-income ratio is 40%. If the borrower is
self-employed, a minimum of two years in business is required, the maximum loan
amount is $50,000 and the maximum debt-to-income ratio is 40%. The maximum
debt-to-income ratio is 50% for mortgage loans of $35,000 or less and 45% for
mortgage loans greater than $35,000. The maximum CLTV is 125%. The mortgage loan
maximum is $65,000 for a mortgage loan secured by a single family residence, a
planned urban development or a townhouses and $25,000 for a mortgage loan
secured by a condominium, a 2-4 unit property, a manufactured home or a
pre-fabricated home.
"B+" RISK. Under the "B+" risk category, a minimum credit score of 660
is required. The existing mortgage obligation must be current with no 30-day
late payments in the last 3 months, no more than one 30-day late payments in the
last 12 months, two 30-day late payments in the last 24 months and no 60-day
late payments are permitted in the last 36 months. It is unacceptable if more
than two non-mortgage debts
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are 60 or more days late in the last 12 months or if more than one account is 90
or more days late in the last 12 months. A borrower with a credit history that
includes forbearance's, repossessions, unpaid charge-offs and/or settled/short
pay accounts with aggregate losses greater than $1,000 is unacceptable. Unpaid
judgements greater than $1,000 must be paid at the closing. All items affecting
title must be paid off and loan funds may be used to pay the item in full. Any
unpaid derogatory account greater than $10,000 is not permitted. If the lien was
paid outside of the loan, a release of lien is required to be certain that
HAFSI's lien position is not in jeopardy. If the aggregate balance of all unpaid
collections, judgements, and/or liens not affecting title totals more than
$1,000 these types of accounts must be paid off in full; with the loan funds if
necessary. If a collection account was paid off prior to the date on the credit
report submitted with the loan application, HAFSI will accept a verbal
verification ascertaining this to be true, however a paydown or a partial
payment to the account to bring the balance down below $1,000 is not permitted.
A prior bankruptcy/CCCS is not permitted within the last three years. The
maximum loan that a borrower with a previous bankruptcy/CCCS can receive is
$25,000 and his/her maximum debt-to-income ratio is 40%. If the borrower is
self-employed, a minimum of two years in business is required, the maximum loan
amount is $50,000 and the maximum debt-to-income ratio is 40%. The maximum
debt-to-income ratio is 50% for mortgage loans of $35,000 or less and 45% for
mortgage loans greater than $35,000. The maximum CLTV is 125%. The mortgage loan
maximum is $55,000 for a mortgage loan secured by a single family residence, a
planned urban development or a townhouses and $25,000 for a mortgage loan
secured by a condominium, a 2-4 unit property, a manufactured home or a
pre-fabricated home.
"B" RISK. Under the "B" risk category, a minimum credit score of 640 is
required. The existing mortgage obligation must be current with no 30-day late
payments in the last 3 months, no more than one 30-day late payments in the last
12 months, two 30-day late payments in the last 24 months and no 60-day late
payments are permitted in the last 36 months. It is unacceptable if more than
two non-mortgage debts are 60 or more days late in the last 12 months or if more
than one account is 90 or more days late in the last 12 months. A borrower with
a credit history that includes forbearance's, repossessions, unpaid charge-offs
and/or settled/short pay accounts with aggregate losses greater than $1,000 is
unacceptable. Unpaid judgements greater than $1,000 must be paid at the closing.
All items affecting title must be paid off and loan funds may be used to pay the
item in full. Any unpaid derogatory account greater than $10,000 is not
permitted. If the lien was paid outside of the loan, a release of lien is
required to be certain that HAFSI's lien position is not in jeopardy. If the
aggregate balance of all unpaid collections, judgements, and/or liens not
affecting title totals more than $1,000 these types of accounts must be paid off
in full; with the loan funds if necessary. If a collection account was paid off
prior to the date on the credit report submitted with the loan application,
HAFSI will accept a verbal verification ascertaining this to be true, however a
paydown or a partial payment to the account to bring the balance down below
$1,000 is not permitted. A prior bankruptcy/CCCS is not permitted within the
last three years. The maximum loan that a borrower with a previous
bankruptcy/CCCS can receive is $25,000 and his/her maximum debt-to-income ratio
is 40%. If the borrower is self-employed, a minimum of two years in business is
required, the maximum loan amount is $50,000 and the maximum debt-to-income
ratio is 40%. The maximum debt-to-income ratio is 45% for mortgage loans of
$35,000 or less and 40% for mortgage loans greater than $35,000. The maximum
CLTV is 125%. The mortgage loan maximum is $45,000 for a mortgage loan secured
by a single family residence, a planned urban development or a townhouses and
$25,000 for a mortgage loan secured by a condominium, a 2-4 unit property, a
manufactured home or a pre-fabricated home.
"C" RISK. Under the "C" risk category, a minimum credit score of 630 is
required. The existing mortgage obligation must be current with no 30-day late
payments in the last 3 months, no more than one 30-day late payments in the last
12 months, two 30-day late payments in the last 24 months and no 60-day late
payments are permitted in the last 36 months. It is unacceptable if more than
two non-mortgage debts are 60 or more days late in the last 12 months. A
borrower with a credit history that includes forbearance's,
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repossessions, unpaid charge-offs and/or settled/short pay accounts with
aggregate losses greater than $1,000 is unacceptable. Unpaid judgements are not
allowed. All items affecting title must be paid off and loan funds may be used
to pay the item in full. Any unpaid derogatory account greater than $10,000 is
not permitted. If the lien was paid outside of the loan, a release of lien is
required to be certain that HAFSI's lien position is not in jeopardy. If the
aggregate balance of all unpaid collections, judgements, and/or liens not
affecting title totals more than $1,000 these types of accounts must be paid off
in full; with the loan funds if necessary. If a collection account was paid off
prior to the date on the credit report submitted with the loan application,
HAFSI will accept a verbal verification ascertaining this to be true, however a
paydown or a partial payment to the account to bring the balance down below
$1,000 is not permitted. A prior bankruptcy/CCCS is not permitted. First time
borrowers, relocation borrowers, limited history borrowers, self-employed and
resident alien borrowers are not eligible. The maximum debt-to-income ratio is
40%. The maximum CLTV is 125%. The mortgage loan maximum is $25,000 for a
mortgage loan secured by a single family residence, a planned urban development
or a townhouses. Loans are not permitted for a mortgage loan secured by a
condominium, a 2-4 unit property, a manufactured home or a pre-fabricated home.
EXCEPTIONS. As described above, HAFSI 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 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: good
maintenance; a maximum of one 30-day late payment on all debts during the last
12 months; stable employment; and the length of residence in the subject
property. Accordingly, HAFSI 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.
EMERGENT MORTGAGE CORPORATION
The Mortgage Loans originated or purchased by Emergent Mortgage
Corporation ("Emergent") were underwritten pursuant to the Lending Guidelines of
Emergent.
Emergent's Lending Guidelines are primarily intended to assess the
creditworthiness of the mortgagor and the value of the mortgaged property and to
evaluate the adequacy of such property as collateral for the mortgage loan.
Emergent's primary considerations in underwriting a mortgage loan is the
mortgagor's employment stability, the value of the mortgaged property relative
to the amount of the mortgage loan and the lien position of the Emergent loan.
In addition, Emergent 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.
INCOME VERIFICATION
Under its Lending Guidelines, Emergent 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, reviews the type and use of the property being financed and reviews
the property for compliance with Emergent's standards. Emergent's Lending
Guidelines also provide for the
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classification of self-employed borrowers into one of the following
classifications: sole proprietors, partnerships, S Corporations and Corporations
that file on Form 1120.
Emergent's criteria require it to verify the income of each borrower.
Borrowers are generally required to submit written verification of income
covering the most recent two-year period, together with a current paystub and
two years' W-2 forms or verification of employment. Emergent may also require
evidence of items such as rental income, fixed income, pension, bonuses, capital
gains and alimony. If appropriate compensating factors exist, Emergent may waive
certain documentation requirements for individual borrowers.
LOAN PROGRAMS
Emergent has seventeen loan programs. Following is a description of
each category of Emergent's loan programs, detailing the guidelines it uses to
determine the likelihood that the mortgagor will satisfy the repayment
conditions of a mortgage loan:
"AA GRADE" (FULL INCOME VERIFICATION; LITE DOCUMENTATION; STATED
INCOME). Under the "AA Grade" category, the maximum loan amount for a first
mortgage is $350,000. All interest rates are fixed and the terms of the loans
range from 5 to 30 years. The maximum loan amount for a second mortgage is
$150,000. All interest rates are fixed and the terms of the loans range from 5
to 15 years. The maximum gross debt to income ratio for both first and second
mortgages is 45%. Under the Full Income Verification category, the loan to value
("LTV") ratio allowed for owner occupied, first and second mortgages ranges from
80% to 90%, depending on the type of home and whether it is a first or second
mortgage. The LTV ratio allowed for second home (owner occupied part-time),
first or second mortgages is 80%. The LTV ratio allowed for non-owner occupied,
first or second mortgages ranges from 75% to 80%. Under the Lite Doc category,
the LTV ratio allowed for owner occupied, first and second mortgages ranges from
70% to 80%, depending on the type of home and whether it is a first or second
mortgage. The LTV ratio allowed for second home (owner occupied part-time),
first or second mortgages is 75%. The LTV ratio allowed for non-owner occupied,
first or second mortgages is 70%. Under the Stated Income category, the LTV
ratio allowed for owner occupied, first and second mortgages ranges from 70% to
75%, depending on the type of home and whether it is a first or second mortgage.
The LTV ratio allowed for second homes and nonowner occupied homes (owner
occupied part-time) for first or second mortgages is 70%. In addition, all LTVs
in all of the categories are reduced by 5% for rural properties.
"A GRADE" (FULL INCOME VERIFICATION; LITE DOCUMENTATION; STATED
INCOME). Under the "A Grade" category, the maximum loan amount for a first
mortgage is $350,000. All interest rates are fixed and the terms of the loans
range from 5 to 30 years. The maximum loan amount for a second mortgage is
$150,000. All interest rates are fixed and the terms of the loans range from 5
to 15 years. The maximum gross debt to income ratio for both first and second
mortgages is 45% to 50% depending on the amount of disposable income available
to the borrower and those in the borrower's household. Under the Full Income
Verification category, the LTV ratio allowed for owner occupied, first and
second mortgages ranges from 80% to 90%, depending on the type of home and
whether it is a first or second mortgage. The LTV ratio allowed for second homes
(owner occupied part-time) and non-owner occupied homes with first or second
mortgages is 75%. Under the Lite Doc category, the LTV ratio allowed for owner
occupied first and second mortgages ranges from 70% to 80%, depending on the
type of home and whether it is a first or second mortgage. The LTV ratio allowed
for second home (owner occupied part-time) and non-owner occupied, first or
second mortgages is 70%. Under the Stated Income category, the loan to value
("LTV") ratio allowed for owner occupied, first and second mortgages ranges from
60% to 75%, depending on the type of home and whether it is a first or second
mortgage. The loan to value ("LTV") ratio allowed for
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second homes and non-owner occupied homes (owner occupied part-time) for first
or second mortgages is 60%. In addition, all LTVs are reduced by 5% for rural
properties.
"B GRADE" (FULL INCOME VERIFICATION; LITE DOCUMENTATION; STATED
INCOME). Under the "B Grade" category, the maximum loan amount for a first
mortgage is $350,000. All interest rates are fixed and the terms of the loans
range from 5 to 30 years. All interest rates are fixed and the terms of the
loans range from 5 to 15 months. The maximum gross debt to income ratio for both
first and second mortgages is 45% to 50% depending on the amount of disposable
income available to the borrower and those in the borrower's household. Under
the Full Income Verification category, the LTV ratio allowed for owner occupied,
first and second mortgages ranges from 75% to 85%, depending on the type of home
and whether it is a first or second mortgage. The LTV ratio allowed for second
homes (owner occupied part-time) and non-owner occupied homes with first or
second mortgages ranges from 70% to 75%. Under the Lite Doc category, the LTV
ratio allowed for owner occupied first and second mortgages ranges from 60% to
70%, depending on the type of home and whether it is a first or second mortgage.
The LTV ratio allowed for second home (owner occupied part-time) and non-owner
occupied, first or second mortgages is 60%. Under the Stated Income category,
the LTV ratio allowed for owner occupied, first and second mortgages ranges from
50% to 65%, depending on the type of home and whether it is a first or second
mortgage. The LTV ratio allowed for second homes and non-owner occupied homes
(owner occupied part-time) for first or second mortgages is 50%. In addition,
all LTVs are reduced by 5% for rural properties.
"C GRADE" (FULL INCOME VERIFICATION; LITE DOCUMENTATION; STATED
INCOME). Under the "C Grade" category, the maximum loan amount for a first
mortgage is $250,000. All interest rates are fixed and the terms of the loans
range from 5 to 30 years. The maximum loan amount for a second mortgage is
$150,000. All interest rates are fixed and the terms of the loans range from 5
to 15 years. The maximum gross debt to income ratio for both first and second
mortgages is 50% to 55% depending on the amount of disposable income available
to the borrower and those in the borrower's household. Under the Full Income
Verification category, the LTV ratio allowed for owner occupied, first and
second mortgages ranges from 65% to 80%, depending on the type of home and
whether it is a first or second mortgage. The LTV ratio allowed for second homes
(owner occupied part-time) and non-owner occupied homes with first or second
mortgages ranges from 60% to 65%. Under the Lite Doc and Stated Income
categories, the LTV ratio allowed for owner occupied first and second mortgages
ranges from 60 to 65% and is limited to mortgages on one to four-family units
and townhouses. In addition, the LTV is reduced by 5% for rural properties.
"D GRADE" (FULL INCOME VERIFICATION ONLY). Under the "D Grade"
category, the maximum loan amount for a first mortgage is $250,000. All interest
rates are fixed and the terms of the loans range from 5 to 30 years. The maximum
loan amount for a second mortgage is $100,000. All interest rates are fixed and
the terms of the loans range from 5 to 15 years. The maximum gross debt to
income ratio for both first and second mortgages is 50% to 55% depending on the
amount of disposable income available to the borrower and those in the
borrower's household. The LTV ratio allowed for owner occupied, first and second
mortgages ranges from 55% to 70% depending on the type of home and whether it is
a first or second mortgage. In addition, the LTV is reduced by 5% for rural
properties.
"$60,000 2ND MORTGAGE/90%-100% LTV" (FULL INCOME VERIFICATION ONLY).
Under the "$60,000 2nd Mortgage/90%-100% LTV" category, the maximum loan amount
for a first mortgage is $60,000. All interest rates are fixed and the terms of
the loans range from 5 to 15 years. The maximum gross debt to income ratio for
both first and second mortgages is 45% depending on the amount of disposable
income available to the borrower and those in the borrower's household. The
property types available to obtain this loan are owner-occupies properties only,
and exclude condominiums, second homes, rentals and single-wide
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mobile homes. In addition, there are strict requirements as to the borrower's
credit history, employment history, income and length of residency at the
property.
"$15,000 2ND MORTGAGE/UP TO 100% LTV - 1ST MORTGAGE PURCHASE OR
REFINANCE" (FULL INCOME VERIFICATION ONLY). Under the "$15,000 2nd Mortgage/up
to 100% LTV - 1st Mortgage Purchase or Refinance" category, the maximum loan
amount for a first mortgage is $3,500. All interest rates are fixed at 17.95%
and the terms of the loans range from 5 to 15 years. The maximum gross debt to
income ratio for both first and second mortgages is 50% depending on the amount
of disposable income available to the borrower and those in the borrower's
household. The property types available to obtain this loan are owner-occupies
properties only, and exclude condominiums, second homes, rentals and single-wide
mobile homes. In addition, there are strict requirements as to the borrower's
credit history, employment history, income and length of residency at the
property.
"MIXED USE" (FULL INCOME VERIFICATION ONLY). Under the "Mixed Use"
category, the maximum loan amount for a first mortgage is $350,000. All interest
rates are fixed and the terms of the loans range from 5 to 30 years. The maximum
gross debt to income ratio for both first and second mortgages is 45% to 50%
depending on the amount of disposable income available to the borrower and those
in the borrower's household. The minimum LTV is 65% on first mortgage, owner and
non-owner occupies 2 to 4 unit maximum properties.
"125% LTV ". Under the "125% LTV" category, the maximum LTV is 125%,
the maximum cash- out is $25,000 and the maximum loan amount is $50,000 for a
single-family residence of one to four units, first or second lien, excluding
manufactured homes and the minimum amount is $10,000. In addition, a minimum
credit score of 620 is required, the maximum loan term is 180 months and there
must have been no bankruptcies in the last seven years and or foreclosures ever.
In addition, Emergent will examine the borrowers mortgage history, credit
history, employment history and imposes certain appraisal requirements.
Generally, Emergent requires that any loan with a CLTV over 100% must have a
credit score over 620.
"PURCHASE MONEY LOANS". Purchase Money Loans are subject to the same
underwriting standards as refinancing loans except for several conditions such
as their availability to all credit grades and certain criteria for down
payments.
CREDIT AND APPRAISAL
The required credit profile for all categories of Emergent's loan
program examine the borrower's: recent mortgage payment history, the general
recent credit history, history of bankruptcy, judgments, open liens and
foreclosures in the borrower's credit file and the number of trades in the
borrower's credit file. Emergent may also require additional documentation
beyond its normal requirements.
Regarding appraisals, property requirements and property limitations,
Emergent specifies properties which are acceptable and unacceptable. Acceptable
properties include several types of owner and non-owner occupied on to four-unit
residential properties. Unacceptable properties include those in average minus
or worse condition (unless they are being corrected to average or better),
commercial properties, resort type properties and properties with less than 750
square feet.
COMPENSATING FACTORS
Emergent will sometimes make exceptions to its Lending Guidelines,
where one or more compensating factors are present. These factors include low
LTVs coupled with a large down payment,
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where the borrower has a long time job with stability and where the borrower has
a large cash flow or significant verified savings.
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PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
SOUTHERN PACIFIC SECURED ASSETS CORP.
The mortgage pass-through certificates ("Certificates") or mortgage-backed notes
("Notes") offered hereby (the "Offered Securities") and by the supplements
hereto (each, a "Prospectus Supplement") will be offered from time to time in
series. The Offered Securities of each series, together with any other mortgage
pass-through certificates or mortgage-backed notes of such series, are
collectively referred to herein as the "Securities."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of Notes will represent
indebtedness of, a trust fund (with respect to any series, the "Trust Fund") to
be established by Southern Pacific Secured Assets Corp. (the "Company"). Each
Trust Fund will consist primarily of a segregated pool (a "Mortgage Pool") of
one- to four-family and/or multifamily residential first and/or junior mortgage
loans or manufactured housing conditional sales contracts and installment loan
agreements (collectively, the "Mortgage Loans") or interests therein (which may
include Mortgage Securities as defined herein), acquired by the Company from one
or more affiliated or unaffiliated institutions (the "Sellers"). See "The
Company" and "The Mortgage Pools." The Mortgage Loans and other assets in each
Trust Fund will be held in trust for the benefit of the holders of the related
series of Securities (the "Securityholders") pursuant to (i) with respect to
each series of Certificates, a pooling and servicing agreement or other
agreement (in either case, a "Pooling Agreement") or (ii) with respect to each
series of Notes, an indenture (an "Indenture"), in each case as more fully
described herein and in the related Prospectus Supplement. Information regarding
the Offered Securities of a series, and the general characteristics of the
Mortgage Loans and other assets in the related Trust Fund, will be set forth in
the related Prospectus Supplement.
Each series of Securities will include one or more classes. Each class of
Securities of any series will represent the right, which right may be senior or
subordinate to the rights of one or more of the other classes of the Securities,
to receive a specified portion of payments of principal or interest (or both) on
the Mortgage Loans and other assets in the related Trust Fund in the manner
described herein and in the related Prospectus Supplement. A series may include
one or more classes of Securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of Securities which differ as to the
timing, sequential order, priority of payment, pass-through rate or amount of
distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF SECURITIES WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY, EXCEPT
AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER (THE
"MASTER SERVICER") FOR ANY SERIES OF SECURITIES WILL BE NAMED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH INCLUDE ITS LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE RELATED MORTGAGE LOANS). SEE "DESCRIPTION OF THE SECURITIES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include any one or any combination of a mortgage pool
insurance policy, letter of credit, bankruptcy bond, special hazard insurance
policy, reserve fund or other form of credit support. In addition to or in lieu
of the foregoing, credit enhancement may be provided by means of subordination
of one or more classes of Securities. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Securities entitled to a
portion of principal payments on the Mortgage Loans and other assets in the
related Mortgage Pool will depend on the priority of payment of such class and
the rate and timing of principal payments (including by reason of prepayments,
defaults, liquidations and repurchases of Mortgage Loans) on such Mortgage Loans
and other assets. A rate of principal payment slower or faster than that
anticipated may affect the yield on a class of Securities in the manner
described herein and in the related Prospectus Supplement. See "Yield
Considerations."
With respect to each series of Certificates, one or more separate elections may
be made to treat the related Trust Fund or a designated portion thereof as a
real estate mortgage investment conduit ("REMIC") for federal income tax
purposes. If applicable, the Prospectus Supplement for a series of Certificates
will specify which class or classes of the related series of Certificates will
be considered to be regular interests in the related REMIC and which class of
Certificates or other interests will be designated as the residual interest in
the related REMIC. See "Certain Federal Income Tax Consequences" herein.
Prospective investors should review the information appearing under the caption
"Risk Factors" herein and such information as may be set forth under the caption
"Risk Factors" in the related Prospectus Supplement before purchasing any
Offered Security.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SECURITIES OF ANY SERIES NOR THE UNDERLYING MORTGAGE LOANS OR
MORTGAGE SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
RESPECTIVE AFFILIATES, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Offered Securities may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Securities of any series prior
to the offering thereof. There can be no assurance that a secondary market for
any of the Offered Securities will develop or, if it does develop, that it will
continue. The Offered Securities will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is June 23, 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 Events of Default..................57
Amendment............................................................60
Termination; Retirement of Certificates..............................61
The Trustee..........................................................62
Limitations on the Duties of the Trustee.............................62
Certain Matters Regarding the Trustee................................62
Resignation and Removal of the Trustee...............................62
YIELD CONSIDERATIONS..........................................................63
MATURITY AND PREPAYMENT CONSIDERATIONS........................................65
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................66
Single Family Loans and Multifamily Loans............................66
Contracts............................................................67
Foreclosure on Mortgages and Certain Contracts.......................68
Repossession with respect to Contracts...............................70
Rights of Redemption.................................................71
Anti-Deficiency Legislation and Other Limitations on
Lenders.....................................................71
Environmental Legislation............................................73
Consumer Protection Laws with respect to Contracts
...........................................................74
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......................77
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..................................................94
STATE AND OTHER TAX CONSEQUENCES.............................................102
ERISA CONSIDERATIONS.........................................................102
Representation from Plans Investing in Notes with
"Substantial Equity Features" or Certain
Certificates...............................................105
Tax Exempt Investors................................................106
Consultation with Counsel...........................................106
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
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<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., 4949 Meadows Road, Suite 600, Lake
Oswego, Oregon 97035, or by telephone at (503) 303-5400. The Company has
determined that its financial statements will not be material to the offering of
any Offered Securities.
-3-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Offered Securities of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
elsewhere in this Prospectus. An index indicating where certain capitalized
terms used herein are defined appears at the end of this Prospectus.
Securities Offered........................Mortgage pass-through certificates or
mortgage-backed notes. The mortgage
pass-through certificates (the
"Offered Certificates") or
mortgage-backed notes (the "Offered
Notes"; the Offered Notes or the
Offered Certificates, the "Offered
Securities") offered hereby and by the
various Prospectus Supplements with
respect hereto will be offered from
time to time in series. The Offered
Securities of each series, together
with any other mortgage pass-through
certificates or mortgage- backed notes
of such series, are collectively
referred to herein as the
"Securities."
Company...................................Southern Pacific Secured Assets Corp.
(the "Company"), a wholly-owned
subsidiary of Southern Pacific Funding
Corporation ("SPFC"). See "The
Company."
Master Servicer...........................The master servicer (the "Master
Servicer"), if any, for a series of
Securities will be specified in the
related Prospectus Supplement and may
be SPFC or another affiliate of the
Company. See "Servicing of Mortgage
Loans--The Master Servicer."
Special Servicer..........................The special servicer (the "Special
Servicer"), if any, for a series of
Securities will be specified, or the
circumstances under which a Special
Servicer will be appointed will be
described, in the related Prospectus
Supplement. Any Special Servicer may
be an affiliate of the Company. See
"Servicing of Mortgage Loans--Special
Servicers."
Issuer....................................With respect to each series of Notes,
the issuer (the "Issuer") will be the
Company or an owner trust established
by it for the purpose of issuing such
series of Notes. Each such owner trust
will be created pursuant to a trust
agreement (the "Owner Trust
Agreement") between the Company,
acting as depositor, and the Owner
Trustee. Each series of Notes will
represent indebtedness of the Issuer
and will be issued pursuant to an
indenture between the Issuer and the
Trustee (the "Indenture") whereby the
Issuer will pledge the Trust Fund to
secure the Notes under the lien of the
Indenture.
-4-
<PAGE>
As to each series of Notes where the
Issuer is an owner trust, the
ownership of the Trust Fund will be
evidenced by certificates (the "Equity
Certificates") issued under the Owner
Trust Agreement, which are not offered
hereby. The Notes will represent
nonrecourse obligations solely of the
Issuer, and the proceeds of the Trust
Fund will be the sole source of
payments on the Notes, except as
described herein under "Description of
Credit Enhancement" and in the related
Prospectus Supplement.
Trustees..................................The trustee or indenture trustee
(each, the "Trustee") for each series
of Certificates and Notes,
respectively, will be named in the
related Prospectus Supplement. The
Owner Trustee (the "Owner Trustee")
for each series of Notes will be named
in the related Prospectus Supplement.
See "The Agreements--The Trustee."
The Securities............................Each series of Securities will include
one or more classes of Securities
which will represent either (i) with
respect to each series of
Certificates, in the aggregate the
entire beneficial ownership interest
in, or (ii) with respect to each
series of Notes, indebtedness of, a
segregated pool of Mortgage Loans
(exclusive of any portion of interest
payments (the "Spread") relating to
each Mortgage Loan retained by the
Company or any of its affiliates) or
interests therein (which may include
Mortgage Securities as defined
herein), and certain other assets as
described below (collectively, a
"Trust Fund"), and will be issued
pursuant to either (i) with respect to
each series of Certificates, a pooling
and servicing agreement or other
agreement specified in the related
Prospectus Supplement (in either case,
a "Pooling Agreement") or (ii) with
respect to each series of Notes, an
indenture specified in the related
Prospectus Supplement (the
"Indenture"). Except for certain Strip
Securities and REMIC Residual
Certificates (each as hereinafter
described), each series of Securities,
or class of Securities in the case of
a series consisting of two or more
classes, will have a stated principal
balance and will be entitled to
distributions of interest based on a
specified interest rate or rates
(each, a "Security Interest Rate").
The Security Interest Rate of each
Security offered hereby will be stated
in the related Prospectus Supplement
as the "Pass-Through Rate" with
respect to a Certificate and the "Note
Interest Rate" with respect to a Note.
Each series or class of Securities may
have a different Security Interest
Rate, which may be a fixed, variable
or adjustable Security Interest Rate,
or any combination of two or more such
Security Interest
-5-
<PAGE>
Rates. The related Prospectus
Supplement will specify the Security
Interest Rate or Rates for each series
or class of Securities, or the initial
Security Interest Rate or Rates and
the method for determining subsequent
changes to the Security Interest Rate
or Rates.
A series may include one or more
classes of Securities ("Strip
Securities") entitled (i) to principal
distributions, with disproportionate,
nominal or no interest distribu tions,
or (ii) to interest distributions,
with dispropor tionate, nominal or no
principal distributions. In addition,
a series may include two or more
classes of Securities which differ as
to timing, sequential order, priority
of payment, pass-through rate or
amount of distributions of principal
or interest or both, or as to which
distributions of principal or interest
or both on any class may be made upon
the occurrence of specified events, in
accordance with a schedule or formula,
or on the basis of collections from
designated portions of the Mortgage
Pool, which series may include one or
more classes of Securities ("Accrual
Securities"), as to which certain
accrued interest will not be
distributed but rather will be added
to the principal balance thereof on
each Distribution Date, as hereinafter
defined, in the manner described in
the related Prospectus Supplement.
If so provided in the related
Prospectus Supplement, a series of
Securities may include one or more
classes of Securities (collectively,
the "Senior Securities") which are
senior to one or more classes of
Securities (collectively, the
"Subordinate Securities") in respect
of certain distributions of principal
and interest and allocations of losses
on Mortgage Loans. In addition,
certain classes of Senior (or
Subordinate) Securities may be senior
to other classes of Senior (or
Subordinate) Securities in respect of
such distributions or losses. As to
each series of Certificates, one or
more elections may be made to treat
the related Trust Fund or a designated
portion thereof as a "real estate
mortgage investment conduit" or
"REMIC" as defined in the Internal
Revenue Code of 1986 (the "Code"). See
"Description of the Securities."
The Securities will not be guaranteed
or insured by any governmental agency
or instrumentality, by the Company,
the Master Servicer or any of their
respective affiliates or by any other
person, unless otherwise specified in
the related Prospectus Supplement.
-6-
<PAGE>
The Mortgage Pools........................Unless otherwise specified in the
related Prospectus Supplement, each
Trust Fund will consist primarily of a
segregated pool (a "Mortgage Pool") of
mortgage loans and/or manufactured
housing conditional sales and
installment loan agreements
(collectively, the "Mortgage Loans").
Unless otherwise specified in the
related Prospectus Supplement, each
Mortgage Loan will be secured by a
first or junior lien on or security
interest in (i) a one- to four-family
residential property, (ii) a
residential property consisting of
five or more rental or
cooperatively-owned dwelling units or
(iii) a new or used manufactured home
(each, a "Mortgaged Property"). The
Mortgaged Properties may be located in
any one of the 50 states, the District
of Columbia or the Commonwealth of
Puerto Rico. For a description of the
types of Mortgage Loans that may be
included in the Mortgage Pools, see
"The Mortgage Pools--The Mortgage
Loans." The Mortgage Loans will not be
guaranteed or insured by the Company,
any of its affiliates or, unless
otherwise specified in the related
Prospectus Supplement, by any
governmental agency or instrumentality
or any other person.
If specified in the related Prospectus
Supplement, Mortgage Loans which are
converting or converted from an
adjustable-rate to a fixed-rate or
certain Mortgage Loans for which the
Mortgage Rate has been reset may be
repurchased by the Company or
purchased by the related Master
Servicer, the applicable Seller or
another party, or a designated
remarketing agent will use its best
efforts to arrange the sale thereof as
further described herein.
If so specified in the related
Prospectus Supplement, some Mortgage
Loans may be delinquent or
non-performing as of the date of their
deposit in the related Trust Fund.
If specified in the related Prospectus
Supplement, a Trust Fund may include
or consist solely of mortgage
participations or pass-through
certificates evidencing interests in
Mortgage Loans ("Mortgage
Securities"), as described herein. See
"The Mortgage Pools-General" herein.
Unless otherwise specified in the
related Prospectus Supplement, each
Mortgage Loan and Mortgage Security
included in a Trust Fund will have
been selected by the Company from
among those purchased, either directly
or indirectly, from a prior holder
thereof
-7-
<PAGE>
(a "Seller"), which prior holder may
or may not be the originator of such
Mortgage Loan or the issuer of such
Mortgage Security and may be an
affiliate of the Company. A Mortgage
Security included in a Trust Fund,
however, may also have been issued
previously by the Company or an
affiliate thereof.
A Current Report on Form 8-K will be
available upon request to purchasers
of the Offered Securities of the
related series and will be filed,
together with the related Pooling
Agreement, with respect to each series
of Certificates, and the related
Servicing Agreement, Owner Trust
Agreement and Indenture, with respect
to each series of Notes, with the
Securities and Exchange Commission
within fifteen days after such initial
issuance.
Interest Distributions....................Except as otherwise specified herein
or in the related Prospectus
Supplement, interest on each class of
Offered Securities of each series,
other than Strip Securities or Accrual
Securities (prior to the time when
accrued interest becomes payable
thereon), will accrue at the
applicable Security Interest Rate
(which may be a fixed, variable or
adjustable rate or any combination
thereof) on such class's principal
balance outstanding from time to time
and will be remitted on the 25th day
(or, if such day is not a business
day, on the next succeeding business
day) of each month, commencing with
the month following the month in which
the Cut-off Date (as defined in the
applicable Prospectus Supplement)
occurs (each, a "Distribution Date").
Distributions, if any, with respect to
interest on Strip Securities will be
calculated and made on each
Distribution Date as described herein
and in the related Prospectus
Supplement. Interest that has accrued
but is not yet payable on any Accrual
Securities will be added to the
principal balance of such class on
each Distribution Date, and will
thereafter bear interest.
Distributions of interest with respect
to one or more classes of Offered
Securities (or, in the case of a class
of Accrual Securities, accrued
interest to be added to the principal
balance thereof) may be reduced as a
result of the occurrence of certain
delinquencies not covered by advances,
losses, prepayments and other
contingencies described herein and in
the related Prospectus Supplement. See
"Yield Considerations" and
"Description of the Securities."
Principal Distributions...................Except as otherwise specified in the
related Prospectus Supplement,
principal distributions on the
Securities of each series will be
payable on each Distribution Date,
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<PAGE>
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."
Advances..................................If and to the extent described in the
related Prospectus Supplement, and
subject to any limitations specified
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<PAGE>
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 highest rating categories by at
least one Rating Agency will
constitute "mortgage related
securities" for purposes
-10-
<PAGE>
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."
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<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
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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
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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-
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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."
A Mortgage Pool may include Mortgage Loans that are delinquent or
non-performing as of the date the related series of Securities is issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
non-performance and any other information relevant for a prospective purchaser
to make an investment decision.
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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
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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
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* The index (the "Index") for a particular Mortgage Pool will be
specified in the related Prospectus Supplement and may include one of
the following indexes: (i) the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of either six months or one
year, (ii) the weekly auction average investment yield of U.S. Treasury
bills of six months, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board, (iv) the cost of funds of
member institutions for the Federal Home Loan Bank of San Francisco,
(v) the interbank offered rates for U.S. dollar deposits in the London
market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related Prospectus
Supplement or (vi) any other index described in the related Prospectus
Supplement.
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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."
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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
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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.
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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;
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(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
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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
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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.
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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);
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(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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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.
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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 4949 Meadows Road, Suite
600, Lake Oswego, Oregon 97035. Its telephone number is (503) 303-5400.
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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,
while setting forth the material provisions that may be included in the
Agreements, 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
"Certificate" 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 Pooling Agreement
(without exhibits) that relates to any series of Securities without charge upon
written request of a holder of a Certificate of such series addressed to it at
its principal executive offices specified herein under "The Company."
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement or Servicing Agreement for each series of
Certificates will provide that the Master Servicer may not resign from its
obligations and duties thereunder except upon a determination that performance
of such duties is no longer permissible under applicable law or except (a) in
connection with a permitted transfer of servicing or (b) upon appointment of a
successor servicer reasonably acceptable to the Trustee and upon receipt by the
Trustee of a letter from each Rating Agency generally to the effect that such
resignation and appointment will not, in and of itself, result in a downgrading
of the Certificates. No such resignation will become effective until the Trustee
or a successor servicer has assumed the Master Servicer's obligations and duties
under the Pooling Agreement or Servicing Agreement.
Each Pooling Agreement and each 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 holders of any Certificates for
any action taken or for refraining from the taking of any action in good faith
pursuant to such Agreements, 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 each 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 Certificates, other than any loss, liability
or expense related to any specific Mortgage Loan or Mortgage Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the Pooling
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of
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reckless disregard of obligations and duties thereunder. In addition, each
Pooling Agreement and each Servicing Agreement will provide that neither the
Master Servicer nor the Company will be under any obligation to appear in,
prosecute or defend any legal or administrative action that is not incidental to
its respective duties under the Pooling Agreement or Servicing Agreement and
which in its opinion may involve it in any expense or liability. The Master
Servicer or the Company may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Pooling
Agreement or Servicing Agreement and the rights and duties of the parties
thereto and the interests of the holders of the related Certificates 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 any holders of
Certificates.
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 Certificates of the related series that have been rated. In
addition, notwithstanding the prohibition on its resignation, the Master
Servicer may assign its rights under a Pooling Agreement 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 EVENTS OF 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 five 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
holder of a Certificate) 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
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obligated to succeed the Master Servicer but is unwilling so to act, it may
appoint (or if it is unable so to act, it shall appoint) or petition a court of
competent jurisdiction for the appointment of, a FNMA or FHLMC-approved mortgage
servicing institution with a net worth of at least $10,000,000 to act as
successor to the Master Servicer under the Pooling Agreement (unless otherwise
set forth in the Pooling Agreement). Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and such successor may agree upon
the servicing compensation to be paid, which in no event may be greater than the
compensation to the initial Master Servicer under the Pooling Agreement.
No holder of a Certificate 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 holders of such Certificates 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 holders of
Certificates.
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 Certificates 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
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Trustee and such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation to the initial Master
Servicer under the Servicing Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Company
or the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Company or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Company or the Trust Fund; or (v) any other Event of Default
provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, the Trustee or the holders of a majority
of the then aggregate outstanding amount of the Notes of such series may declare
the principal amount (or, if the Notes of that series are Accrual Securities,
such portion of the principal amount as may be specified in the terms of that
series, as provided in the related Prospectus Supplement) of all the Notes of
such series to be due and payable immediately. Such declaration may, under
certain circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment 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
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been given to the Trustee during such 60 day period by the holders of a majority
of the Note Balances of such class. However, the Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
applicable Agreement or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of Notes or Equity Certificates covered by such Agreement, unless
such holders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without the
consent of any of the holders of Certificates covered by such Pooling Agreement,
(i) to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be inconsistent with any other provision therein or to correct any
error, (iii) to change the timing and/or nature of deposits in the Certificate
Account, provided that (A) such change would not adversely affect in any
material respect the interests of any Holder of a Certificate, 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
holder of a Certificate, 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, the related Servicing Agreement may
be amended by the parties thereto, provided that any amendment be accompanied by
a letter from the Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the rating then assigned to the Notes; and provided
further, that the Indenture Trustee may decline to consent (or allow the Issuer
to consent) to such amendment if the Noteholders' rights, duties or immunities
shall be adversely affected.
With respect to each series of Notes, the holders of a majority of the
outstanding Notes, 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.
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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 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 or 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, without obtaining the consent of the Noteholders, for the purpose
of, among other things, curing any ambiguity or correcting or supplementing any
provision in the Indenture that may be inconsistent with any other provision
therein; provided, however, that such action shall not, as evidenced by an
opinion of counsel, (i) adversely affect in any material respect the interests
of any Noteholder or (ii) cause the Issuer to be subject to an entity level tax
for federal income tax purposes.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the related Agreements for each series of
Certificates (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
holders of Certificates 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 "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
Certificates specified in the related Prospectus Supplement in the manner set
forth in the related Prospectus Supplement. Upon the purchase of such
Certificates or at any time thereafter, at the option of the Master Servicer or
the Company, the assets of the Trust Fund may be sold, thereby effecting a
retirement of the Certificates and the termination of the Trust Fund, or the
Certificates so purchased may be held or resold by the Master Servicer or the
Company. In no event, however, will the trust created by the Pooling Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in such Pooling Agreement. Written notice of termination
of the Pooling Agreement will be given to each holder of a Certificate, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the holders of Certificates are
permitted to terminate the trust under the applicable Pooling Agreement, a
penalty may be imposed upon the holder of Certificates based upon the fee that
would be foregone by the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates or Equity Certificates at the price specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Certificates of that series, but the right of the Master
Servicer, the Company or, if applicable, such holder to so purchase is subject
to the aggregate principal balance of the Mortgage Loans and/or Mortgage
Securities in the Trust Fund for that series as of the Distribution Date on
which the purchase
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proceeds are to be distributed to holder of a Certificate being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of such Mortgage Loans and/or Mortgage Securities at the
Cut-off Date for that series. The Prospectus Supplement for each series of
Certificates will set forth the amounts that the holders of such Certificates
will be entitled to receive upon such early retirement. Such early termination
may adversely affect the yield to holders of certain classes of such
Certificates. The foregoing is subject to the provision that if a REMIC election
has been made, the termination of the related Trust Fund will be effected only
in connection with a "qualified liquidation" within the meaning of Section
860F(a)(4) of the Code.
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.
LIMITATIONS ON THE DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Agreements, the Certificates or
any underlying Mortgage Loan, Mortgage Security or related document and will not
be accountable for the use or application by or on behalf of any Master Servicer
or Special Servicer of any funds paid to the Master Servicer or Special Servicer
in respect of the Certificates or the underlying Mortgage Loans or Mortgage
Securities, or any funds deposited into or withdrawn from the Certificate
Account for such series or any other account by or on behalf of the Master
Servicer or Special Servicer. If no Event of Default has occurred and is
continuing, the Trustee for each series of Certificates will be required to
perform only those duties specifically required under the related Pooling
Agreement or Indenture. However, upon receipt of any of the various securities,
reports or other instruments required to be furnished to it pursuant to the
related Pooling Agreement, a Trustee will be required to examine such documents
and to determine whether they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne
by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement
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 Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate undivided interests
(or, if applicable, voting rights) in the
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related Trust Fund. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the price
paid by the holder for such Certificate, the Security Interest Rate on any such
Certificate entitled to payments of interest (which Security Interest Rate may
vary if so specified in the related Prospectus Supplement) and the rate and
timing of principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if applicable)
and other factors.
A class of Securities may be entitled to payments of interest at a fixed
Security Interest Rate, a variable Security Interest Rate or adjustable Security
Interest Rate, or any combination of such Security Interest Rates, each as
specified in the related Prospectus Supplement. A variable Security Interest
Rate may be calculated based on the weighted average of the Mortgage Rates (in
each case, net of the per annum rate or rates applicable to the calculation of
servicing and administrative fees and any Spread (each, a "Net Mortgage Rate"))
of the related Mortgage Loans for the month preceding the Distribution Date if
so specified in the related Prospectus Supplement. As will be described in the
related Prospectus Supplement, the aggregate payments of interest on a class of
Securities, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Securities (or the rate of reduction in the notional
balance of Securities entitled only to payments of interest) and, in the case of
Securities evidencing interests in ARM Loans, by changes in the Net Mortgage
Rates on the ARM Loans. See "Maturity and Prepayment Considerations" below. The
yield on the Securities will also be affected by liquidations of Mortgage Loans
following Mortgagor defaults and by purchases of Mortgage Loans in the event of
breaches of representations made in respect of such Mortgage Loans by the
Company, the Master Servicer and others, or conversions of ARM Loans to a fixed
interest rate. See "The Mortgage Pools--Representations by Sellers" and
"Descriptions of the Securities--Assignment of Trust Fund Assets" above. Holders
of certain Strip Securities or a class of Securities having a Security Interest
Rate that varies based on the weighted average Mortgage Rate of the underlying
Mortgage Loans will be affected by disproportionate prepayments and repurchases
of Mortgage Loans having higher Net Mortgage Rates or rates applicable to the
Strip Securities, as applicable.
With respect to any series of Securities, a period of time will elapse
between the date upon which payments on the related Mortgage Loans are due and
the Distribution Date on which such payments are passed through to
Securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Securityholders on or near the date they were due.
In general, if a class of Securities is purchased at initial issuance at a
premium and payments of principal on the related Mortgage Loans occur at a rate
faster than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
a class of Securities is purchased at initial issuance at a discount and
payments of principal on the related Mortgage Loans occur at a rate slower than
that assumed at the time of purchase, the purchaser's actual yield to maturity
will be lower than that originally anticipated. The effect of principal
prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities, Securities with a Security Interest Rate which
fluctuates inversely with or at a multiple of an index or certain other classes
in a series including more than 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
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underlying Mortgage Loans or a repurchase thereof, the greater will be the
effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of a series of Securities would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Securities and distributable thereon on any
Distribution Date will generally correspond to interest accrued on the principal
balance of Mortgage Loans for their respective full accrual periods.
Consequently, if a prepayment on any Mortgage Loan is distributable to
Securityholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
Spread) may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the Securities
of the related series. If and to the extent that any such shortfall is allocated
to a class of Offered Securities, the yield thereon will be adversely affected.
The Prospectus Supplement for a series of Securities will describe the manner in
which any such shortfalls will be allocated among the classes of such
Securities. If so specified in the related Prospectus Supplement, the Master
Servicer will be required to apply some or all of its servicing compensation for
the corresponding period to offset the amount of any such shortfalls. The
related Prospectus Supplement will also describe any other amounts available to
offset such shortfalls. See Servicing of Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses; Spread".
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans and thus the yield on the
Securities. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. However, there is a risk that
Mortgage Loans, including Multifamily Loans, that require Balloon Payments may
default at maturity, or that the maturity of such a Mortgage Loan may be
extended in connection with a workout. The rate of default on Single Family
Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans, including Multifamily Loans, with high Loan-to- Value Ratios,
may be higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the Mortgagor under each Mortgage Loan generally will be
qualified, or the Mortgage Loan otherwise approved, on the basis of the Mortgage
Rate in effect at origination. The repayment of any such Mortgage Loan may thus
be dependent on the ability of the mortgagor to make larger level monthly
payments following the adjustment of the Mortgage Rate. In addition, the
periodic increase in the amount paid by the Mortgagor of a Buydown Mortgage Loan
during or at the end of the applicable Buydown Period may create a greater
financial burden for the Mortgagor, who might not have otherwise qualified for a
mortgage under applicable underwriting guidelines, and may accordingly increase
the risk of default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination 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
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addition, with respect to certain ARM Loans subject to negative amortization,
during a period of declining interest rates, it might be expected that each
minimum scheduled monthly payment on such a Mortgage Loan would exceed the
amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce the principal balance
of the related class or classes of Securities, the weighted average life of such
Securities will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which such Securities were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the life and yield of the related series of Securities.
With respect to Balloon Loans, payment of the Balloon Payment (which, based
on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Unless otherwise specified in the related Prospectus Supplement,
none of the Company, the Master Servicer, or any of their affiliates will be
obligated to refinance or repurchase any Mortgage Loan or to sell the Mortgaged
Property.
The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located and, in the case of
Multifamily Loans, the quality of management of the Mortgage Properties, the
servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
Mortgage Loans may be affected by the existence of Lock-out Periods and
requirements that principal prepayments be accompanied by Prepayment Premiums,
as well as due-on-sale and due-on-encumbrance provisions, and by the extent to
which such provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures" and "Certain Legal Aspects of
the Mortgage Loans--Enforceability of Certain Provisions" for a description of
certain provisions of the Pooling Agreement and certain legal developments that
may affect the prepayment experience on the Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally will,
unless otherwise specified in the related Prospectus Supplement, (i) not
increase or decrease such Mortgage Rates by more than a fixed percentage amount
on each adjustment date, (ii) not increase such Mortgage Rates over a fixed
percentage amount during the life of any ARM Loan and (iii) be based on an 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.
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There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the Mortgage Loans over an extended period of time. All statistics known to
the Company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the Mortgage Loans or as to the
relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates or Equity Certificates may have the option to purchase the
assets in a Trust Fund and effect early retirement of the related series of
Securities. See "The Agreements--Termination; Retirement of Securities."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS
GENERAL. Each Single Family and Multifamily Loan will, and if applicable,
Contracts, be evidenced by a note or bond and secured by an instrument granting
a security interest in real property, which may be a mortgage, deed of trust or
a deed to secure debt, depending upon the prevailing practice and law in the
state in which the related Mortgaged Property is located, and may have first,
second or third priority. Mortgages and deeds to secure debt are herein referred
to as "mortgages." Contracts evidence both the obligation of the obligor to
repay the loan evidenced thereby and grant a security interest in the related
Manufactured Homes to secure repayment of such loan.
However,
as Manufactured Homes have become larger and often have been attached to their
sites without any apparent intention by the borrowers to move them, courts in
many states have held that Manufactured Homes may, under certain circumstances
become subject to real estate title and recording laws. See "-- Contracts"
below. In some states, a mortgage or deed of trust creates a lien upon the real
property encumbered by the mortgage or deed of trust. However, in other states,
the mortgage or deed of trust conveys legal title to the property respectively,
to the mortgagee or to a trustee for the benefit of the mortgagee subject to a
condition subsequent (i.e., the payment of the indebtedness secured thereby).
The lien created by the mortgage or deed of trust is not prior to the lien for
real estate taxes and assessments and other charges imposed under governmental
police powers. Priority between mortgages depends on their terms or on the terms
of separate subordination or inter-creditor agreements, the knowledge of the
parties in some cases and generally on the order of recordation of the mortgage
in the appropriate recording office. There are two parties to a mortgage, the
mortgagor, who is the borrower and homeowner, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. Although a deed of trust is similar to a 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
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interest as landlord under each lease and the income derived therefrom, while
(unless rents are to be paid directly to the lender) retaining a revocable
license to collect the rents for so long as there is no default. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect the
rents.
CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related Pooling Agreement or
Servicing Agreement to effect such notation or delivery of the required
documents and fees, and to obtain possession of the certificate of title, as
appropriate under the laws of the state in which any Manufactured Home is
registered. In the event the Master Servicer fails, due to clerical errors or
otherwise, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that manufactured homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located. Generally,
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, other parties could obtain an interest in the Manufactured Home
that is prior to the security interest originally retained by the Seller and
transferred to the Company.
The Company will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Company,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Company or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such 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
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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 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
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on the real estate, may, during a reinstatement period, cure the default by
paying the entire amount in arrears plus the costs and expenses incurred in
enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for a credit bid less than or equal to the unpaid principal amount of
note plus the accrued and unpaid interest and the expense of foreclosure, in
which case the mortgagor's debt will be extinguished unless the lender purchases
the property for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment and such remedy is available under state
law and the related loan documents. In the same states, there is a statutory
minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of Securities. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family and
Multifamily Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
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REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law. A
few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice
of the right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be repossessed
in accordance with that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured home
to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants
were residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of the
lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgement in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor
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executes and files various documents in the appropriate real estate records and
all mortgagees under real estate mortgages on the property and the land to which
it was affixed file releases with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. The purposes of a
foreclosure action in respect of a Single Family Property or Multifamily
Property are to enable the lender to realize upon its security and to bar the
borrower, and all persons who have interests in the property that are
subordinate to that of the foreclosing lender, from exercise of their "equity of
redemption". The doctrine of equity of redemption provides that, until the
property encumbered by a mortgage has been sold in accordance with a properly
conducted foreclosure and foreclosure sale, those having interests that are
subordinate to that of the foreclosing lender have an equity of redemption and
may redeem the property by paying the entire debt with interest. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which should
be distinguished from post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
MANUFACTURED HOMES. While state laws do not usually require notice to be
given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Certain states have imposed
statutory prohibitions which limit the remedies of a beneficiary under a deed of
trust or a mortgagee under a mortgage. In some states (including California)
statutes limit the right of the beneficiary or mortgagee to obtain a deficiency
judgment against the borrower following foreclosure. A deficiency judgment is a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets 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
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requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, under the federal Bankruptcy Code, as
amended from time to time (Title 11 of the United States Code) (the "Bankruptcy
Code"), virtually all actions (including foreclosure actions and deficiency
judgment proceedings) to collect a debt are automatically stayed upon the filing
of the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in a bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out of
such junior lien. Moreover, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearage within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
In the case of income-producing multifamily properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender 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.
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ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed- in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related series of
Certificates. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an "Environmental Lien"). All subsequent
liens on such property generally are subordinated to such an Environmental Lien
and, in some states, even prior recorded liens are subordinated to Environmental
Liens. In the latter states, the security interest of the Trustee in a related
parcel of real property that is subject to such an Environmental Lien could be
adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not made
and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a 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.
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CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related Pooling Agreement or Servicing Agreement, late charges will be
retained by the Master Servicer as additional servicing compensation, and any
inability to collect these amounts will not affect payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder. Most of the
Contracts in a Trust Fund will be subject to the requirements of the FTC Rule.
Accordingly, the Trust Fund, as holder of the Contracts, will be subject to any
claims or defenses that the purchaser of the related manufactured home may
assert against the seller of the manufactured home, subject to a maximum
liability equal to the amounts paid by the obligor on the Contract. If an
obligor is successful in asserting any such claim or defense, and if the Seller
had or should have had knowledge of such claim or defense, the Master Servicer
will have the right to require the Seller to repurchase the Contract because of
a breach of its Seller's representation and warranty that no claims or defenses
exist that would affect the obligor's obligation to make the required payments
under the Contract. The Seller would then have the right to require the
originating dealer to repurchase the Contract from it and might also have the
right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
ENFORCEABILITY OF CERTAIN PROVISIONS
TRANSFER OF SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. Unless the
related Prospectus Supplement indicates otherwise, the Single Family Loans and
Multifamily Loans generally contain due-on-sale clauses. These clauses permit
the lender to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property without the prior consent of the lender. The
enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
was limited or denied. However, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn-St Germain Act") preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
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
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prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing contracts
contain provisions prohibiting the sale or transfer of the related manufactured
homes without the consent of the obligee on the contract and permitting the
acceleration of the maturity of such contracts by the obligee on the contract
upon any such sale or transfer that is not consented to. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will, to the
extent it has knowledge of such conveyance or proposed conveyance, exercise or
cause to be exercised its rights to accelerate the maturity of the related
Contracts through enforcement of due-on-sale clauses, subject to applicable
state law. In certain cases, the transfer may be made by a delinquent obligor in
order to avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages, as
well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In certain states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the enforceability
of provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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
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the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum Mortgage
Rates for ARM Loans, as set forth in the related Prospectus
Supplement.
As indicated above under "The Mortgage Pools--Representations by Sellers,"
each Seller of a Mortgage Loan will have represented that such Mortgage Loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Mortgage Loans will
be subject to applicable usury laws as in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, (i) state-chartered banks may originate
alternative mortgage instruments in accordance with regulations promulgated by
the Comptroller of the Currency with respect to origination of alternative
mortgage instruments by national banks, (ii) state-chartered credit unions may
originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with respect to
origination of alternative mortgage instruments by federal credit unions, and
(iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mutual savings banks and mortgage banking companies, may originate alternative
mortgage instruments in accordance with the regulations promulgated by the
Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision,
with respect to origination of alternative mortgage instruments by federal
savings and loan associations. Title VIII provides that any state may reject
applicability of the provisions of Title VIII by adopting, prior to October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
such provisions. Certain states have taken such action.
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
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could suffer a loss if (i) the related Seller fails or cannot be required to
repurchase the affected Contract for a breach of representation and warranty and
(ii) the Master Servicer or the Trustee were unsuccessful in asserting any claim
of contribution or subrogation on behalf of the Securityholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, by any Letter of Credit or any other form of credit
enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan or enforce rights
under a Contract during the Mortgagor's period of active duty status, and, under
certain circumstances, during an additional three month period thereafter. Thus,
in the event that the Relief Act or similar legislation or regulations applies
to any Mortgage Loan which goes into default, there may be delays in payment and
losses on the related Securities in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the Mortgage Loans resulting
from similar legislation or regulations may result in delays in payments or
losses to Securityholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
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
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or satisfies the defaulted senior loan or loans. A junior mortgagee may satisfy
a defaulted senior loan in full or, in some states, may cure such default and
bring the senior loan current thereby reinstating the senior loan, in either
event usually adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee. Where applicable law
or the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of any such notice may prevent the
junior mortgagee from exercising any right to reinstate the loan which
applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First Circuit,
held that state restrictions on the compounding of interest are not preempted by
the provisions of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("DIDMC") and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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
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be given the IRS will not take contrary positions. Taxpayers and preparers of
tax returns (including those filed by any REMIC or other issuer) should be aware
that under applicable Treasury regulations a provider of advice on specific
issues of law is not considered an income tax return preparer unless the advice
(i) is given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the consequences of contemplated
actions, and (ii) is directly relevant to the determination of an entry on a tax
return. Accordingly, taxpayers should consult their own tax advisors and tax
return preparers regarding the preparation of any item on a tax return, even
where the anticipated tax treatment has been discussed herein. In addition to
the federal income tax consequences described herein, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of three general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee, the Master Servicer or another specified
party (the "REMIC Administrator") will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) notes representing indebtedness of a trust
fund as to which no REMIC election will be made and (iii) certificates ("Grantor
Trust Certificates") representing interests in a Trust Fund ("Grantor Trust
Fund") as to which no REMIC election will be made. The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election (or
elections) will be made for the related Trust Fund and, if such an election is
to be made, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, references to a "Securityholder"
or a "holder" are to the beneficial owner of a Security.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS. Upon the issuance of each series of REMIC
Certificates, Thacher Proffitt & Wood, counsel to the Company, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling Agreement, the related Trust Fund (or each applicable
portion thereof) will qualify as a REMIC and the REMIC Certificates offered with
respect thereto will be considered to evidence ownership of "regular interests"
("REMIC Regular Certificates") or "residual interests" ("REMIC Residual
Certificates") in that REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, 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
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Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for regular or residual interests therein. The determination as to the
percentage of the REMIC's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The REMIC Administrator will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not be
treated entirely as assets described in the foregoing sections of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is considered part of
the Mortgage Loans for purposes of Section 856(c)(5)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(C)(5)(A) of the Code.
TIERED REMIC STRUCTURES. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related Pooling Agreement, the
Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued by
the Tiered REMICs, respectively, will be considered to evidence ownership of
REMIC Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual
method.
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
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pricing the initial offering of such REMIC Regular Certificate. The prepayment
assumption (the "Prepayment Assumption") used in reporting original issue
discount for each series of REMIC Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, neither the Company, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such REMIC
Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
the day prior to each Distribution Date, in some cases, as a consequence of this
"long first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
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
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of which is the stated redemption price at maturity of such REMIC Regular
Certificate. Under the OID Regulations, original issue discount of only a de
minimis amount (other than de minimis original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday) will be
included in income as each payment of stated principal is made, based on the
product of the total amount of such de minimis original issue discount and a
fraction, the numerator of which is the amount of such principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
Regular Certificate. The OID Regulations also would permit a Certificateholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" for a description of such election under the OID
Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to the day prior to each Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date), a calculation will be made of the portion
of the original issue discount that accrued during such accrual period. The
portion of original issue discount that accrues in any accrual period will equal
the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
REMIC Regular Certificate, if any, in future periods and (B) the distributions
made on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption price, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC Regular
Certificate will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption, (ii) using a discount rate
equal to the original yield to maturity of the Certificate. For these purposes,
the original yield to maturity of the Certificate will be calculated based on
its issue price and assuming that distributions on the Certificate will be made
in all accrual periods based on the Mortgage Loans being prepaid at a rate equal
to the Prepayment Assumption and (iii) taking into account events (including
actual prepayments) that have occurred before the close of the accrual period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price 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
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market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"Taxation of Owners of REMIC Regular Certificates--Premium" below. Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable, except with the
approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to 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
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during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule
described above will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. 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
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income of the REMIC will be determined under the rules described below in
"Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions" and
"noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue 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.
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Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
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A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS. Although it
has not done so, the Treasury 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
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applicable tax treaty with respect to the 30% United States withholding tax
imposed on distributions to REMIC Residual Certificateholders that are foreign
investors. See, however, "--Foreign Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax, excess inclusions
will not be permitted to be offset by the alternative tax net operating loss
deduction and alternative minimum taxable income may not be less than the
taxpayer's excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the tentative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, 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
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thus may not be marked to market. Prospective purchasers of a Residual
Certificate should consult their tax advisors regarding the possible application
of the mark-to-market requirement to Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described under
"--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net Losses
and Distributions." Except as provided in the following four 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."
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REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code imposes a
tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income 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
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assets to do so, and provided further that such tax arises out of a breach of
the Master Servicer's or the Trustee's obligations, as the case may be, under
the related Pooling Agreement and in respect of compliance with applicable laws
and regulations. Any such tax not borne by the Master Servicer or the Trustee
will be charged against the related Trust Fund resulting in a reduction in
amounts payable to holders of the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling Agreement, and will be discussed more fully in any Prospectus Supplement
relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization. For taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the 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
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on such REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in such Certificate, such REMIC Residual
Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of such difference, and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and under the terms of the related Agreement, will either (i) be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects or (ii)
will be designated as and will act as the "tax matters person" with respect to
the related REMIC in all respects and will hold at least a nominal amount of
REMIC Residual Certificates.
The REMIC Administrator, as the tax matters person or as agent for the tax
matters person, subject to certain notice requirements and various restrictions
and limitations, generally will have the authority to act on behalf of the REMIC
and the REMIC Residual Certificateholders in connection with the administrative
and judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report such REMIC items consistently with their treatment on
the REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the REMIC Administrator, as either tax matters person or as
agent for the tax matters person, and the IRS concerning any such REMIC item.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from such an audit,
could result in an audit of a REMIC Residual Certificateholder's return. Any
person that holds a REMIC Residual Certificate as a nominee for another person
may be required to furnish the REMIC, in a manner to be provided in Treasury
regulations, with the name and address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of
REMIC
Regular Certificates that are corporations, trusts, securities dealers and
certain other non-individuals will be provided interest and original issue
discount income information and the information set forth in the following
paragraph upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of 30 days after the
end of the quarter for which the information was requested, or two weeks after
the receipt of the request. The REMIC must also comply with rules requiring a
REMIC Regular Certificate issued with original issue discount to disclose on its
face the amount of original issue discount and the issue date, and requiring
such information to be reported to the IRS. Reporting with respect to the REMIC
Residual Certificates, including income, excess inclusions, investment expenses
and relevant information regarding qualification of the REMIC's assets will be
made as required under the Treasury regulations, generally on a quarterly basis.
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
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income tax. Furthermore, certain penalties may be imposed by the IRS on a
recipient of payments that is required to supply information but that does not
do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular Certificateholder
that is not a "United States person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in the related Prospectus Supplement, be subject
to United States federal income or withholding tax in respect of a distribution
on a REMIC Regular Certificate, provided that the holder complies to the extent
necessary with certain identification requirements (including delivery of a
statement, signed by the Certificateholder under penalties of perjury,
certifying that such Certificateholder is not a United States person and
providing the name and address of such Certificateholder). For these purposes,
"United States person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof (except, in the
case of a partnership, to the extent provided in regulations), or an estate
whose income is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. To the extent prescribed in regulations by the Secretary of the
Treasury, which regulations have not yet been issued, a trust which was in
existence on August 20, 1996 (other than a trust treated as owned by the grantor
under subpart E of part I of subchapter J of chapter 1 of the Code), and which
was treated as a United States person on August 19, 1996, may elect to continue
to be treated as a United States person notwithstanding the previous sentence.
It is possible that the IRS may assert that the foregoing tax exemption should
not apply with respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling Agreement.
NOTES
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).
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TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs --
Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of
Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the Company,
will deliver their opinion to the effect that, assuming compliance with all
provisions of the related Pooling Agreement and upon issuance of such Grantor
Trust Certificates, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of Chapter 1 of the Code
and not as a partnership or an association taxable as a corporation.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Company will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s]
(including any participation or Certificate of beneficial ownership therein)
which . . .[are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3) of the Code; and (iii) "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code. In addition, counsel to the
Company will deliver an opinion that interest on Grantor Trust Fractional
Interest Certificates will to the same extent be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code.
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
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shares of the entire income from the Mortgage Loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, Section 68 of
the Code provides that the amount of itemized deductions otherwise allowable for
an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted gross
income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) 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
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the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Company, the Master Servicer, any
subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, for taxable years beginning after August 5, 1997,
Section 1272(a)(6) of the Code requires (i) the use of a reasonable prepayment
assumption in accruing original issue discount and (ii) adjustments in the
accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997 or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "--REMICs--Taxation
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
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on the original mortgage loan (before subtracting any servicing fee or any
stripped coupon). If interest payable on a Grantor Trust Fractional Interest
Certificate is more than one percentage point lower than the gross interest rate
payable on the Mortgage Loans, the related Prospectus Supplement will disclose
that fact. If the original issue discount or market discount on a Grantor Trust
Fractional Interest Certificate determined under the stripped bond rules is less
than 0.25% of the stated redemption price multiplied by the weighted average
maturity of the Mortgage Loans, then such original issue discount or market
discount will be considered to be de minimis. Original issue discount or market
discount of only a de minimis amount will be included in income in the same
manner as de minimis original issue and market discount described in
"Characteristics of Investments in Grantor Trust Certificates--If Stripped Bond
Rules Do Not Apply" and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate to
the extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments. The determination as to whether original issue discount
will be considered to be de minimis will be calculated using the same test
described in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool 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
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price of a Mortgage Loan on any given day equals the sum of (i) the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Mortgage Loan at the beginning of the accrual period that includes such day
and (ii) the daily portions of original issue discount for all days during such
accrual period prior to such day. The adjusted issue price of a Mortgage Loan at
the beginning of any accrual period will equal the issue price of such Mortgage
Loan, increased by the aggregate amount of original issue discount with respect
to such Mortgage Loan that accrued in prior accrual periods, and reduced by the
amount of any payments made on such Mortgage Loan in prior accrual periods of
amounts included in its stated redemption price.
In addition to its regular reports, the Master Servicer or the Trustee,
except as provided in the related Prospectus Supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount," that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original 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
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deferral of interest expense deductions attributable to accrued market discount
not yet includible in income, unless an election has been made to report market
discount currently as it accrues. This rule applies without regard to the
origination dates of the Mortgage Loans.
PREMIUM. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their own tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
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
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to August 5, 1997, or whether use of a prepayment assumption may be required or
permitted in the absence of such provisions. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Certificates. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the Mortgage Loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code, as
described above, or due to their similarity to other mortgage-backed securities
(such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code) that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from 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.
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Assuming that a prepayment assumption were used, if the Contingent Payment
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules
to the Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING. Except as set forth in the related Prospectus
Supplement, the Master Servicer or the Trustee will furnish to each holder of a
Grantor Trust Fractional Interest Certificate with each distribution a statement
setting forth the amount of such distribution allocable to principal on the
underlying Mortgage Loans and 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.
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FOREIGN INVESTORS. In general, the discussion with respect to REMIC Regular
Certificates in "REMICS--Foreign Investors in REMIC Certificates" applies to
Grantor Trust Certificates except that Grantor Trust Certificates will, except
as disclosed in the related Prospectus Supplement, be eligible for exemption
from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain specified relationships to such Plans ("Parties in
Interest" within the meaning of ERISA or "Disqualified Persons" within the
meaning of the Code, collectively "Parties in Interest"), unless a statutory or
administrative exemption is available with respect to any such transaction.
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
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any class of equity securities issued by the entity. For this purpose, "Benefit
Plan Investors" include Plans, as well as any "employee benefit plan" (as
defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA, such
as governmental plans (as defined in Section 3(32) of ERISA) and church plans
(as defined in Section 3(33) of ERISA) which have not made an election under
Section 410(d) of the Code, and any entity whose underlying assets include Plan
Assets by reason of a Plan's investment in the entity. In addition, the DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features." Under the
DOL Regulations, Plan Assets will be deemed to include an interest in the
instrument evidencing the equity interest of a Plan (such as a Certificate or a
Note with "substantial equity features"), and, because of the factual nature of
certain of the rules set forth in the DOL Regulations, Plan Assets may be deemed
to include an interest in the underlying assets of the entity in which a Plan
acquires an interest (such as the Trust Fund). Without regard to whether the
Notes are characterized as equity interests, the purchase, sale and holding of
Notes by or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the Issuer, the Trustee or any of their respective affiliates is
or becomes a Party in Interest with respect to such Plan. Neither Plans nor
persons investing Plan Assets should acquire or hold Securities in reliance upon
the availability of any exception under the DOL Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual prohibited transactions exemption
("Exemption") to certain underwriters, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the initial purchase, holding and
subsequent resale of mortgage pass-through certificates underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations", the term "Underwriter" shall include (a) the underwriter, (b)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the underwriter and (c)
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
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person's services under the related Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Sixth, the Exemption states that
the investing Plan or Plan Asset investor must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Securities evidencing
interests in such other investment pools must have been rated in one of the
three highest generic categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of Securities by or on behalf of a Plan
or with Plan Assets; and (iii) Securities evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Securities by or on behalf of a Plan
or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth above
will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the Code
by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection with
the direct or indirect sale, exchange or transfer of Securities in the initial
issuance of such Securities or the direct or indirect acquisition or disposition
in the secondary market of Securities by a Plan or with Plan Assets or the
continued holding of Securities acquired by a Plan or with Plan Assets pursuant
to either of the foregoing. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Security on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections
4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Securities in the initial issuance of Securities between the Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in the
Securities is (a) a mortgagor with respect to 5% or less of the fair market
value of the Trust Fund Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Securities by a Plan or with Plan Assets and (3) the continued holding of
Securities acquired by a Plan or with Plan Assets pursuant to either of the
foregoing.
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
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Transaction Class Exemption ("PTCE") 83-1, regarding transactions involving
mortgage pool investment trusts; PTCE 84-14, regarding transactions effected by
a "qualified professional asset manager"; PTCE 90-1, regarding transactions by
insurance company pooled separate accounts; PTCE 91-38, regarding investments by
bank collective investment funds; PTCE 95-60, regarding transactions by
insurance company general accounts; and PTCE 96-23, regarding transactions
effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Securities by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL is required to issue final
regulations ("401(c) Regulations") no later than December 31, 1997 which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan Assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c) Regulations become final, no person
shall be subject to liability under Part 4 of Title I of ERISA and Section 4975
of the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Securities should consult with their legal counsel
with respect to the applicability of Section 401(c) of ERISA, including the
general account's ability to continue to hold the Securities after the date
which is 18 months after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN CERTIFICATES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies transfers of any such Securities to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Company, the Trustees and the Master Servicer 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.
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An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Securities. Any purchaser of a DTC registered
Security will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security by or
on behalf of, or with Plan Assets of, any Plan is permissible under applicable
law, will not result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences -- Taxation of Owners
of REMIC Residual Certificates -- Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the Trust Fund. Prospective Plan investors should consult
with their legal counsel concerning the impact of ERISA and the Code and the
potential consequences to their specific circumstances prior to making an
investment in the Securities. Neither the Company, the Trustees, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, A FIDUCIARY OF A PLAN OR OTHER PLAN ASSET
INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL CONDITIONS
SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION 401(C) OF
ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER
THE EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE AVAILABILITY OF
THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR
SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
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
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such securities, so long as such contractual commitment was made or such
securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can be
no assurance as to which classes of Offered Securities will be treated as
high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Securities. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Offered Securities. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of SMMEA.
Any such class of Certificates will be identified in the related Prospectus
Supplement. Prospective investors in such classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
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
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make additional sales of securities similar to the Offered Securities from time
to time, but the timing and amount of any such additional offerings will be
dependent upon a number of factors, including the volume of mortgage loans
purchased by the Company, prevailing interest rates, availability of funds and
general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Offered Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Securities of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Company with institutional investors through
dealers; and
3. By direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, the Offered
Securities of any series may be offered in whole or in part in exchange for the
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Certificates.
If underwriters are used in a sale of any Offered Securities (other than in
connection with an underwriting on a best efforts basis), such Certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Company whose identities and relationships to
the Company will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of the
Offered Securities of a particular series will be set forth on the cover of the
Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Offered Securities, underwriters may
receive compensation from the Company or from purchasers of such Certificates in
the form of discounts, concessions or commissions. Underwriters 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
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in connection with reoffers and sales by them of such Certificates. Holders of
Offered Securities should consult with their legal advisors in this regard prior
to any such reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series will be passed
upon for the Company by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of Securities,
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by the holders thereof of all collections on
the underlying mortgage assets to which such holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates and notes, the nature of the underlying mortgage assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and mortgage-backed notes do not represent any assessment of the
likelihood of principal prepayments by borrowers or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
Securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest securities in extreme cases might fail to recoup
their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
401(c) Regulations...........................................................105
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...............................................................72
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, 73
Certificate...................................................................56
Certificate Account...........................................................37
Certificate Registrar.........................................................33
Certificates...................................................................1
Class Exemptions.............................................................104
Closing Date..................................................................81
Code ..................................................................6, 78
Commission.....................................................................3
Committee Report..............................................................80
Company ...................................................................1, 4
Conservation Act..............................................................73
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
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Due Period....................................................................42
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, 79
Grantor Trust Fractional Interest Certificate.................................94
Grantor Trust Fund............................................................79
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
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Mortgages.....................................................................15
Mortgagor.....................................................................13
Multifamily Loans.............................................................15
Multifamily Properties........................................................15
Multifamily Property...........................................................7
Net Mortgage Rate.............................................................63
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.............................................................107
Pool Insurer..................................................................39
Pooling Agreement.......................................................1, 5, 56
Pre-Funding Account...........................................................32
Prepayment Assumption.....................................................81, 96
Prepayment Interest Shortfall.................................................64
Prepayment Penalty............................................................18
Primary Insurance Policy......................................................52
Primary Insurer...............................................................53
Prohibited Transactions Tax...................................................90
Prospectus Supplement..........................................................1
PTCE ....................................................................105
PTCE 83-1....................................................................105
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....................................................................77
REMIC ...............................................................1, 6, 79
REMIC Administrator...........................................................79
REMIC Certificates............................................................79
REMIC Provisions..............................................................79
REMIC Regular Certificates................................................11, 79
REMIC Regulations.............................................................79
REMIC Residual Certificates...............................................11, 79
REO Mortgage Loan.............................................................29
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REO Property..................................................................27
Reserve Fund..................................................................49
RICO .....................................................................77
RTC .....................................................................16
Securities..................................................................1, 4
Securities Act............................................................3, 108
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..........................................................106
Terms and Conditions..........................................................34
Tiered REMICs.................................................................80
Title V .....................................................................75
Title VIII....................................................................76
Trust Agreement................................................................4
Trust Fund..................................................................1, 5
Trustee ......................................................................5
UBTI ....................................................................106
Unaffiliated Sellers..........................................................16
Underwriter..................................................................103
United States person..........................................................93
Value .....................................................................18
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