<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 19, 1997)
$110,330,000
PSB LENDING HOME LOAN OWNER TRUST 1997-4
[ LOGO ]
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
------------------------
The PSB Lending Home Loan Owner Trust 1997-4 will be established pursuant to
a Trust Agreement between Bear Stearns Asset Backed Securities, Inc., as
Depositor, Wilmington Trust Company, as Owner Trustee, Norwest Bank Minnesota,
National Association, in its capacity as Co-Owner Trustee, and PSB Receivables
IV Corp., as FHA Insurance Holder. The Trust will issue Asset Backed Notes
consisting of the following classes: the Class A-1 Notes, the Class A-2 Notes,
the Class A-3 Notes, the Class A-4 Notes, the Class A-5 Notes, the Class M-1
Notes and the Class M-2 Notes (the 'Notes') pursuant to an Indenture between the
Trust and Norwest Bank Minnesota, National Association, in its capacity as
Indenture Trustee. The Trust also will issue two classes of Asset Backed
Certificates consisting of the Class B-1 Certificates and the Class B-2
Certificates (the 'Certificates') pursuant to the Trust Agreement and
instruments evidencing the residual interest in the assets of the Trust (the
'Residual Interest'). The Notes and the Certificates are referred to herein
together as the 'Securities.' Only the Class A-2 Notes, the Class A-3 Notes, the
Class A-4 Notes and the Class A-5 Notes (the 'Offered Notes') are being offered
hereby.
(continued on next page)
------------------------
SEE 'RISK FACTORS' HEREIN ON PAGE S-15 AND IN THE PROSPECTUS ON PAGE 15 FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED NOTES.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF, AND THE CERTIFICATES REPRESENT
INTERESTS IN, THE TRUST. THE OFFERED NOTES DO NOT REPRESENT AN OBLIGATION
OF OR INTEREST IN THE DEPOSITOR, THE TRANSFEROR, THE MASTER SERVICER,
THE SERVICER, THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE, THE INDENTURE
TRUSTEE, THE FHA INSURANCE HOLDER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE OFFERED NOTES NOR A MAJORITY OF THE
UNDERLYING HOME LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL ENTITY, OR BY ANY OTHER PERSON.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
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.
<TABLE>
<CAPTION>
ORIGINAL CLASS NOTE
PRINCIPAL INTEREST PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE(1) PUBLIC(2) DISCOUNT DEPOSITOR(2)(3)
<S> <C> <C> <C> <C> <C>
Class A-2 Notes....................... $ 22,720,000.00 6.70% 99.99612% 0.250% 99.74612%
Class A-3 Notes....................... $ 29,220,000.00 6.85% 99.98211% 0.300% 99.68211%
Class A-4 Notes....................... $ 42,750,000.00 7.22% 99.99248% 0.350% 99.64248%
Class A-5 Notes....................... $ 15,640,000.00 7.63% 99.99767% 0.400% 99.59767%
Total................................. $110,330,000.00 $110,320,311.79 $356,645.00 $109,963,666.79
</TABLE>
(1) The Note Interest Rate of each Class outstanding will increase by 0.50% for
the Due Periods beginning after the Optional Termination Date.
(2) Plus accrued interest, if any, from December 1, 1997.
(3) Before deducting expenses, estimated to be $350,000.
------------------------
The Offered Notes are offered by Bear, Stearns & Co. Inc. (the
'Underwriter') when, as and if issued, delivered to and accepted by the
Underwriter and subject to certain other conditions. It is expected that
delivery of the Offered Notes will be made in book entry form only, through the
Same Day Funds Settlement System of The Depository Trust Company, on or about
December 16, 1997.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 9, 1997
<PAGE>
(Continued from previous page)
The assets of the Trust will primarily include the Home Loan Pool
consisting of Home Loans (defined herein) that will include Conventional Loans
and Title I Loans and that will be secured by Mortgages. Substantially all of
the Mortgages for the Home Loans will be junior in priority to the related first
liens on the related Mortgaged Properties which will consist primarily of owner
occupied single family residences. In addition, a majority of the Home Loans
will be secured by liens on Mortgaged Properties in which the borrowers have no
equity therein at the time of origination (i.e., the related combined
loan-to-value ratios exceed 100%). The Home Loans were generally made to the
related borrowers for the purpose of financing (i) property improvements, (ii)
debt consolidation, (iii) a combination of the foregoing, or (iv) other consumer
purposes. See 'Risk Factors--Additional Factors Affecting Delinquencies,
Defaults and Losses on Home Loans' and 'The Home Loan Pool' herein.
THE HOME LOANS WILL NOT BE COVERED BY ANY MORTGAGE GUARANTY INSURANCE, ANY
SPECIAL HAZARD INSURANCE, ANY FRAUD INSURANCE OR ANY INSURANCE COVERING CERTAIN
LOSSES RESULTING FROM MORTGAGOR BANKRUPTCY PROCEEDINGS, EXCEPT THAT THE TITLE I
LOANS WILL BE PARTIALLY INSURED BY THE FHA. The obligations of the FHA with
respect to the insurance covering the Title I Loans will not be unlimited or
unconditional obligations of the FHA, but will be limited by the amount of
insurance coverage available to reimburse for losses on the Title I Loans
pursuant to the regulations and rules of the FHA under the Title I Program as
described herein. See 'Risk Factors--Adequacy of Credit Enhancement--Additional
Limitations on FHA Insurance' and 'Certain Legal Aspects of The Title I Program'
herein.
Payments on the Notes and distributions in respect of the Certificates will
be made to the holders of the Securities (the 'Security Owners') on each Payment
Date occurring on the 20th day of each month, or, if such day is not a Business
Day, the next succeeding Business Day, beginning in January 1998. The Notes will
be secured by the assets of the Trust pursuant to the Indenture. Interest on all
Classes of Notes (other than the Class A-1 Notes) will accrue at the respective
fixed per annum interest rates (each, a 'Note Interest Rate') specified on the
cover hereof. On each Payment Date, the Noteholders will be entitled to receive,
from and to the extent that funds are available therefor in the Note Payment
Account, payments with respect to interest and principal calculated as described
herein. Payments of interest on the Class M-1 and Class M-2 Notes (the
'Mezzanine Notes') and the Certificates will be subordinated in priority to such
payments on the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Notes
(the 'Senior Notes'), as described herein. In addition, payments of principal on
the Mezzanine Notes and the Certificates will be subordinated in priority to
such payments on the Senior Notes. The Senior Notes and the Mezzanine Notes are
referred to herein collectively as the 'Notes.' The Certificates will represent
undivided ownership interests in the Trust. Interest on each Class of
Certificates will accrue at the fixed per annum interest rate specified herein
(the 'Pass-Through Rate'). On each Payment Date, the Certificateholders will be
entitled to receive, from and to the extent that funds are available therefor in
the Certificate Account, distributions in respect of interest and principal
calculated as described herein. Distributions of interest on the Certificates
will be subordinated in priority to payments of interest on the Notes and
distributions of principal on the Certificates will be subordinated in priority
to payments of principal on the Notes, as described herein. See 'Description of
the Securities--Payments and Distributions on the Securities' herein. Only the
Class A-2, Class A-3, Class A-4 and Class A-5 Notes (the 'Offered Notes') are
offered hereby.
Credit enhancement with respect to the Securities will be provided by (A)
the subordination of (i) the Residual Interest and the Certificates to the Notes
and (ii) the Class M-2 and Class M-1 Notes, respectively, to each Class of Notes
having a higher priority, and (B) the overcollateralization feature described
herein. The Securities are not insured by any financial guaranty insurance
policy. See 'Description of Credit Enhancement' herein.
The yields to maturity on the Securities will depend on (i) the rate and
timing of reductions of the outstanding principal balances of the Securities as
a result of the receipt of payments of principal and interest on and other
principal reductions of the Home Loans (including scheduled payments,
prepayments, delinquencies, liquidations, defaults, losses, substitutions,
repurchases and modifications), (ii) the application of Allocable Loss Amounts
to the Certificates and the Mezzanine Notes and the reimbursement or repayment
of Loss Reimbursement Deficiencies or Deferred Amounts in respect thereof as
described herein, (iii) any principal
i
<PAGE>
reductions of the outstanding principal balances of the Securities from amounts
remaining on deposit in the Pre-Funding Account after the termination of the
Funding Period, and (iv) the price paid for the Securities by the holders
thereof. Because substantially all of the Home Loans will be secured by junior
liens, the prepayment experience of the Home Loan Pool may be significantly
different from that of a pool of conventional first lien residential mortgage
loans with equivalent interest rates and maturities or unsecured consumer loans
with equivalent interest rates and maturities. Prospective investors should
carefully consider the associated risks. See 'Risk Factors' and 'Prepayment and
Yield Considerations' herein and 'Risk Factors' in the Prospectus.
The Class M-1 Notes will be subordinate to the Senior Notes, the Class M-2
Notes will be subordinate to the Class M-1 Notes and the Senior Notes, and the
Certificates will be subordinate to the Notes, in each case to the extent
described herein. Investors should consider that, as a result of such
subordination, the yields to maturity on the Certificates and the Mezzanine
Notes will be sensitive, in varying degrees (and each will each be more
sensitive than the yields to maturity on the Senior Notes), to delinquencies and
losses on the Home Loans.
------------------
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Offered Notes
offered hereby. Such transactions may include stabilizing and the purchase of
the Offered Notes to cover syndicate short positions. For a description of these
activities, see 'Underwriting' herein.
------------------
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
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------
The Offered Notes offered hereby constitute part of a separate series of
Asset Backed Notes being offered by the Depositor from time to time pursuant to
its Prospectus dated November 19, 1997. This Prospectus Supplement does not
contain complete information about the offering of the Offered Notes. Additional
information is contained in the Prospectus and investors are urged to read both
this Prospectus Supplement and the Prospectus in full. Sales of the Offered
Notes may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
REPORTS TO SECURITYHOLDERS
Unaudited monthly and annual reports concerning the Securities will be sent
by the Indenture Trustee to the beneficial owners of the Securities. So long as
any Note or Certificate is in book-entry form, such reports will be sent to Cede
& Co., as the nominee of DTC and as the registered owner of such Notes pursuant
to the Indenture or such Certificates pursuant to the Trust Agreement,
respectively. DTC will supply such reports to such Security Owners in accordance
with its procedures.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, on or subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Offered Notes. The Depositor will provide without charge to each person to whom
this Prospectus Supplement and Prospectus are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be made in writing
to Bear Stearns Asset Backed Securities, Inc., at 245 Park Avenue, 4th Floor,
New York, New York 10167.
ii
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iii
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the accompanying
Prospectus. Certain capitalized terms used herein are defined elsewhere in this
Prospectus Supplement or in the Prospectus. See 'Index of Terms' included at the
end hereof and at the end of the Prospectus.
<TABLE>
<S> <C>
Issuer....................................... PSB Lending Home Loan Owner Trust 1997-4 (the 'Trust' or the
'Issuer'), a Delaware business trust, established pursuant to a
trust agreement dated as of December 1, 1997 (the 'Trust
Agreement'), between the Depositor, the Owner Trustee, the Co-
Owner Trustee and the FHA Insurance Holder.
Depositor.................................... Bear Stearns Asset Backed Securities, Inc. (the 'Depositor'), a
wholly-owned, special purpose subsidiary of The Bear Stearns
Companies Inc. None of the Depositor, The Bear Stearns Companies
Inc. or any other affiliate of the Depositor has guaranteed or is
otherwise obligated with respect to the Offered Notes. See 'The
Depositor' in the Prospectus.
FHA Insurance Holder......................... PSB Receivables IV Corp. (the 'FHA Insurance Holder'), a Nevada
corporation, in its capacity as the FHA Insurance Holder for the
Title I Loans.
Servicer, Transferor and FHA Claims
Administrator.............................. PSB Lending Corp. ('PSB Lending' or the 'Servicer' or the
'Transferor'), a Nevada corporation, in its capacity as Servicer
and Transferor of the Home Loans under the Sale and Servicing
Agreement dated as of December 1, 1997 (the 'Sale and Servicing
Agreement') among the Depositor, the Transferor, the Servicer, the
Master Servicer, the Issuer, the FHA Insurance Holder, the
Indenture Trustee and the Co-Owner Trustee, and in its capacity as
the FHA Claims Administrator for the Title I Loans.
Master Servicer.............................. Norwest Bank Minnesota, National Association, a national banking
association ('Norwest'), as master servicer under the Sale and
Servicing Agreement (in such capacity, the 'Master Servicer'). See
'Description of the Transfer and Servicing Agreements--Servicing'
herein.
Indenture Trustee and Co-Owner Trustee....... Norwest, as indenture trustee under the Indenture (in such
capacity, the 'Indenture Trustee'), and as co-owner trustee under
the Trust Agreement and the Sale and Servicing Agreement (in such
capacity, the 'Co-Owner Trustee').
Owner Trustee................................ Wilmington Trust Company, as owner trustee under the Trust
Agreement (the 'Owner Trustee').
Closing Date................................. On or about December 16, 1997.
Cut-Off Date................................. December 1, 1997 with respect to the Initial Home Loans and, with
respect to the Subsequent Home Loans, the date specified as the
cut-off date in the applicable Subsequent Transfer Agreement
(each, a 'Cut-Off Date').
Payment Date................................. The 20th day of each month or, if such day is not a Business Day,
then the next succeeding Business Day, commencing in January 1998
(each, a 'Payment Date').
Due Period................................... With respect to a Payment Date, the calendar month immediately
preceding such Payment Date (each, a 'Due Period').
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
Determination Date........................... The 5th Business Day prior to each Payment Date (each, a
'Determination Date').
Record Date.................................. With respect to each Payment Date, the close of business on the
last Business Day of the month immediately preceding the month in
which such Payment Date occurs (each, a 'Record Date').
The Notes.................................... The Trust will issue Asset Backed Notes (collectively, the
'Notes') pursuant to an Indenture dated as of December 1, 1997 (as
amended and supplemented from time to time, the 'Indenture'),
between the Issuer and the Indenture Trustee. The initial
aggregate principal balance of each Class of Notes (the 'Original
Class Principal Balance' for each such Class) is as follows:
</TABLE>
<TABLE>
<S> <C> <C>
ORIGINAL CLASS CLASS
PRINCIPAL BALANCE ---------------------------
---------------------------
$45,070,000 Class A-1 Notes
$22,720,000 Class A-2 Notes
$29,220,000 Class A-3 Notes
$42,750,000 Class A-4 Notes
$15,640,000 Class A-5 Notes
$36,600,000 Class M-1 Notes
$17,400,000 Class M-2 Notes
</TABLE>
<TABLE>
<S> <C>
The 'Class Principal Balance' with respect to each Class of Notes,
as of any date of determination, will be equal to the Original
Class Principal Balance of each such Class reduced by (i) all
amounts previously paid to Noteholders of such Class in reduction
of the Class Principal Balance of such Class on all previous
Payment Dates and (ii) any Allocable Loss Amounts applied thereto.
The Notes will be secured by the assets of the Trust pursuant to
the Indenture and as described herein.
Only the Class A-2, Class A-3, Class A-4 and Class A-5 Notes (the
'Offered Notes') are offered hereby. The description of the Class
A-1 Notes, the Mezzanine Notes and the Certificates (the 'Other
Securities') is included herein for the purposes of explaining the
Offered Notes only and such Other Securities are not offered
hereby.
Interest................................... Interest will accrue on each Class of Offered Notes at the
respective rates set forth on the cover page hereof (as to each
Class, the 'Note Interest Rate'). The Note Interest Rate for the
Class A-1 Notes with respect to each Payment Date will be a per
annum rate equal to LIBOR for the related Accrual Period (as
defined herein) plus 0.20%, subject to the Net Weighted Average
Rate (as defined herein). The Note Interest Rate for the Class M-1
Notes is 7.88% per annum (the 'Class M-1 Note Rate') and the Note
Interest Rate for the Class M-2 Notes is 8.07% per annum (the
'Class M-2 Note Rate'). The Note Interest Rate on each Class of
Notes outstanding (other than the Class A-1 Notes) will increase
by 0.50% for the Due Periods beginning after the Optional
Termination Date (as defined herein). Interest on each Class of
Notes (other than the Class A-1 Notes) will be payable on each
Payment Date in an amount equal to interest accrued for the
related Due Period on a 30/360 basis at the respective Note
Interest Rate for such Class on the Class Principal Balance
thereof immediately preceding such Payment
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
Date. See 'Description of the Securities--Payments and
Distributions on the Securities' herein.
Principal.................................. Principal of each Class of Notes will be payable on each Payment
Date as described herein under 'Description of the Securities--
Payments and Distributions on the Securities' herein.
Maturity Dates............................. The outstanding principal amount of, and all accrued and unpaid
interest on, each Class of Offered Notes, to the extent not
previously paid, will be payable in full on the maturity dates set
forth below (as to each Class of Notes, the 'Maturity Date'),
although it is anticipated that the actual final Payment Date for
each Class of Notes may occur significantly earlier than the
related Maturity Date.
</TABLE>
<TABLE>
<S> <C> <C>
MATURITY DATE
--------------------------------
Class A-2 Notes May 20, 2009
Class A-3 Notes October 20, 2011
Class A-4 Notes May 20, 2017
Class A-5 Notes May 20, 2024
</TABLE>
<TABLE>
<S> <C>
The Certificates............................. The Trust will issue Asset Backed Certificates consisting of the
Class B-1 Certificates and the Class B-2 Certificates (the
'Certificates' and, together with the Notes, the 'Securities').
The initial aggregate principal balance of each Class of
Certificates (the 'Original Class Principal Balance') for each
such Class is as follows:
</TABLE>
<TABLE>
<S> <C> <C>
ORIGINAL CLASS CLASS
PRINCIPAL BALANCE ---------------------------
---------------------------
$22,800,000 Class B-1 Certificates
$ 7,800,000 Class B-2 Certificates
</TABLE>
<TABLE>
<S> <C>
The 'Class Principal Balance' with respect to each Class of
Certificates, as of any date of determination, will be equal to
the Original Class Principal Balance of each such Class of
Certificates reduced by (i) all amounts previously distributed to
Certificateholders of such Class in reduction of the Class
Principal Balance of such Class on all previous Payment Dates and
(ii) any Allocable Loss Amounts applied thereto. The Certificates
will represent undivided ownership interests in the Trust and will
be issued pursuant to the Trust Agreement. The Certificates will
be subordinate in right of payment to the Notes to the extent
described herein but will be senior in right of payment to the
Residual Interest.
Interest................................... Interest will be distributed in respect of the Certificates on
each Payment Date in an amount equal to interest accrued for the
related Due Period on a 30/360 basis at the fixed rate of 8.30%
per annum, in the case of the Class B-1 Certificates (the 'Class
B-1 Pass-Through Rate') and 8.50% per annum, in the case of the
Class B-2 Certificates (the 'Class B-2 Pass-Through Rate' and in
each case, a 'Pass-Through Rate') on the Class Principal Balance
of the related Class of Certificates thereof immediately preceding
such Payment Date. The Pass-Through Rate on each Class of
Certificates outstanding will increase by 0.50% for the Due
Periods beginning after the Optional Termination Date. See
'Description of the Securities--Payments and Distributions on the
Securities' herein.
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Principal.................................. Principal distributions in respect of the Certificates will be
made on each Payment Date to the extent described herein under
'Description of the Securities--Payments and Distributions on the
Securities' herein.
Final Scheduled Payment Date............... The final scheduled distribution in respect of the Certificates
has been calculated to occur on May 20, 2024 (the 'Final Scheduled
Payment Date'), although it is anticipated that the actual final
Payment Date for the Certificates may occur significantly earlier
than the Final Scheduled Payment Date.
Priority of Payments
Regular Payment Amount..................... The Regular Payment Amount will be applied on each Payment Date in
the following order of priority: (i) to pay accrued and unpaid
interest on the Senior Notes, pro rata; (ii) to pay accrued and
unpaid interest on the Class M-1 Notes; (iii) to pay accrued and
unpaid interest on the Class M-2 Notes; (iv) to distribute accrued
and unpaid interest on the Class B-1 Certificates; (v) to
distribute accrued and unpaid interest on the Class B-2
Certificates; (vi) to pay as principal of the Class A-1, Class
A-2, Class A-3, Class A-4 and Class A-5 Notes, in that order, the
amount necessary to reduce the aggregate of the Class Principal
Balances of the Senior Notes to the Senior Optimal Principal
Balance; (vii) to pay as principal of the Class M-1 Notes until
the Class Principal Balance thereof is reduced to the Class M-1
Optimal Principal Balance; (viii) to pay as principal of the Class
M-2 Notes until the Class Principal Balance thereof is reduced to
the Class M-2 Optimal Principal Balance; (ix) to distribute as
principal of the Class B-1 Certificates, until the Class Principal
Balance thereof is reduced to the Class B-1 Optimal Principal
Balance; (x) to distribute as principal of the Class B-2
Certificates, until the Class Principal Balance thereof is reduced
to the Class B-2 Optimal Principal Balance; (xi) to pay to the
Class M-1 Notes and the Class M-2 Notes, in that order, their
respective Deferred Amounts, if any, until such Deferred Amounts
have been paid in full; (xii) to distribute to the Class B-1
Certificates and Class B-2 Certificates, in that order, their
respective Loss Reimbursement Deficiency, if any, until such Loss
Reimbursement Deficiency has been paid in full; and (xiii) to
distribute any remaining amount to the Residual Interest.
Excess Spread.............................. The Excess Spread will be applied on each Payment Date in the
following order of priority (after giving effect to all payments
specified above under '--Regular Payment Amount'): (i) in an
amount equal to the Overcollateralization Deficiency Amount, if
any, as follows: (A) to pay as principal of the Class A-1, Class
A-2, Class A-3, Class A-4 and Class A-5 Notes, in that order,
until the respective Class Principal Balances thereof are reduced
to zero, the amount necessary to reduce the aggregate of the Class
Principal Balances of the Senior Notes to the Senior Optimal
Principal Balance; (B) to pay as principal of the Class M-1 Notes
until the Class Principal Balance thereof is reduced to the Class
M-1 Optimal Principal Balances; (C) to pay as principal of the
Class M-2 Notes until the Class Principal Balance thereof is
reduced to the Class M-2 Optimal Principal Balances; (D) to
distribute as principal of the Class B-1 Certificates, until the
Class Principal Balance thereof is reduced to the Class B-1
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Optimal Principal Balance; and (E) to distribute as principal of
the Class B-2 Certificates, until the Class Principal Balance
thereof is reduced to the Class B-2 Optimal Principal Balance;
(ii) to pay to the Class M-1 Notes and Class M-2 Notes, in that
order, their respective Deferred Amounts, if any, until such
Deferred Amounts have been paid in full; (iii) to distribute to
the Class B-1 and Class B-2 Certificates, in that order, their
respective Loss Reimbursement Deficiency, if any, until such Loss
Reimbursement Deficiency has been paid in full; (iv) to reimburse
the Master Servicer or Servicer for any unreimbursed Servicing
Advances; and (v) to distribute the remaining amount to the
Residual Interest.
Form and Registration of the Offered
Notes...................................... The Offered Notes initially will be issued only in book-entry
form. Persons acquiring beneficial ownership interests in the
Offered Notes will hold such Offered Notes through the book entry
facilities of The Depository Trust Company ('DTC'). Transfers
within DTC will be in accordance with the usual rules and
operating procedures of DTC. So long as each Class of Offered
Notes is in book-entry form, each such Class of Offered Notes will
be evidenced by one or more certificates registered in the name of
the nominee of DTC. The interests of the Security Owners with
respect to the Offered Notes will be represented by book-entries
on the records of DTC and participating members thereof. No
Security Owner holding an Offered Note will be entitled to receive
a definitive certificate representing such person's interest,
except in the event that Definitive Securities are issued under
the limited circumstances described herein. With respect to the
Offered Notes, all references in this Prospectus Supplement to any
Class of Offered Notes reflect the rights of the Security Owners
of such Class only as such rights may be exercised through DTC and
its participating members so long as such Class of Offered Notes
is held through DTC. See 'Description of the Offered
Notes--Book-Entry Registration' herein. The Security Owners'
interests in each Class of Offered Notes will be held only in
minimum denominations of $100,000 and integral multiples of $1,000
in excess thereof.
Assets of the Trust.......................... On the Closing Date, the Trust will purchase Home Loans (the
'Initial Home Loans') having an aggregate principal balance of
approximately $180,000,000 (the 'Initial Pool Principal Balance')
as of the December 1, 1997 Cut-Off Date from the Depositor
pursuant to the Sale and Servicing Agreement. In addition, on the
Closing Date, the Depositor is expected to deposit approximately
$60,000,000 into a pre-funding account (the 'Pre-Funding Account')
for the purchase of additional Home Loans (the 'Subsequent Home
Loans') during the Funding Period. The sum of the aggregate
principal balance of the Initial Home Loans and the amount
expected to be deposited into the Pre-Funding Account on the
Closing Date equals approximately $240,000,000.
The Initial Loans included in the Preliminary Initial Home Loan
Pool are expected to consist of approximately 3,467 loans, having
an aggregate principal balance of approximately $115,529,600. See
'The Home Loan Pool' herein. The statistical information
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
presented in this Prospectus Supplement regarding the Home Loans
is based only on the Initial Home Loans included in the
Preliminary Initial Home Loan Pool identified as of November 1,
1997 (the 'Statistical Calculation Date'), and does not take into
account any additional Initial Home Loans identified after the
Statistical Calculation Date or any Subsequent Home Loans that may
be sold to the Trust during the Pre-Funding Period through
application of amounts in the Pre-Funding Account. See 'Risk
Factors--Acquisition of Subsequent Loans' and 'The Home Loan Pool'
herein.
The assets of the Trust will primarily include a pool of home
loans (the 'Home Loan Pool') consisting of loans ('Home Loans')
which will be secured by mortgages, deeds of trust or other
similar security instruments creating a first or second lien on
real property (the 'Mortgages'); provided that, in order to
effectuate the transfer of the related FHA Insurance with respect
to the Title I Loans (as defined below), legal title to the Title
I Loans and the related FHA Insurance coverage will be transferred
to the FHA Insurance Holder, and the Trust will hold a beneficial
interest in the Title I Loans and the related FHA Insurance and
the contractual obligation of the FHA Insurance Holder under the
Sale and Servicing Agreement to collect any amount due under the
FHA Insurance for the benefit of the Trust. The assets of the
Trust also will include (i) payments in respect of the Home Loans
of interest accrued and principal due on or after the applicable
Cut-Off Date (other than servicing related penalties and fees
retained by the Servicer as described herein); (ii) amounts on
deposit in the Pre-Funding Account and the Capitalized Interest
Account until the expiration of the Funding Period; (iii) amounts
on deposit in the FHA Insurance Premium Account; (iv) amounts on
deposit in the Collection Account, Note Payment Account and
Certificate Distribution Account; (v) the benefit of the FHA
Insurance applicable to the Title I Loans; (vi) the rights of the
Transferor in and to the obligations of any seller pursuant to
each loan purchase agreement pursuant to which the Transferor
acquired any Home Loans; and (vii) certain other ancillary or
incidental funds, rights, proceeds and properties related to the
foregoing. See 'Description of the Trust--General' herein. The
assets of the Trust will also include the unpaid principal balance
of each Home Loan as of the related Cut-Off Date (the 'Cut-Off
Date Principal Balance'). The 'Principal Balance' of a Home Loan
on any day is equal to its Cut-Off Date Principal Balance, minus
all principal reductions credited against the principal balance of
such Home Loan since such Cut-Off Date, provided, however, that
the Principal Balance of a Liquidated Home Loan shall be zero.
With respect to any date, the 'Pool Principal Balance' will be
equal to the aggregate of the Principal Balances of all Home Loans
as of the last day of the immediately preceding Due Period.
The Trust will also issue instruments evidencing the residual
interest in the assets of the Trust (the 'Residual Interest'),
which are not being offered hereby. The Residual Interest will be
subordinate in right of payment to the Securities.
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The Home Loans............................... As further described herein, the Initial Home Loans included in
the Preliminary Initial Loan Pool consist of approximately 98% of
conventional loans (i.e., not insured or guaranteed by any
governmental agency or instrumentality) ('Conventional Loans') for
property improvements, debt consolidation, a combination of the
foregoing or other consumer purposes, and approximately 2% of
property improvement loans (the 'Title I Loans') that will be
partially insured to the extent described herein by the FHA under
the Title I Program. Assuming that all funds on deposit in the
Pre-Funding Account are used to purchase Subsequent Home Loans,
then the Cut-Off Date Pool Principal Balance is expected to
consist of approximately 97% to 99% Conventional Loans and
approximately 1% to 3% Title I Loans. Substantially all of the
Mortgages for the Home Loans will be second liens that are junior
in priority to the related first liens on the related mortgaged
properties ('Mortgaged Properties'), which will consist primarily
of owner occupied single family residences. Substantially all of
the Home Loans will be secured by liens on Mortgaged Properties in
which the borrowers have little or no equity (i.e., the related
combined loan-to-value ratios approach or exceed 100%) at the time
of origination. See 'The Home Loan Pool' herein.
'Combined loan-to-value ratio' means, with respect to any Home
Loan, the fraction, expressed as a percentage, the numerator of
which is the principal balance of such Home Loan at origination
plus, in the case of a junior lien Home Loan, the aggregate
outstanding principal balance of the related senior lien loans on
the date of origination of such Home Loan, and the denominator of
which is the appraised or stated value of the related Mortgaged
Property at the time of origination of such Home Loan (determined
as described herein under 'The Transferor and
Servicer--Underwriting Criteria').
The Initial Home Loans included in the Home Loan Pool will have an
Initial Pool Principal Balance of approximately $180,000,000 and
are expected to include on the Closing Date: (1) the preliminary
pool of Home Loans (the 'Preliminary Initial Home Loan Pool')
having an aggregate principal balance of approximately
$115,529,600 and for which certain statistical information has
been presented herein; and (2) an additional pool of Home Loans
(the 'Additional Initial Home Loan Pool') having an aggregate
principal balance of approximately $64,470,400. Certain
statistical information will be furnished to Security Owners with
respect to the final Home Loan Pool after the Pre-Funding Period
ends. See 'The Home Loan Pool' herein. Prior to the Closing Date,
the composition of the Preliminary Initial Home Loan Pool may be
altered at the option of the Transferor by removing certain of the
Home Loans and substituting substantially similar Home Loans
therefore. As a result of the foregoing, the statistical
information presented herein regarding the Preliminary Initial
Loan Pool expected to be included in the Home Loan Pool as of the
date of this Prospectus Supplement: (1) does not take into account
any additional Home Loans included in the Home Loan Pool; (2) does
not take into account any Subsequent Home Loans that may be added
to the Home Loan Pool during the Pre-Funding Period
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through the application of amounts in the Pre-Funding Account; and
(3) may vary in certain respects from comparable information based
on the actual composition of the Home Loan Pool at the Closing
Date or any Subsequent Transfer Date. See 'Risk Factors--
Acquisition of Subsequent Home Loans' and 'The Home Loan Pool'
herein.
As further described herein, the Servicer will have the option,
subject to certain conditions, after the Closing Date (i) to
remove any Home Loans and substitute Qualified Substitute Home
Loans therefor, and (ii) either to repurchase any Home Loan
incident to foreclosure, default or imminent default thereof or to
remove such Home Loan and substitute a Qualified Substitute Home
Loan therefor. The Transferor will also be obligated either to
repurchase any Home Loan as to which a representation or warranty
has been breached, which breach remains uncured for a period of 60
days and has a materially adverse effect on the interests of the
Security Owners in such Home Loan (each, a 'Defective Home Loan')
or to remove such Defective Home Loan and substitute a Qualified
Substitute Home Loan therefor. As used herein, a 'Qualified
Substitute Home Loan' will have characteristics that are generally
the same as or substantially similar to the characteristics of the
Home Loan which it replaces. The repurchase of any Home Loan
(rather than the replacement thereof through substitution) will
result in accelerated principal payments and distributions on the
Securities. See 'The Transferor and Servicer--Repurchase or
Substitution of Home Loans' herein.
The Pre-Funding Account and Capitalized
Interest Account........................... On the Closing Date, a portion of the proceeds from the sale of
the Securities in an amount equal to approximately $60,000,000
(the 'Pre-Funding Account Deposit'), is expected to be deposited
into the Pre-Funding Account maintained by the Indenture Trustee
for the purpose of purchasing the Subsequent Home Loans after the
Closing Date. The Pre-Funding Account Deposit will be increased or
decreased by an amount equal to the aggregate of the principal
balances of any Home Loans removed from or added to, respectively,
the Home Loan Pool prior to the Closing Date as described herein,
provided that any such increase or decrease will not exceed 10% of
the Initial Pool Principal Balance. See 'Description of the
Transfer and Servicing Agreements--Pre-Funding Account' herein.
During the period from the Closing Date until the earlier of (i)
the date on which the amount in the Pre-Funding Account is reduced
to $50,000 or less, and (ii) January 30, 1998 (the 'Funding
Period'), the amount on deposit in the Pre-Funding Account will be
reduced in accordance with the terms of the Sale and Servicing
Agreement by the amount used to purchase Subsequent Home Loans.
Subsequent Home Loans purchased by the Trust and added to the Home
Loan Pool on any Subsequent Transfer Date must satisfy the
criteria set forth in the Sale and Servicing Agreement. See 'The
Home Loan Pool--Conveyance of Subsequent Home Loans' herein. A
'Subsequent Transfer Date' is any date on which any such
Subsequent Home Loans will be conveyed by the Seller to the
Depositor and by the Depositor to the Trust after the Closing
Date.
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On the Payment Date following the Due Period in which such Funding
Period ends, the portion of the Pre-Funding Account Deposit that
is remaining will be applied to reduce, on a pro rata basis, the
outstanding principal balances of each Class of Notes and each
Class of Certificates; provided, however, that if such remaining
portion is less than or equal to $100,000, such amount will be
included in the Noteholders' Payable Amount and will be paid
sequentially to each Class of Notes in reduction of the respective
Class Principal Balances thereof; and provided further that if an
event of default has occurred under the Indenture, such amount
will be paid on a pro rata basis in reduction of the aggregate
Class Principal Balances of each Class of Notes. See 'Risk
Factors--Acquisition of Subsequent Home Loans,' 'Description of
the Transfer and Servicing Agreements--Pre-Funding Account' and
'Prepayment and Yield Considerations' herein.
On the Closing Date, an amount approved by the Rating Agencies
(the 'Capitalized Interest Account Deposit') will be deposited in
an Eligible Account maintained by the Indenture Trustee (the
'Capitalized Interest Account') from a portion of the proceeds
from the sale of the Securities. The Capitalized Interest Account
Deposit will be available to cover the projected interest
shortfall in respect of amounts on deposit in the Pre-Funding
Account during the Funding Period. Any amounts remaining in the
Capitalized Interest Account on any Determination Date that are
not required to cover the interest shortfall for the related
Payment Date and the anticipated interest shortfall during the
remainder of the Funding Period as described herein will be
distributed to the holders of the Residual Interest, including any
net reinvestment income thereon on the related Payment Date. See
'Description of the Transfer and Servicing Agreements--Capitalized
Interest Account' herein.
Credit Enhancement........................... Credit enhancement with respect to the Securities will be provided
by (A) the subordination of (i) the Residual Interest and the
Certificates to the Notes, (ii) the Class M-2 Notes and Class M-1
Notes, respectively, to each Class of Notes having a higher
priority, and (B) the overcollateralization feature described
herein. The Securities are not insured by any financial guaranty
insurance policy. See 'Risk Factors--Adequacy of Credit
Enhancement' and 'Description of Credit Enhancement' herein.
Subordination.............................. The rights of the holders of the Class M-1 Notes to receive
payments of interest on each Payment Date will be subordinated to
such rights of the holders of the Senior Notes, the rights of the
holders of the Class M-1 Notes to receive payments of principal on
each Payment Date will be subordinated to such rights of the
holders of the Senior Notes, the rights of the holders of the
Class M-2 Notes to receive payments of interest on each Payment
Date will be subordinated to such rights of the holders of the
Class M-1 Notes and the Senior Notes, the rights of the holders of
the Class M-2 Notes to receive payments of principal on each
Payment Date will be subordinated to such rights of the holders of
the Class M-1 Notes and the Senior Notes, the rights of the
holders of the Certificates to receive distributions of principal
on each Payment Date will be subordinated to the rights of the
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holders of the Notes to receive payments of principal on such
Payment Date. The rights of holders of the Residual Interest to
receive distributions on each Payment Date will be subordinated to
the rights of the Security Owners to receive payments and
distributions on such Payment Date. The subordination feature
described above is intended to enhance the likelihood of regular
receipt by the holders of the Senior Notes, the Class M-1 Notes,
the Class M-2 Notes, the Class B-1 Certificates and the Class B-2
Certificates, in that order of priority, of the full amount of
interest and principal payments due to such holders and to afford
such holders protection against losses on the Home Loans. See
'Description of Credit Enhancement--Subordination and Allocation
of Losses' herein.
Application of Allocable Loss
Amounts............................... In the event that (a) the aggregate of the outstanding principal
balances of the Securities on any Payment Date (after giving
effect to all payments and distributions on such date) exceeds (b)
the sum of (i) the Pool Principal Balance as of the end of the
preceding Due Period and (ii) the amount, if any, on deposit in
the Pre-Funding Account on such Payment Date (after giving effect
to all withdrawals from such account on such Payment Date) (such
excess, an 'Allocable Loss Amount'), such Allocable Loss Amount
will be applied in reduction of the Class Principal Balance of the
Class B-2 and the Class B-1 Certificates, in that order, until the
respective Class Principal Balances thereof have been reduced to
zero, and then to the reduction of the Class Principal Balances of
the Class M-2 Notes and the Class M-1 Notes, in that order, until
the respective Class Principal Balances thereof have been reduced
to zero. Allocable Loss Amounts will not be applied to the
reduction of the Class Principal Balance of any Class of Senior
Notes. With respect to any Allocable Loss Amounts so applied,
holders of the Mezzanine Notes will be entitled to receive
payments of Deferred Amounts and holders of the Certificates will
be entitled to receive payment of Loss Reimbursement Deficiencies
under the circumstances and to the extent provided herein. See
'Description of the Securities--Application of Allocable Loss
Amounts' herein.
Overcollateralization...................... As of each Payment Date, the 'Overcollateralization Amount' will
be an amount (not less than zero) equal to the excess of (a) the
sum of (i) the Pool Principal Balance as of the end of the
preceding Due Period and (ii) the amount, if any, on deposit in
the Pre-Funding Account as of the end of such Due Period over (b)
the aggregate of the Class Principal Balances of all Classes of
Notes and Certificates, after giving effect, unless otherwise
specified, to all payments on the Notes and distributions in
respect of the Certificates and the Residual Interest on such
Payment Date. The application of Excess Spread in reduction of the
outstanding principal balances of the Offered Notes as described
herein is intended to increase the Overcollateralization Amount
over time until such amount is equal to the Required
Overcollateralization Amount.
Except as otherwise provided herein, the 'Required Overcol-
lateralization Amount' for any Payment Date prior to the
Overcollateralization Stepdown Date for any Payment Date will
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be equal to the greater of (a) 3.25% of the Assumed Pool Princi-
pal Balance and (b) the Net Delinquency Calculation Amount (as
defined herein). On any other Payment Date, the Required
Overcollateralization Amount will be equal to the greater of (a)
6.50% of the Pool Principal Balance as of the end of the preced-
ing Due Period and (b) the Net Delinquency Calculation Amount;
provided however, that on any Payment Date the Required
Overcollateralization Amount will in no event be less than 0.50%
of the Assumed Pool Principal Balance.
While the payment of Excess Spread to holders of the Securities
has been designed to produce and maintain a given level of over-
collateralization with respect to the Securities, there can be no
assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be
achieved or maintained at all times. See 'Description of Credit
Enhancement--Subordination and Allocation of Losses' and 'Risk
Factors--Adequacy of Credit Enhancement' herein.
FHA Insurance on the Title I Loans......... The Transferor will transfer the FHA insurance coverage for the
Title I Loans to the FHA Insurance Holder and the FHA Insurance
Holder will hold such insurance coverage for the benefit of the
Security Owners. Due to the FHA procedures for transferring FHA
insurance coverage from one Title I Lender's FHA insurance
coverage reserve account (such account, an 'FHA Reserve') to
another Title I Lender's FHA Reserve, the insurance coverage for
the Title I Loans will not be effectively transferred from the
Transferor to the FHA Insurance Holder by the Closing Date;
rather, the FHA insurance coverage for the Title I Loans will be
transferred to the FHA Insurance Holder's FHA Reserve on
subsequent dates (each, a 'Transfer Date'), that will occur as
promptly as practical after the Closing Date for any such loans
that are Initial Home Loans and the related Subsequent Transfer
Date for any such loans that are Subsequent Home Loans.
The FHA will recognize the FHA Insurance Holder as the holder of
the Title I Loans for purposes of the FHA insurance coverage and
the related FHA Reserve, and none of the Depositor, the Owner
Trustee, the Co-Owner Trustee, the Master Servicer or the
Indenture Trustee will be obligated or entitled to proceed
directly against the FHA to recover FHA Insurance Proceeds. See
'Risk Factors--Adequacy of Credit Enhancement--Additional Limita-
tions on FHA Insurance' herein.
The final amount of FHA Insurance that is transferred from the
Transferor's FHA Reserve to the FHA Insurance Holder's FHA Reserve
in respect of the Title I Loans (the 'FHA Insurance Amount') is
expected to equal 10% of the Cut-Off Date Principal Balances of
the Title I Loans that will be conveyed to the Trust, including
any Subsequent Home Loans. See 'Risk Factors--Adequacy of Credit
Enhancement' and 'Description of Credit Enhancement--FHA Insurance
for Title I Loans--Transfer of FHA Insurance' herein. If the FHA
Insurance Amount so transferred is less than 10% of the Cut-Off
Date Principal Balances of the Title I Loans that are actually
conveyed to the Trust, then the amount of the Required
Overcollateralization Amount will be increased by the amount of
such shortfall.
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The FHA Insurance Amount for the Securities will be commingled in
the FHA Insurance Holder's FHA Reserve with the insurance coverage
relating to any Title I Loans that are included in other series of
asset-backed securities issued by special purpose entities
established by the FHA Insurance Holder (the 'Additional Series').
On each Transfer Date, the FHA Insurance Holder will record on its
books and records the FHA Insurance Amount for the Title I Loans
that have been acknowledged by the FHA as having been transferred
to the FHA Insurance Holder on such date, separately from
insurance coverage attributable to Title I Loans for any
Additional Series. The FHA Insurance Holder and the FHA Claims
Administrator will not submit any FHA Claim in respect of a Title
I Loan to the FHA if the FHA Insurance Amount, as shown on the
records of the FHA Insurance Holder relating to the Securities, is
insufficient to reimburse such FHA Claim. In addition, the FHA
Insurance Holder has agreed that neither it nor any FHA Claims
Administrator will submit any FHA Claims in respect of any Title I
Loans included in any Additional Series where such claims would
reduce the FHA Insurance Amount. See 'Description of Credit
Enhancement--FHA Insurance for Title I Loans--Submission of FHA
Claims' herein.
Servicing of the Home Loans and FHA Claims
Administration............................... The Master Servicer will be responsible for performing the loan
servicing functions with respect to the Home Loans pursuant to the
Sale and Servicing Agreement and shall be entitled to receive a
fee for performing such functions (the 'Master Servicing Fee'),
payable monthly. The Servicer will perform the loan servicing
functions with respect to the Home Loans on behalf of the Master
Servicer and shall be entitled to receive a fee (the 'Servicing
Fee') and other servicing compensation (collectively, the
'Servicing Compensation'), payable monthly, as described herein.
The Servicing Fee will be reduced on any Home Loan with a Home
Loan Rate below 10.135% per annum. See 'Description of the
Transfer and Servicing Agreements--Servicing' herein. The
Servicer will administer, process and submit all FHA Claims in the
name and on behalf of the FHA Insurance Holder and the Trust and
record and monitor the FHA Insurance Amount for the Title I Loans
for the FHA Insurance Holder (in such capacity, the Servicer, and
any successor acting in such capacity, the 'FHA Claims
Administrator'). See 'The Transferor and Servicer' herein.
Fees and Expenses of the Trust............... In addition to the Servicing Compensation and the Master Servicing
Fee, on each Payment Date, prior to payments and distributions on
the Securities, amounts from the Available Collection Amount will
be applied (i) to deposit a portion of the FHA Insurance Premium
into the FHA Insurance Premium Account (the 'FHA Insurance Premium
Deposit Amount') for the Title I Loans, and (ii) to pay the
following periodic fees: (1) the fees of the Indenture Trustee and
the Co-Owner Trustee (the 'Indenture Trustee Fee'); and (2) the
fees of the Owner Trustee (the 'Owner Trustee Fee') (collectively,
such fees together with the Servicing Compensation and the Master
Servicing Fee, the 'Trust Fees and Expenses'); provided,
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however, that with respect to the first Payment Date, the payment
of all such Trust Fees and Expenses (other than the Indenture
Trustee Fee and the Master Servicing Fee) will be prorated for the
first Due Period from the Closing Date. See 'Description of the
Transfer and Servicing Agreements--Trust Fees and Expenses' and
'Description of the Securities--Payments and Distributions on the
Securities' herein.
Optional Termination......................... The Master Servicer or the Servicer may, at its option, effect an
early redemption or termination of the Securities on or after any
Payment Date on which the Pool Principal Balance declines to 10%
or less of the Assumed Pool Principal Balance (the 'Optional
Termination Date'), by providing for the payments as described
herein. See 'Description of the Securities--Optional Redemption of
the Notes; Optional Prepayment of the Certificates' herein.
Tax Status................................... In the opinion of Andrews & Kurth L.L.P. ('Tax Counsel') for
federal income tax purposes, the Notes will be characterized as
debt, and the Trust will not be characterized as an association
(or a publicly traded partnership) or a taxable mortgage pool
taxable as a corporation. Each Noteholder, by the acceptance of a
Note, will agree to treat the Notes as indebtedness, and each
Certificateholder, by the acceptance of a Certificate, will agree
to treat the Trust as a partnership in which the
Certificateholders are partners for federal income tax purposes.
Alternative characterizations of the Trust and the Certificates
are possible, but would not result in materially adverse tax
consequences to Certificateholders. See 'Certain Federal Income
Tax Consequences' herein and 'Certain Federal Income Tax
Considerations' in the Prospectus for additional information
concerning the application of federal income tax laws to the Trust
and the Securities.
Certificateholders who are tax-exempt entities or non-U.S. persons
will have tax consequences that may be considered adverse by such
holders. See 'Certain Federal Income Tax Considerations' in the
Prospectus.
ERISA Considerations......................... Subject to the considerations discussed under 'ERISA
Considerations' herein and in the Prospectus, the Offered Notes
may be purchased by an employee benefit plan or an individual
retirement account (a 'Plan') subject to the Employee Retirement
Income Security Act of 1974, as amended ('ERISA') or Section 4975
of the Internal Revenue Code of 1986, as amended (the 'Code'). A
fiduciary of a Plan must determine that the purchase or holding of
a Note is consistent with its fiduciary duties under ERISA and
does not result in a nonexempt prohibited transaction as defined
in Section 406 of ERISA or Section 4975 of the Code.
Legal Investment Considerations.............. The Offered Notes will not constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA'), because substantially all of
the Mortgages securing the Home Loans are not first mortgages.
Accordingly, many institutions with legal authority to invest in
comparably rated securities backed by first mortgages may not be
legally authorized to invest in the Offered Notes. See
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'Legal Investment Matters' herein and 'Legal Investment' in the
Prospectus.
Ratings of the Offered Notes................. It is a condition to the issuance of the Offered Notes that they
receive the respective ratings of Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies, Inc. ('Standard
& Poor's'), Moody's Investors Service, Inc. ('Moody's') and Fitch
I.B.C.A. Inc. ('Fitch') (collectively, the 'Rating Agencies') set
forth below:
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STANDARD &
POOR'S MOODY'S FITCH
---------- -------- -----
<S> <C> <C> <C> <C>
Class A-2 Notes................... AAA Aaa AAA
Class A-3 Notes................... AAA Aaa AAA
Class A-4 Notes................... AAA Aaa AAA
Class A-5 Notes................... AAA Aaa AAA
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A security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to Security
Owners. None of the Depositor, the FHA Insurance Holder, the
Transferor, the Servicer, the Master Servicer, the Indenture
Trustee, the Owner Trustee, the Co-Owner Trustee, the FHA
Insurance Holder or any other person is obligated to maintain the
rating on any of the Offered Notes.
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RISK FACTORS
Prospective investors in the Offered Notes should consider the following
risk factors (as well as the factors set forth under 'Risk Factors' in the
Prospectus) in connection with the purchase of Notes or Certificates. These
factors are intended to identify the significant sources of risk affecting an
investment in the Offered Notes. Unless the context indicates otherwise, any
numerical or statistical information presented is based upon the characteristics
of the Initial Home Loans proposed to be included in the Home Loan Pool as of
the date of this Prospectus Supplement.
ACQUISITION OF SUBSEQUENT HOME LOANS
Variation in Credit Quality and Characteristics of Subsequent Home
Loans. Any conveyance of Subsequent Home Loans is subject to the conditions set
forth in the Sale and Servicing Agreement, which conditions include among
others: (i) each Subsequent Home Loan must satisfy the representations and
warranties specified in the Sale and Servicing Agreement; (ii) the Transferor
will not select Subsequent Home Loans in a manner that it believes is adverse to
the interests of the Security Owners; and (iii) as of the related Cut-Off Date,
all of the Home Loans, including the Subsequent Home Loans to be conveyed by the
Transferor as of such Cut-Off Date, must satisfy certain statistical criteria
set forth in the Sale and Servicing Agreement. Although each Subsequent Home
Loan must satisfy the eligibility criteria referred to above at the time of its
transfer to the Trust, the Subsequent Home Loans may have been originated or
purchased by the Transferor using credit criteria different from those which
were applied to the Initial Home Loans and may be of a different credit quality
and have different loan characteristics from the Initial Home Loans. After the
transfer of the Subsequent Home Loans to the Trust, the aggregate statistical
characteristics of the Home Loan Pool may vary from those of the Initial Home
Loans as described herein. See 'The Home Loan Pool--Characteristics of
Preliminary Initial Home Loans' and '--Conveyance of Subsequent Home Loans'
herein.
Ability of Transferor to Acquire Subsequent Home Loans. The ability of the
Trust to acquire Subsequent Home Loans is dependent upon the ability of the
Transferor to acquire additional home loans that satisfy the eligibility
criteria for the transfer of Subsequent Home Loans. See 'The Home Loan
Pool--Conveyance of Subsequent Home Loans' herein. The ability of the Transferor
to acquire additional home loans may be affected by a variety of social,
economic and competitive factors, including prevailing interest rates,
unemployment levels, the rate of inflation, consumer perceptions of economic
conditions generally and the availability of home loan financing and similar
types of consumer financing. The Transferor and the Depositor are unable to
determine and have no basis to predict whether and to what extent economic or
social factors will affect the ability of the Transferor to originate and
purchase Subsequent Home Loans.
Effect of Prepayment from Pre-Funding Account. If the Pre-Funding Account
Deposit has not been fully applied to purchase Subsequent Home Loans by the end
of the Funding Period, and the amount remaining in the Pre-Funding Account (net
of reinvestment income, which will be transferred to the Capitalized Interest
Account) is in excess of $100,000, then on the Payment Date following the Due
Period in which the Funding Period ends, such amount will be applied to reduce,
on a pro rata basis, the outstanding Class Principal Balance of each Class of
the Notes and (except if an event of default has occurred under the Indenture)
the outstanding Class Principal Balance of the Certificates. If such remaining
amount is equal to or less than $100,000, such amount will be included in the
Regular Principal Payment Amount and will be paid sequentially to each Class of
Notes in reduction of the Class Principal Balance thereof. Notwithstanding the
foregoing, if an event of default has occurred under the Indenture, then such
remaining amount will be paid to reduce, on a pro rata basis, the Class
Principal Balance of each Class of the Notes. See 'Prepayment and Yield
Considerations' herein. Although no assurances can be given, the Transferor
expects that the principal amount of the Subsequent Home Loans sold to the
Depositor for sale to the Trust will require the application of substantially
all of the Pre-Funding Account Deposit and that there will be no material
principal prepayment paid or distributed to the Security Owners from the amount
remaining in the Pre-Funding Account at the termination of the Funding Period.
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PREPAYMENT AND YIELD CONSIDERATIONS
The Home Loans may generally be prepaid in whole or in part at any time;
however, with respect to certain Home Loans, a prepayment charge, as permitted
by applicable law, may apply to full and partial prepayments during the first
three years after origination as described herein under 'Prepayment and Yield
Considerations.' The Servicer will be entitled to retain any prepayment charges
paid in respect of the Home Loans. See 'Description of the Transfer and
Servicing Agreements--Trust Fees and Expenses' herein. Loans similar to the Home
Loans have been originated in significant volume only during the past few years
and neither the Transferor nor the Depositor is aware of any publicly available
studies or statistics on the rate of prepayment of such loans, including the
Home Loans. The Trust's prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates, the
availability of alternative financing, homeowner mobility, the combined
loan-to-value ratios of the Home Loans and the receipt of proceeds from credit
life and disability insurance policies in respect of the Home Loans. In
addition, substantially all of the Home Loans contain due-on-sale provisions and
the Servicer intends, except under the circumstances described in the succeeding
paragraph, to enforce such provisions unless (i) the Servicer, in a manner
consistent with accepted servicing practices, permits the purchaser of the
related Mortgaged Property to assume the Home Loan, or (ii) such enforcement is
not permitted by applicable law. To the extent permitted by applicable law, such
assumption will not release the original borrower from its obligation under any
such Home Loan. See 'Certain Legal Aspects of The Title 1 Program' herein.
In certain cases, the Servicer may, in a manner consistent with its
servicing practices, permit a borrower who is selling his principal residence
and purchasing a new one to substitute the new Mortgaged Property as collateral
for the related Home Loan. In such event, the Servicer will generally require
the borrower to make a partial prepayment in reduction of the principal balance
of the Home Loan to the extent that the borrower has received proceeds from the
sale of the prior residence that will not be applied to the purchase of the new
residence.
The extent to which the yield to maturity of an Offered Security may vary
from the anticipated yield will depend upon (i) the degree to which it is
purchased at a premium or discount, (ii) the degree to which the timing of
payments or distributions to the holder thereof is sensitive to scheduled
payments, prepayments, liquidations, defaults, delinquencies, substitutions,
modifications and repurchases of Home Loans and to the application of Excess
Spread and amounts remaining in the Pre-Funding Account after the Funding Period
ends, and (iii) to the application of Allocable Loss Amounts to the Certificates
and the Mezzanine Notes as described herein. In the case of any Offered Security
purchased at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments and distributions to the Security Owners
(including, without limitation, principal prepayments on the Home Loans) could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Security purchased at a premium, an
investor should consider the risk that a faster than anticipated rate of
principal payments and distributions to the Security Owners (including, without
limitation, principal prepayments on the Home Loans) could result in an actual
yield to such investor that is lower than the anticipated yield. On each Payment
Date, until the Overcollateralization Amount is at least equal to the Required
Overcollateralization Amount, the allocation of the Excess Spread for such
Payment Date as an additional payment or distribution of principal on the
Offered Notes will accelerate the amortization of the Offered Notes then
entitled to payments of principal relative to the amortization of the Home
Loans; however, on the Overcollateralization Stepdown Date, the distribution of
any Overcollateralization Surplus Amount to the holders of the Residual
Interest, as described herein, can be expected to result in a slower
amortization of the Offered Notes and may delay principal payments and
distributions to the Security Owners on a Payment Date. Further, in the event
that significant principal payments or distributions are made to Security Owners
as a result of prepayments, liquidations, repurchases and purchases of the Home
Loans or payments of Excess Spread and amounts remaining in the Pre-Funding
Account, there can be no assurance that Security Owners will be able to reinvest
such payments or distributions in a comparable alternative investment having a
comparable yield. See'Prepayment and Yield Considerations' herein.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Notes will be provided by
(A) the subordination of (i) the Residual Interest and the Certificates to the
Notes, (ii) the Class M-2 Notes and the Class M-1 Notes, respectively, to each
Class of Notes having a higher priority, and (B) the overcollateralization
feature described
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herein. The Offered Notes are not insured by any financial guaranty insurance
policy. If the Home Loans experience higher rates of delinquencies, defaults and
losses (see '--Additional Factors Affecting Delinquencies, Defaults and Losses
on Home Loans' below) than initially anticipated in connection with the rating
of the Offered Notes, there can be no assurance that the amounts available from
the credit enhancement will be adequate to cover the delays or shortfalls in
payments or distributions to the Security Owners that result from such higher
delinquencies, defaults and losses. If the amounts available from the credit
enhancement are inadequate, the Security Owners will bear the risk of any delays
in payment and losses resulting from the delinquencies, defaults and losses on
the Home Loans.
The rights of the holders of the Class M-1 Notes to receive payments of
interest on each Payment Date will be subordinated to such rights of the holders
of the Senior Notes, the rights of the holders of the Class M-2 Notes to receive
payments of interest on each Payment Date will be subordinated to such rights of
the holders of the Class M-1 Notes and the Senior Notes, and the rights of the
holders of the Certificates to receive distributions of interest on each Payment
Date will be subordinated to the rights of the holders of the Notes to receive
payments of interest. In addition, the rights of the holders of the Class M-1
Notes to receive payments of principal on each Payment Date will be subordinated
to such rights of the holders of the Senior Notes, the rights of the holders of
the Class M-2 Notes to receive payments of principal on each Payment Date
generally will be subordinated to such rights of the holders of the Class M-1
Notes and the Senior Notes, and the rights of the holders of the Certificates to
receive distributions of principal on the Certificates on each Payment Date will
be subordinated to the rights of the holders of the Notes to receive payments of
principal on such Payment Date. See 'Description of Credit
Enhancement--Subordination and Allocation of Losses' herein and '--Additional
Factors Affecting Delinquencies, Defaults and Losses on Home Loans--No Servicer
Delinquency Advances' below. As a result of such subordination, the yields to
maturity on the Mezzanine Notes and the Certificates will be more sensitive than
the yields on the Senior Notes to delinquencies and losses on the Home Loans.
While the payment and distribution of Excess Spread to the Security Owners
in the manner specified herein has been designed to produce and maintain a given
level of overcollateralization with respect to the Offered Notes, there can be
no assurance that Excess Spread will be generated in sufficient amounts to
ensure that such overcollateralization level will be achieved or maintained at
all times. In particular, as a result of delinquencies on the Home Loans during
any Due Period, the amount of interest received on the Home Loans during such
Due Period may be less than the amount of interest payable or distributable on
the Offered Notes on the related Payment Date. Such an occurrence would cause
the aggregate principal balances of the Offered Notes to decrease at a slower
rate relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount.
The holders of the Residual Interest will not be required to refund any
amounts previously distributed to such holders pursuant to the Transfer and
Servicing Agreements, including any payments of Excess Spread, regardless of
whether there are sufficient funds on a subsequent Payment Date to pay or
distribute all amounts then payable or distributable to the Security Owners.
Additional Limitations on FHA Insurance. Although the Transfer and
Servicing Agreements provide for the transfer of the Title I Loans to the Trust
for the benefit of the Security Owners, the FHA will recognize the FHA Insurance
Holder as the holder of the Title I Loans for purposes of the FHA Insurance
Amount and the related FHA Reserve (in such capacity, the 'FHA Insurance
Holder'). The FHA will not recognize such transfer of the Title I Loans for
purposes of transferring the rights to make FHA Claims or receive payments in
respect of FHA Claims submitted to the FHA with respect to the Title I Loans,
and none of the Depositor, the Indenture Trustee, the Co-Owner Trustee or the
Owner Trustee will be entitled to proceed directly against the FHA to recover
FHA Insurance Proceeds. The Security Owners, the Indenture Trustee, the Co-Owner
Trustee and the Owner Trustee will be dependent upon the FHA Insurance Holder,
to (1) assure that the FHA Insurance Amount for the Title I Loans is included in
the FHA Reserve for the Seller as reported by the FHA, (2) file FHA Claims on
the Title I Loans in accordance with the FHA Regulations and (3) remit all FHA
Insurance Proceeds received from the FHA in accordance with the Sale and
Servicing Agreement. The FHA Insurance Holder will contract with the Servicer to
act as the FHA Claims Administrator and in such capacity to handle all aspects
of administering, processing and submitting FHA Claims with respect to the Title
I Loans, in the name and on behalf of the Trust. Assignments of mortgage
relating to certain of the Title I Loans will be recorded in the name of the
Indenture Trustee in the real property records in the jurisdiction where the
related real property is located.
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These assignments will not be reported to the FHA and, accordingly, the FHA
insurance coverage that involves the FHA Insurance Holder for the benefit of the
Security Owners and the FHA will not be transferred to the Indenture Trustee.
The FHA has been advised of this arrangement and has indicated that such an
arrangement will not jeopardize the FHA Insurance Amount with respect to such
Title I Loans.
Since the FHA Insurance Amount for the Title I Loans is limited as
described herein, and since the adequacy of such FHA Insurance Amount is
dependent upon future events, including reductions in available coverage for the
payment of FHA Claims, no assurance can be given that the FHA Insurance Amount
is or will be adequate to cover 90% of all potential losses on the Title I Loans
or that the Title I Loans will qualify for the payment of FHA Claims. If the FHA
Insurance Amount for the Title I Loans is reduced to zero, the Title I Loans
will be effectively uninsured from and after the date of such reduction.
Due to the FHA procedures for transferring FHA insurance coverage from one
Title I Lender to another, the transfer by the FHA of the FHA Insurance Amount
for the Initial Home Loans that are Title I Loans from the Transferor's FHA
Reserve to the Seller's FHA Reserve will not be completed on the Closing Date,
but rather will occur on the Transfer Dates. See 'Summary of Terms--FHA
Insurance on the Title I Loans' herein. On each Transfer Date, the FHA Claims
Administrator on behalf of the FHA Insurance Holder will record the FHA
Insurance Amount for the Title I Loans that have been acknowledged by the FHA as
having been transferred to the Seller on such date separately from the insurance
coverage attributable to Title I Loans for any Additional Series on the books
and records of the Seller. Although the FHA Claims Administrator and the Seller
will separate, on the Seller's books and records, the FHA Insurance Amount from
the FHA insurance coverage available with respect to other Title I Loans
reported for insurance in the Seller's FHA Reserve, the FHA will not recognize
such separate treatment. Accordingly, claims paid to the Seller or the FHA
Claims Administrator by the FHA with respect to Title I Loans included in any
Additional Series could reduce the FHA Insurance Amount. In the Sale and
Servicing Agreement and the FHA Claims Administration Agreement, the Seller and
the FHA Claims Administrator will agree not to submit claims to the FHA with
respect to such other Title I Loans if the effect thereof would be to reduce the
FHA Insurance Amount for the Title I Loans. If the Seller or the FHA Claims
Administrator inadvertently submits a claim to the FHA in respect of a Title I
Loan that is not a Title I Loan at a time when the insurance coverage in the
Seller's FHA Reserve other than the FHA Insurance Amount has been reduced below
the amount of such claim, the FHA Insurance Amount will be reduced because the
FHA will honor such claim so long as the total insurance coverage in the
Seller's FHA Reserve, including that constituting the FHA Insurance Amount, has
not been exhausted. In the event of the bankruptcy of the Seller, there can be
no assurance that a trustee in bankruptcy would continue to separate insurance
coverage, including the FHA Insurance Amount, in the Seller's FHA Reserve with
respect to Title I Loans for the Offered Notes, any Additional Series, or any
other Title I Loans owned by the Seller in the same manner as provided in the
Sale and Servicing Agreement.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE HOME LOANS
As of the Cut-Off Date, the weighted average combined loan-to-value ratio
of the Conventional Home Loans included in the Initial Home Loan Pool is
expected to be approximately 115% and approximately 89% of the Conventional
Homes Loans included in the Initial Home Loan Pool are expected to have combined
loan-to-value ratios in excess of 100%. Consequently, the Mortgaged Properties
are not likely to provide adequate security for the Home Loans. Even assuming
that a Mortgaged Property provides adequate security for the related Home Loan,
substantial delays could be encountered in connection with the liquidation of a
Home Loan that would result in current shortfalls in payments and distributions
to the Security Owners to the extent such shortfalls are not covered by the
credit enhancement described herein. In addition, liquidation expenses relating
to any Liquidated Home Loan (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will reduce the liquidation proceeds
otherwise available for payment to the Security Owners. In the event that any
Mortgaged Property fails to provide adequate security for the related Home Loan,
any losses in connection with such Home Loan will be borne by Offered
Securityholders as described herein to the extent that the applicable credit
enhancement described herein is insufficient to absorb all such losses.
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RECENT ORIGINATION OF INITIAL HOME LOANS
None of the Preliminary Initial Home Loans were more than 30 days
delinquent in their scheduled monthly payments of principal and interest as of
the Statistical Calculation Date. Approximately 84% of the Preliminary Initial
Home Loans (by aggregate principal balance as of the Statistical Calculation
Date) have a first scheduled monthly payment due date occurring on or after
October 1, 1997, and therefore, it was not possible for such Preliminary Initial
Home Loans to have had a scheduled monthly payment that was 30 days or more
delinquent as of the Statistical Calculation Date. See '--Additional Factors
Affecting Delinquencies, Defaults and Losses on Home Loans--Limited Historical
Delinquency, Loss and Prepayment Information' below.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, DEFAULTS AND LOSSES ON HOME LOANS
Underwriting Guidelines. Pursuant to the underwriting guidelines of the
Transferor, the assessment of the creditworthiness of the related borrower is
the primary consideration in underwriting a Home Loan. The evaluation of the
adequacy of the value of the related Mortgaged Property in relation to the Home
Loan, together with the amount of all liens senior to the lien of the Home Loan
(i.e., the related 'combined loan-to-value ratio'), is given less consideration,
and in certain cases no consideration, in underwriting the Home Loans. See 'The
Transferor and Servicer--Underwriting Criteria' herein. The credit quality of
some of the borrowers under the Home Loans is lower than that of borrowers under
mortgage loans conforming to the FNMA or FHLMC underwriting guidelines for
first-lien, single family mortgage loans. See 'The Home Loan
Pool--Characteristics of Initial Home Loans' herein. Consequently, the Home
Loans are likely to experience higher rates of delinquencies, defaults and
losses (which rates could be substantially higher) than those rates that would
be experienced by similar types of loans underwritten in conformity with the
FNMA or FHLMC underwriting guidelines for first-lien, single family mortgage
loans. In addition, the losses sustained from defaulted Home Loans are likely to
be more severe (and will frequently be total losses) because the costs incurred
in the collection and liquidation of defaulted Home Loans in relation to the
smaller principal balances thereof are proportionately higher than for
first-lien, single family mortgage loans, and because substantially all of the
Home Loans are secured by junior liens on Mortgaged Properties in which the
borrowers had little or no equity at the time of origination of such Home Loans
(i.e., the related combined loan-to-value ratios approach or exceed 100%).
Furthermore, with respect to a significant number of the Home Loans, the
loan-to-value ratio determinations are based upon the borrower's representations
as to the value of the underlying property; accordingly, there can be no
assurance that such values accurately reflect prevailing market prices.
See'--Adequacy of Credit Enhancement' above.
Although the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Home Loans, no assurance can be given
that the creditworthiness of such borrower will not deteriorate as a result of
future economic and social factors, which deterioration may result in a
delinquency or default by such borrower on the related Home Loan. Furthermore,
because the adequacy of the value of the related Mortgaged Property is given
less or no consideration in underwriting the Home Loan, no assurance can be
given that any proceeds will be recovered from the foreclosure or liquidation of
the Mortgaged Property for a defaulted Home Loan. See'--Realization Upon
Defaulted Home Loans' below.
In response to changes and developments in the consumer finance area as
well as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time, which in certain instances, may result in more
stringent and in other instances less stringent, underwriting requirements.
Depending upon the date on which the Home Loans were acquired by the Transferor,
such Home Loans included in the Home Loan Pool may have been acquired by the
Transferor under different underwriting requirements, and accordingly, certain
Home Loans included in the Home Loan Pool may be of a different credit quality
and have different loan characteristics from other Home Loans. Furthermore, to
the extent that certain Home Loans were originated or purchased by the
Transferor under less stringent underwriting requirements, such Home Loans may
be more likely to experience higher rates of delinquencies, defaults and losses
than those Home Loans originated or purchased under more stringent underwriting
requirements.
No Servicer Delinquency Advances. In the event of a delinquency or a
default with respect to a Home Loan, neither the Servicer nor the Master
Servicer will have an obligation to advance scheduled monthly
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payments of principal and interest with respect to such Home Loan. As a result
of the foregoing, the amount of principal and interest received on the Home
Loans during any particular Due Period may be less than the amount of principal
and interest payable or distributable on the Offered Notes on the related
Payment Date. Such an occurrence would cause the aggregate principal balance of
the Offered Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount. However, the Servicer or, if it
fails to do so, the Master Servicer will make reasonable and customary expense
advances with respect to the Home Loans in accordance with their servicing
obligations. See 'Description of the Transfer and Servicing
Agreements--Servicing' herein.
Relocation and Reloading of Debt. With respect to Home Loans which in
combination with superior liens have loan-to-value ratios in excess of 100%,
there is a risk that if the related borrowers decide or are obliged to relocate,
these borrowers will be unable to discharge the 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
delinquencies, defaults and losses. With respect to Home Loans, the proceeds of
which were used in whole or in part for debt consolidation, there can be no
assurance that, following the debt consolidation, the related borrower will not
incur further consumer debt to third party lenders. This reloading of debt could
impair the ability of these borrowers to service their debts, which in turn
could result in higher rates of delinquencies, defaults and losses on the Home
Loans.
Acquisitions from Third Parties. All of the Home Loans were acquired by
the Transferor through purchases from a network of correspondent lenders. See
'The Home Loan Pool--General' herein. All of the Home Loans will have been
re-underwritten and reviewed for compliance with the Transferor's underwriting
guidelines. The Home Loans may have been originated by the originator thereof
through the application of the underwriting guidelines of the Transferor in a
manner that is different from the Transferor's application and such loans may be
of a lesser credit quality. In addition, the Transferor may have acquired
certain Home Loans which were originated by an originator that, at the time of
origination thereof, was not an approved FHA lender or an approved FNMA or FHLMC
seller/servicer, and therefore did not have an internal quality control program
substantially similar to the FNMA or FHLMC required quality control programs
with respect to the underwriting and origination of such Home Loans. Such Loans
may be subject to a higher incidence of delinquency or default.
Limited Historical Delinquency, Loss and Prepayment Information. PSB
Lending began acquiring and servicing home loans in July of 1996, and from such
date to the present, has substantially increased the volume of conventional home
loans that it has acquired, sold and/or serviced. Consequently, PSB Lending has
limited historical experience with respect to the performance, including the
delinquency and loss experience and the rate of prepayments of these
conventional home loans, with respect to its entire portfolio of loans and in
particular with respect to such increased volume. Accordingly, neither the
delinquency experience and loan loss and liquidation experience set forth under
'The Transferor and Servicer--Servicing and FHA Claims Experience' herein, nor
the prepayment scenarios set forth under 'Prepayment and Yield
Considerations--Weighted Average Lives of the Offered Notes' herein may be
indicative of the performance of the Home Loans included in the Home Loan Pool.
Prospective investors should make their investment determination based on the
Home Loan underwriting criteria, the availability of the credit enhancement
described herein, the characteristics of the Initial Home Loans and other
information provided herein, and not based on any prior delinquency experience
and loan loss and liquidation experience information set forth herein or any
rate of prepayments assumed herein. As a result of such limited history, the
market value of the Offered Notes may differ from securities backed by
comparable loans for which greater historical information is available.
Geographic Concentration. Approximately 47.55% of the Preliminary Initial
Pool Principal Balance will consist of Home Loans that are secured by Mortgaged
Properties located or have the related borrowers residing in the State of
California. Because of the relative geographic concentration of the Mortgaged
Properties and borrowers within California, delinquencies and losses on the Home
Loans may be higher than would be the case if the Home Loans were more
geographically diversified. Adverse economic conditions, including a recession,
in such State or geographic regions (which may or may not affect real property
values) may affect the ability of the related borrowers to make timely payments
of their scheduled monthly payments of principal and interest and, accordingly,
the actual rates of delinquencies, defaults and losses on such Home Loans could
be higher than those currently experienced in the home lending and consumer
finance industry for similar types of loans. In addition, with respect to the
Home Loans in California, certain of the Mortgaged Properties may be more
susceptible to
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certain types of special hazards that are not covered by any casualty insurance,
such as earthquakes, floods and other natural disasters and major civil
disturbances, than residential properties located in other parts of the country.
Under the Transferor's underwriting guidelines, each borrower is required to
submit evidence of standard hazard insurance and, if applicable, flood
insurance. Such insurance must provide coverage for (i) the full replacement
value of the related Mortgaged Property, if permitted under state law, or (ii)
if not so permitted, 80% of the value of the related Mortgaged Property, with
such value being determined in accordance with the Transferor's underwriting
guidelines. In general, declines in the California residential real estate
market may adversely affect the values of Mortgaged Properties located in
California such that the outstanding principal balances of such Home Loans,
together with the outstanding principal amount of any senior liens on such
Mortgaged Properties, will equal or exceed (or exceed by a greater amount) the
value of such Mortgaged Properties. Accordingly, the actual rates of
delinquencies, defaults and losses on such Home Loans secured by Mortgaged
Properties in California could be higher than those currently experienced in the
home lending and consumer finance industry in general.
Balloon Loans. The Home Loans may include balloon loans (each, a 'Balloon
Loan') which provide for equal monthly payments of principal and interest based
on a 30-year amortization schedule, and a single payment of the remaining
principal balance on the Balloon Loan at the end of the 15th year following
origination. Accordingly, the final payment due on the related Mortgage Note may
be substantially greater than any other previous payment. The remainder of the
Preliminary Initial Home Loans and substantially all of the Home Loans included
in the Additional Initial Home Loan Pool and the Subsequent Home Loans will
provide for substantially equal monthly payments of principal and interest which
are, if timely paid, sufficient to amortize fully the principal balance of such
Home Loans on or before their respective final due dates. Because borrowers
under Balloon Loans are required to make a relatively large single payment upon
maturity, it is possible that the default risk associated with Balloon Loans is
greater than that associated with fully-amortizing Home Loans. None of the
Preliminary Initial Home Loans are Balloon Loans.
Dependence on Master Servicer and Servicer for Servicing Home
Loans Pursuant to the Sale and Servicing Agreement, the Servicer, on behalf of
the Master Servicer, will perform the daily loan servicing functions for the
Home Loans that include, without limitation, the collection of payments on the
Home Loans, the remittance of funds from such collections for payment and
distribution to the Security Owners, the bookkeeping and accounting for such
collections and payments and distributions, all other servicing activities
relating to the Home Loans, the preparation of the monthly servicing and
remittance reports pursuant to the Sale and Servicing Agreement and the
maintenance of all records and files pertaining to such servicing activities.
The Master Servicer has only limited experience in master servicing loans
comparable to the Home Loans. Upon the failure of the Servicer and the Master
Servicer to remedy an Event of Default under the Sale and Servicing Agreement, a
majority of the Security Owners or the Indenture Trustee or the Owner Trustee
may remove the Master Servicer and the Servicer and appoint a successor Master
Servicer and a successor servicer pursuant to the terms of the Sale and
Servicing Agreement. Absent such a replacement, the Security Owners will be
dependent upon the Master Servicer and the Servicer to adequately and timely
perform the servicing obligations and remit to the Indenture Trustee the funds
from the payments of principal and interest received on the Home Loans. The
manner in which the Master Servicer and the Servicer, as applicable, performs
the servicing obligations will affect the amount and timing of the principal and
interest payments received on the Home Loans. The principal and interest
payments received on the Home Loans are the primary source of funds for the
payments and distributions due to the Security Owners under the Sale and
Servicing Agreement and the Indenture. Accordingly, the Security Owners will be
dependent upon the Master Servicer and the Servicer, as applicable, to
adequately and timely perform its servicing obligations and such performance
will affect the amount and timing of payments and distributions to the Security
Owners. See 'The Transferor and Servicer--Servicing and FHA Claims Experience'
herein.
Realization Upon Defaulted Home Loans. Substantially all of the Home Loans
are secured by junior liens, and the loans secured by the related senior liens
are not included in the Home Loan Pool. The primary risk to holders of Home
Loans secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Mortgaged Property to
satisfy fully both the indebtedness secured by the related senior lien(s) and
the related Home Loan. See'Risk Factors--Property Values May Be Insufficient' in
the Prospectus. In accordance with the loan servicing practices of the Servicer
for home loans secured by
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junior liens in its portfolio and based upon a determination that the
realization from a defaulted junior lien Home Loan may not be an economically
viable alternative, the Servicer, in most cases, will not (i) pursue the
foreclosure of a junior lien defaulted Home Loan, (ii) satisfy the senior
mortgage(s) at or prior to the foreclosure sale of the Mortgaged Property, or
(iii) advance funds to keep the senior mortgage(s) current. The Trust will have
no source of funds to satisfy the senior mortgage(s) or make payments due to the
senior mortgagee(s), and, therefore, Security Owners should not expect that any
senior mortgage(s) will be kept current by the Trust for the purpose of
protecting any junior lien Home Loan. See 'Certain Legal Aspects of
Loans--Junior Mortgages; Rights of Senior Mortgages' in the Prospectus.
Furthermore, it is unlikely that any of the foregoing methods of realizing upon
a junior lien defaulted Home Loan will be an economically viable alternative
with respect to any Home Loans having a combined loan-to-value ratio that
exceeds 100% at the time of default. As a result, the Servicer may pursue
alternative methods of realizing proceeds from junior lien defaulted Home Loans,
including without limitation, the whole loan sale of such Home Loans and the
modification of such Home Loans, which, among other things, may include the
abatement of accrued interest or the reduction of a portion of the outstanding
Principal Balances of such Home Loans. Because substantially all of the Home
Loans will have combined loan-to-value ratios at the time of origination that
approach or exceed 100%, losses sustained from defaulted Home Loans are likely
to be more severe (and will frequently be total losses). No assurance can be
given that any proceeds, or a significant amount of proceeds, will be recovered
from the liquidation of defaulted Home Loans.
Generally, the underwriting requirements of the Transferor do not require
that a borrower obtain fire and casualty insurance or title insurance as a
condition to approving the Home Loan. Accordingly, if a Mortgaged Property
suffers any uninsured hazard or casualty losses, or if the borrower is found not
to have clear title to such Mortgaged Property, Security Owners may bear the
risk of loss resulting from a default by the related borrower to the extent such
losses are not recovered by foreclosure or liquidation proceeds on such
defaulted Home Loans or from amounts available from the credit enhancement
provided for such Offered Notes.
Economic Conditions. For the limited period of time during which loans in
the nature of the Home Loans have been originated, economic conditions
nationally and in most regions of the country have been generally favorable. A
deterioration in economic conditions could be expected to adversely affect the
ability and willingness of borrowers to repay their Home Loans; however, because
of lenders' limited experience with loans similar to the Home Loans, no
prediction can be made as to the severity of the effect of a general economic
downturn on the rate of delinquencies and defaults on the Home Loans. Because
borrowers under the Home Loans generally have little or no equity in the related
Mortgaged Properties, any significant increase in the rate of delinquencies and
defaults could result in substantial losses to holders of Offered Notes, in
particular the Certificates and the Mezzanine Notes. See '--Adequacy of the
Mortgaged Properties as Security for the Home Loans' and '--Additional Factors
Affecting Delinquencies, Defaults and Losses on Home Loans' above and
'Prepayment and Yield Considerations' herein.
Non-recordation of Assignments. Subject to confirmation by the Rating
Agencies, with respect to the Home Loans secured by Mortgaged Properties located
in certain states, the Transferor will not be required to record assignments to
the Indenture Trustee of the Mortgages in the real property records of these
states for such Home Loans, but rather the Transferor, in its capacity as the
Servicer, will retain record title to such Mortgages on behalf of the Indenture
Trustee and the Security Owners. See 'Description of the Transfer and Servicing
Agreements--Sale and Assignment of the Home Loans' herein. Although the
recordation of the assignments of the Mortgages in favor of the Indenture
Trustee is not necessary to effect a transfer of the Home Loans to the Indenture
Trustee, if the Transferor or the Seller were to sell, assign, satisfy or
discharge any Home Loan prior to recording the related assignment in favor of
the Indenture Trustee, the other parties to such sale, assignment, satisfaction
or discharge may have rights superior to those of the Indenture Trustee. In some
states, in the absence of such recordation of the assignments of the Mortgages,
the transfer to the Indenture Trustee of the Home Loans may not be effective
against certain creditors or purchasers from the Transferor or a trustee in
bankruptcy of the Transferor. If such other parties, creditors or purchasers
have rights to the Home Loans that are superior to those of the Indenture
Trustee, then the Security Owners could lose the right to future payments of
principal and interest from such Home Loans and could suffer a loss of principal
and interest to the extent that such loss is not otherwise covered by amounts
available from the credit enhancement provided for such Offered Notes.
Other Legal Considerations. The underwriting, origination, servicing and
collection of the Home Loans are subject to a variety of state and federal laws,
public policies and principles of equity. For example, the
S-22
<PAGE>
Federal District Court for the Eastern District of Virginia recently announced a
decision indicating that Federal law prohibits lenders from paying independent
mortgage brokers a premium for loans with above-market interest rates. The
Transferor will be required to repurchase or replace any Home Loan which did not
comply with applicable state and federal laws and regulations as of the Closing
Date for any Initial Home Loan and as of the Subsequent Transfer Date for any
Subsequent Home Loan. Depending on the provisions of applicable law and the
specific facts and circumstances involved, violations of these laws, policies or
principles may limit the ability of the Servicer to collect all or part of the
principal or interest on the Home Loans, may entitle the borrower to a refund of
amounts previously paid or a rescission of the related Home Loan, and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
any Home Loans because of a violation of the aforementioned laws, public
policies or general principles of equity, then the Trust may be delayed or
unable to make all payments and distributions owed to the Security Owners to the
extent any related delays or losses are not otherwise covered by amounts
available from the applicable credit enhancement provided for the Offered Notes.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer or the Transferor, such violations may materially impact (i) the
financial ability of the Servicer to continue to act in such capacity or (ii)
the ability of the Transferor to repurchase or replace Defective Home Loans if
such violation breaches a representation or warranty contained in the Sale and
Servicing Agreement. See '--Limitations on Repurchase or Replacement of
Defective Home Loans by Transferor' below and 'Risk Factors--Consumer Protection
Laws May Affect Loans' in the Prospectus.
The National Bankruptcy Review Commission (the 'Bankruptcy Commission'), an
independent commission established under the Bankruptcy Reform Act of 1994 to
study issues and make recommendations relating to the United States Bankruptcy
Code (the 'Bankruptcy Code'), recently delivered its report to the President and
Congress. The Bankruptcy Commission recommends in its report that the Bankruptcy
Code be amended to treat any claim secured only by a junior lien on a borrower's
principal residence as unsecured to the extent that the amount of such claim
exceeds the value of the mortgaged property at the date of origination. If such
change in the Bankruptcy Code were to be enacted, and if such change were to
apply to loans originated prior to enactment, a substantial majority of the Home
Loans would likely be treated as unsecured debt in a case under Chapter 13 of
the Bankruptcy Code. As a consequence, borrowers who become Chapter 13 debtors
would have substantially less incentive to make arrangements for repayment of
their Home Loans, and the likelihood that the Trust would recover any amounts in
respect of the related Home Loans would be remote. The Bankruptcy Commission's
recommendations are advisory only; any change in the Bankruptcy Code must be
effected through Congressional action.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE HOME LOANS BY TRANSFEROR
Pursuant to the Sale and Servicing Agreement, the Transferor has agreed to
cure in all material respects any breach of the Transferor's representations and
warranties set forth in the Sale and Servicing Agreement with respect to
Defective Home Loans. If the Transferor cannot cure such breach within a
specified period of time, the Transferor is required to repurchase such
Defective Home Loans from the Trust or substitute other loans for such Defective
Home Loans. Although a significant portion of the Home Loans will have been
acquired from unaffiliated correspondent lenders, the Transferor will make the
same representations and warranties for all such Home Loans. To the extent that
the Transferor has obtained any representations and warranties from such
unaffiliated correspondent lenders, the Transferor, and the Trust, on behalf of
the Security Owners, as the successors to the Transferor's rights with respect
thereto, will have an additional party that is liable for the repurchase of any
Home Loan in breach of the applicable representations and warranties made by
such party. For a summary description of the Transferor's representations and
warranties, see 'Description of the Transfer and Servicing Agreements--Sale and
Assignment of Loan Assets' herein.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Home Loans from
the Trust or replacing Defective Home Loans in the manner described above, or
that, at any particular time, any unaffiliated lender from whom the Transferor
obtained the Defective Home Loans will be capable, financially or otherwise, of
repurchasing any Defective Home Loans from the Transferor. If the Transferor
repurchases, or is obligated to repurchase, defective home loans from any other
series of asset backed securities, the financial ability of the Transferor to
repurchase Defective Home Loans from the Trust may be adversely affected. In
addition, other events relating to the
S-23
<PAGE>
Transferor and its home lending and consumer finance operations can occur that
would adversely affect the financial ability of the Transferor to repurchase
Defective Home Loans from the Trust, including without limitation, the
termination of its borrowing arrangements that provide funding for its assets or
operations, or the sale or other disposition of all or any significant portion
of its assets. If the Transferor is unable to repurchase or replace a Defective
Home Loan, and if applicable, an unaffiliated lender is unable to repurchase or
replace a Defective Home Loan it sold to the Transferor, then the Servicer, on
behalf of the Trust, will pursue other customary and reasonable efforts, if any,
to recover the maximum amount possible with respect to such Defective Home Loan,
and any resulting delay or loss will be borne by the Security Owners to the
extent that such delay or loss is not otherwise covered by amounts available
from the credit enhancement provided for the Offered Notes. See '--Adequacy of
Credit Enhancement' above and 'The Transferor and Servicer' herein.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's recent commencement of its business
operations in July 1996, its increasing volume of loan acquisitions, and its
expanding securitization activities, the Transferor requires substantial capital
to fund its operations and has operated, and expects to continue to operate, on
a negative operating cash flow basis. Currently, the Transferor funds certain of
its operations, including its loan originations and purchases, from the capital
contributed by Pacific Southwest Bank ('PSB'), indirectly, its parent, and from
borrowings under the Transferor's borrowing arrangements with PSB. See 'The
Transferor and Servicer' herein. In addition, other operations are funded from
financing arrangements with an affiliate of the Underwriter and the Depositor.
There can be no assurance that PSB will be able to contribute or lend additional
capital to the Transferor or that an affiliate of the Depositor and Underwriter
will continue to lend to the Transferor or that, as the existing lending
arrangements mature, the Transferor will have access to the financing necessary
for its operations or that such financing will be available to the Transferor on
favorable terms. To the extent that the Transferor is unable to arrange new or
alternative methods of financing on favorable terms, the Transferor may have to
curtail its loan purchasing activities, which could have a material adverse
effect on the Transferor's financial condition and, in turn, its ability to
service the Home Loans and to repurchase or replace any Defective Home Loans.
USE OF PROCEEDS
The proceeds from the sale of the Offered Notes, net of certain expenses,
will be used by the Trust as consideration for the purchase of the Initial Home
Loans from the Depositor (which will involve a payment to an affiliate of the
Depositor and the Underwriter in order to pay off a warehouse financing
arrangement) and to fund the Pre-Funding Account and the Capitalized Interest
Account. The Depositor will use all such proceeds from the sale of the Initial
Home Loans to the Trust as consideration for the purchase of the Initial Home
Loans from the Transferor. The Transferor in turn will use all or a substantial
portion of such proceeds from the sale of the Initial Home Loans to repay
certain indebtedness under one or more warehouse financing arrangements, which
have been utilized to finance the acquisition of such Initial Home Loans and are
secured by such Initial Home Loans, and the remainder will be used for working
capital.
DESCRIPTION OF THE TRUST
GENERAL
The Issuer, PSB Lending Home Loan Owner Trust 1997-4, is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. After its
formation, the Trust will not engage in any activity other than (i) acquiring,
holding and managing the Home Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Offered Notes and the Residual Interest,
(iii) making payments on the Notes and distributions in respect of the
Certificates and the Residual Interest, and (iv) engaging in other activities
that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Certificates represent an undivided ownership interest in the Trust.
The Trust will initially be capitalized with equity equal to the aggregate Class
Principal Balances of the Certificates, which is equal to
S-24
<PAGE>
$30,600,000. The Residual Interest will represent the residual interest in the
assets of the Trust. On the Closing Date, the Transferor will retain 100% of the
Residual Interest.
On the Closing Date, pursuant to the Sale and Servicing Agreement, the
Depositor will purchase from the Transferor, and the Trust will purchase from
the Depositor, Home Loans (the 'Initial Home Loans') having an aggregate
principal balance of approximately $180,000,000 (the 'Initial Pool Principal
Balance') as of the December 1, 1997 Cut-Off Date. In addition, on the Closing
Date, approximately $60,000,000 is expected to be deposited into the Pre-Funding
Account for the purchase of Subsequent Home Loans during the Funding Period. The
sum of the aggregate principal balance of the Initial Home Loans and the amount
expected to be deposited into the Pre-Funding Account on the Closing Date equals
approximately $240,000,000.
The assets of the Trust will consist primarily of Home Loans which will be
secured by Mortgages; provided that, in order to effectuate the transfer of the
related FHA Insurance with respect to the Title I Loans (as defined below),
legal title to the Title I Loans and the related FHA Insurance coverage will be
transferred to the FHA Insurance Holder, and the Trust will hold a beneficial
interest in the Title I Loans and the related FHA Insurance and the contractual
obligation of the FHA Insurance Holder under the Sale and Servicing Agreement to
collect any amount due under the FHA Insurance for the Benefit of the Trust.
See'The Home Loan Pool' herein. The assets of the Trust will also include: (i)
payments of interest and principal in respect of the Home Loans received after
the applicable Cut-Off Date; (ii) amounts on deposit in the Pre-Funding Account
and the Capitalized Interest Account until the expiration of the Funding Period;
(iii) amounts on deposit in the Collection Account, Note Payment Account and
Certificate Distribution Account; (iv) such amounts as are from time to time on
deposit in the FHA Insurance Premium Account; (v) the benefit of the FHA
Insurance applicable to the Title I Loans, including the right to make FHA
Claims and the right to direct any FHA Claims Administrator, as agent and
attorney-in-fact on behalf of the Trust to make FHA Claims, subject to the terms
of the Sale and Servicing Agreement; (vi) the rights of the Transferor in and to
the obligations of any seller under each loan sale agreement pursuant to which
the Transferor acquired any Home Loans; and (vii) certain other ancillary or
incidental funds, rights and properties related to the foregoing. The Trust will
include the unpaid principal balance of each Home Loan as of the related Cut-Off
Date (the 'Cut-Off Date Principal Balance'). The 'Principal Balance' of a Home
Loan on any day is equal to its related Cut-Off Date Principal Balance, minus
all principal reductions credited against the Principal Balance of such Home
Loan since such Cut-Off Date; provided, however, that the Principal Balance of a
Liquidated Home Loan shall be zero. With respect to any date, the 'Pool
Principal Balance' will be equal to the aggregate of the Principal Balances of
all Home Loans as of the last day of the immediately preceding Due Period.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under '--The Owner Trustee and Co-Owner Trustee.'
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Closing Date, as if the issuance and sale of all of the Securities had taken
place on such date:
<TABLE>
<S> <C>
Class A-1 Notes............................................................... $ 45,070,000
Class A-2 Notes............................................................... $ 22,720,000
Class A-3 Notes............................................................... $ 29,220,000
Class A-4 Notes............................................................... $ 42,750,000
Class A-5 Notes............................................................... $ 15,640,000
Class M-1 Notes............................................................... $ 36,600,000
Class M-2 Notes............................................................... $ 17,400,000
Class B-1 Certificates........................................................ $ 22,800,000
Class B-2 Certificates........................................................ $ 7,800,000
------------
Total....................................................................... $240,000,000
------------
------------
</TABLE>
S-25
<PAGE>
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by Norwest Bank Minnesota,
National Association, in its capacity as Co-Owner Trustee under the Trust
Agreement and the Sale and Servicing Agreement, including maintaining the
Certificate Distribution Account and making distributions therefrom. Norwest
Bank Minnesota, National Association and the Servicer will also perform certain
additional administrative functions on behalf of the Trust pursuant to the terms
of an administration agreement (the 'Administration Agreement') among the Trust,
Norwest Bank Minnesota, National Association, as administrator, and the
Servicer.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the collective pool of the Initial Home
Loans together with any Subsequent Home Loans and Qualified Substitute Home
Loans conveyed to the Trust after the Closing Date. The Conventional Loans will
consist of (i) Home Loans originated under the Transferor's 'ExtraEquity 50'
program, pursuant to which at least 50% of the related loan proceeds must be
used for home improvement purposes and the remaining proceeds may be used for
debt consolidation and/or large consumer purchases, and (ii) Home Loans
originated under the Transferor's 'ExtraEquity 100' program under which more
than 50% of the net proceeds from the related loan must be used for debt
consolidation and/or large consumer purchases and the remaining net proceeds, if
any, may be used for home improvements. The Title I Loans will be partially
insured to the extent described herein (and subject to the conditions described
herein) by the FHA under the Title I Program. Substantially all of the Mortgages
for the related Home Loans will be second liens in priority to the related first
liens on the related Mortgaged Properties, which will consist primarily of owner
occupied single family residences. Substantially all of the Home Loans will be
secured by liens on Mortgaged Properties in which the borrowers have little or
no equity therein (i.e., the related combined loan-to-value ratios approach or
exceed 100%) at the time of origination of such Home Loans.
The Transferor acquired the Home Loans through wholesale purchases, on a
flow basis, from unaffiliated correspondent lenders that originated the Home
Loans ('correspondent originations'). All of the Home Loans will have been
re-underwritten by the Transferor to determine whether such Home Loans comply
with the underwriting standards of the Transferor.
For a description of the underwriting criteria applicable to the Home
Loans, see 'The Transferor and Servicer--Underwriting Criteria' herein. All of
the Home Loans will be acquired by the Transferor and sold by the Transferor to
the Depositor and, pursuant to the Sale and Servicing Agreement, the Depositor
will sell, convey, transfer and assign the Home Loans to the Trust. Pursuant to
the Indenture, the Trust will pledge and assign the Home Loans to the Indenture
Trustee for the benefit of the Security Owners. The Trust will be entitled to
all payments in respect of the Home Loans of interest accrued and principal due
on and after (i) the December 1, 1997 Cut-Off Date with respect to the Initial
Home Loans and (ii) the related Cut-Off Date with respect to the Subsequent Home
Loans. The Transferor will be entitled to receive all interest accrued on the
Home Loans prior to the December 1, 1997 Cut-Off Date.
PAYMENTS ON THE HOME LOANS
Except for Balloon Loans, the Home Loans provide for a schedule of payments
which will be, if timely paid, sufficient to amortize fully the principal
balance of the related Home Loan on or before its maturity date. The Home Loans
have scheduled monthly payment dates which occur throughout a month. Each Home
Loan bears interest at a fixed rate of interest (the 'Home Loan Rate'). Interest
with respect to the Home Loans will accrue on either an 'actuarial interest'
method or a 'simple interest' method. No Home Loan provides for deferred
interest or negative amortization.
S-26
<PAGE>
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination, and payments received after a grace period following such
scheduled day are subject to late charges. A scheduled payment on an actuarial
interest method Home Loan received either earlier or later (other than
delinquent) than the scheduled due date thereof will not affect the amortization
schedule or the relative application of such payment to principal and interest
in respect of such Home Loan.
The simple interest method provides for the amortization of the amount of a
Home Loan over a series of equal scheduled payments. However, unlike the monthly
actuarial interest method, each scheduled payment consists of an installment of
interest which is calculated on the basis of the outstanding principal balance
of the related Home Loan at the stated Home Loan Rate and based upon the period
elapsed since the preceding payment of principal was made, using the method
permitted by applicable law. As payments are received under the Home Loan, the
amount received is applied first to interest accrued to the date of payment and
the balance, if any, is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on such a Home Loan
less than one month after the previous payment, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment on such a Home Loan more than one month after the previous payment,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to reduce
the unpaid principal balance will be correspondingly lowered. In addition, in
certain states a late charge may be imposed with respect to the past due amount.
With respect to a Home Loan for which interest accrues pursuant to the
simple interest method, if a payment is received on such Home Loan less than one
month after the previous payment, more of such payment will be used on the
related Payment Date to pay principal on the Offered Notes than if such payment
was received on its scheduled monthly due date. Conversely, if a payment is
received on such Home Loan more than one month after the previous payment, less
of such payment will be used on the related Payment Date to pay principal on the
Offered Notes than if such payment was received on its scheduled monthly due
date. This will not affect the total amount of principal to be received by the
Offered Notes over the life of the transaction, but it may affect the weighted
average lives of the Offered Notes. See 'Prepayment and Yield Considerations'
herein.
Certain of the borrowers with respect to the Home Loans may be covered by
credit life and/or disability insurance policies, which provide for payment in
full of the outstanding principal balance of the related Home Loans in the event
of accidental death, disability or (in some cases) unemployment of the related
borrower. If a borrower covered by such a policy elects to cancel the policy,
the amount of the premium refund payable in connection with such cancellation
will be applied as a payment on the related Home Loan. Any proceeds received by
the Trust in respect of such insurance policies will affect the rate of
prepayments on the Home Loans. See 'Prepayment and Yield Consideration' herein.
CHARACTERISTICS OF PRELIMINARY INITIAL HOME LOANS
Set forth below is certain statistical information regarding the
Preliminary Initial Home Loan Pool. The Initial Home Loan Pool on the Closing
Date is expected to consist of the Preliminary Initial Home Loan Pool and an
Additional Initial Home Loan Pool consisting of Home Loans with an aggregate
principal balance (as of the December 1, 1997 Cut-Off Date) of approximately
$180,000,000. The Transferor does not expect the characteristics of the
Additional Initial Home Loan Pool to differ materially from those of the
Preliminary Initial Home Loan Pool. The statistical information set forth below
does not take into account any Subsequent Home Loans that may be added to the
Home Loan Pool during the Funding Period through the application of amounts on
deposit in the Pre-Funding Account. Prior to the Closing Date, the composition
of the Preliminary Initial Home Loan Pool may be altered at the option of the
Transferor by removing certain of the Home Loans and substituting substantially
similar Home Loans therefore. As a result of the foregoing, the statistical
information presented herein regarding the Preliminary Initial Home Loan Pool
expected to be included in the Home Loan Pool as of the date of this Prospectus
Supplement: (1) does not take into account any additional Home Loans included in
the Home Loan Pool; (2) does not take into account any Subsequent Home Loans
that may be added
S-27
<PAGE>
to the Home Loan Pool during the Pre-Funding Period; and (3) may vary in certain
respects from comparable information based on the actual composition of the Home
Loan Pool at the Closing Date or any Subsequent Transfer Date. As a result, the
statistical information presented below regarding the characteristics of the
Preliminary Initial Home Loan Pool as of the date of this Prospectus Supplement
may vary in certain respects from comparable information based on the actual
composition of the Initial Home Loan Pool at the Closing Date. In addition,
after the Statistical Calculation Date, the characteristics of the actual
Initial Home Loan Pool may vary from the information below due to a number of
factors, including prepayments after the the Statistical Calculation Date, or
the purchase of any Subsequent Home Loans after the Closing Date. See
'--Conveyance of Subsequent Home Loans' below. A schedule of the Initial Home
Loans included in the Initial Home Loan Pool as of the Closing Date will be
attached to the Sale and Servicing Agreement delivered to the Indenture Trustee
upon delivery of the Offered Notes.
The Preliminary Initial Home Loans consist of approximately 3,467 loans
having an aggregate principal balance as of the Statistical Calculation Date, of
approximately $115,529,600. Except as provided above, the Preliminary Initial
Home Loans (by aggregate Principal Balance as of the Statistical Calculation
Date) will have the characteristics set forth in the tables beginning on the
following page. The sums of the amounts and percentages in the following tables
may not equal to totals shown due to rounding.
S-28
<PAGE>
HOME LOAN RATE
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
HOME LOAN NUMBER OF AGGREGATE BY AGGREGATE
RATES (%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ---------- ----------------- -----------------
<S> <C> <C> <C>
8.001 to 09.000.............................................. 4 $ 89,574.99 0.08%
9.001 to 10.000.............................................. 4 77,768.95 0.07
10.001 to 11.000.............................................. 24 727,173.66 0.63
11.001 to 12.000.............................................. 464 16,677,107.13 14.44
12.001 to 13.000.............................................. 656 24,154,787.42 20.91
13.001 to 14.000.............................................. 840 28,931,875.99 25.04
14.001 to 15.000.............................................. 677 22,390,166.75 19.38
15.001 to 16.000.............................................. 529 15,278,201.59 13.22
16.001 to 17.000.............................................. 169 4,659,698.77 4.03
17.001 to 18.000.............................................. 67 1,707,131.79 1.48
18.001 to 19.000.............................................. 32 814,113.90 0.70
19.001 to 20.000.............................................. 1 22,000.00 0.02
----- ---------------- ------
Total.................................................... 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
The weighted average Home Loan Rate of the Preliminary Initial Home Loans
as of the Statistical Calculation Date was approximately 13.94% per annum.
CURRENT PRINCIPAL BALANCE DISTRIBUTION
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
CUT-OFF DATE NUMBER OF AGGREGATE BY AGGREGATE
PRINCIPAL BALANCE ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000.00....................................... 22 $ 205,200.24 0.18%
10,000.01 to 20,000.00....................................... 440 7,524,610.53 6.51
20,000.01 to 30,000.00....................................... 1,248 32,129,239.28 27.81
30,000.01 to 40,000.00....................................... 987 34,917,117.67 30.22
40,000.01 to 50,000.00....................................... 490 22,620,309.63 19.58
50,000.01 to 60,000.00....................................... 133 7,417,182.64 6.42
60,000.01 to 70,000.00....................................... 76 4,990,960.06 4.32
70,000.01 to 80,000.00....................................... 48 3,624,236.92 3.14
80,000.01 to 90,000.00....................................... 14 1,200,954.44 1.04
90,000.01 to 100,000.00....................................... 9 899,789.53 0.78
----- ---------------- ------
Total.................................................... 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
The average current principal balance of the Preliminary Initial Home Loans
as of the Statistical Calculation Date was approximately $33,322.64.
S-29
<PAGE>
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
ORIGINAL NUMBER OF AGGREGATE BY AGGREGATE
PRINCIPAL BALANCE ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000.00....................................... 22 $ 205,200.24 0.18%
10,000.01 to 20,000.00....................................... 440 7,524,610.53 6.51
20,000.01 to 30,000.00....................................... 1,248 32,129,239.28 27.81
30,000.01 to 40,000.00....................................... 985 34,837,205.96 30.15
40,000.01 to 50,000.00....................................... 492 22,700,221.34 19.65
50,000.01 to 60,000.00....................................... 133 7,417,182.64 6.42
60,000.01 to 70,000.00....................................... 76 4,990,960.06 4.32
70,000.01 to 80,000.00....................................... 48 3,624,236.92 3.14
80,000.01 to 90,000.00....................................... 14 1,200,954.44 1.04
90,000.01 to 100,000.00....................................... 9 899,789.53 0.78
----- ---------------- ------
Total.................................................... 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
The average principal balance of the Preliminary Initial Home Loans at
origination was approximately $33,357.58.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF MONTHS NUMBER OF AGGREGATE BY AGGREGATE
SINCE ORIGINATION HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
0 to 01................................................. 1,810 $ 61,074,633.44 52.86%
2 to 12................................................. 1,649 54,244,827.52 46.95
13 to 24................................................. 7 185,686.73 0.16
25 to 36................................................. 1 24,453.25 0.02
----- ---------------- ------
Total............................................... 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
The weighted average months since origination of the Preliminary Initial
Home Loans as of the Statistical Calculation Date was approximately 2 months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENT OF TOTAL
RANGE OF REMAINING TERM NUMBER OF AGGREGATE BY AGGREGATE
TO MATURITY (MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
31 to 60.................................................... 25 $ 509,884.07 0.44%
61 to 90.................................................... 5 120,813.65 0.10
91 to 120.................................................... 152 4,124,448.33 3.57
121 to 150.................................................... 4 120,780.17 0.10
151 to 180.................................................... 1,093 33,640,010.76 29.12
211 to 240.................................................... 1,149 36,973,346.71 32.00
271 to 300.................................................... 1,039 40,040,317.25 34.66
----- ---------------- ------
Total.................................................... 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
The weighted average remaining term to maturity of the Preliminary Initial
Home Loans as of the Statistical Calculation Date was approximately 237 months.
S-30
<PAGE>
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------- ----------------- -----------------
<S> <C> <C> <C>
Alabama....................................................... 23 $ 620,564.84 0.54%
Alaska........................................................ 31 1,250,914.76 1.08
Arizona....................................................... 161 4,917,280.71 4.26
Arkansas...................................................... 5 192,390.28 0.17
California.................................................... 1,562 54,929,945.46 47.55
Colorado...................................................... 128 4,073,657.51 3.53
Connecticut................................................... 17 518,101.31 0.45
Delaware...................................................... 1 28,650.00 0.02
District of Columbia.......................................... 2 61,716.34 0.05
Florida....................................................... 343 10,298,068.44 8.91
Georgia....................................................... 115 3,523,706.72 3.05
Idaho......................................................... 45 1,537,486.35 1.33
Illinois...................................................... 32 1,004,781.02 0.87
Indiana....................................................... 23 789,221.41 0.68
Iowa.......................................................... 19 574,627.46 0.50
Kansas........................................................ 14 416,602.08 0.36
Kentucky...................................................... 3 77,839.95 0.07
Louisiana..................................................... 1 25,000.00 0.02
Maryland...................................................... 49 1,749,684.94 1.51
Massachusetts................................................. 3 74,941.13 0.06
Michigan...................................................... 12 331,350.00 0.29
Minnesota..................................................... 57 1,768,367.66 1.53
Mississippi................................................... 3 81,784.29 0.07
Missouri...................................................... 27 808,395.20 0.70
Montana....................................................... 23 635,337.85 0.55
Nebraska...................................................... 6 181,834.17 0.16
Nevada........................................................ 116 3,615,334.36 3.13
New Hampshire................................................. 2 71,364.81 0.06
New Mexico.................................................... 24 822,673.93 0.71
New York...................................................... 2 57,649.38 0.05
North Carolina................................................ 18 618,744.51 0.54
North Dakota.................................................. 3 117,026.41 0.10
Ohio.......................................................... 23 778,253.89 0.67
Oklahoma...................................................... 33 999,586.13 0.87
Oregon........................................................ 115 3,953,094.83 3.42
Pennsylvania.................................................. 6 196,093.68 0.17
Rhode Island.................................................. 1 13,577.54 0.01
South Carolina................................................ 24 787,235.79 0.68
South Dakota.................................................. 1 28,393.00 0.02
Tennessee..................................................... 7 276,162.33 0.24
Texas......................................................... 21 446,220.38 0.39
Utah.......................................................... 61 1,986,216.55 1.72
Virginia...................................................... 68 2,186,707.44 1.89
Washington.................................................... 217 7,427,935.36 6.43
Wisconsin..................................................... 16 505,613.06 0.44
Wyoming....................................................... 4 169,467.68 0.15
----- ---------------- ------
Total.................................................. 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
S-31
<PAGE>
HOME LOAN TYPE
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
LOAN TYPE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ---------- ----------------- -----------------
<S> <C> <C> <C>
ExtraEquity 100............................................... 3,241 $ 109,125,588.80 94.46%
ExtraEquity 50................................................ 118 4,139,542.28 3.58
Title I....................................................... 108 2,264,469.86 1.96
----- ---------------- ------
Total......................................................... 3,467 $ 115,529,600.94 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
CONVEYANCE OF SUBSEQUENT HOME LOANS
Under the Sale and Servicing Agreement, the obligation of the Trust to
purchase Subsequent Home Loans on a Subsequent Transfer Date is subject to the
following conditions, among others: (i) each Subsequent Home Loan purchased
after the Closing Date must satisfy the representations and warranties contained
in the subsequent transfer agreement to be entered into by the Transferor, the
Trust, and the Depositor (the 'Subsequent Transfer Agreement') and in the Sale
and Servicing Agreement, (ii) as of the related cut-off date, all of the Home
Loans in the Home Loan Pool at that time, including the Subsequent Home Loans
purchased after the Closing Date will satisfy the criteria set forth in the Sale
and Servicing Agreement and (iii) the following additional requirements: (a)
such Subsequent Home Loans may not be 30 or more days contractually delinquent
as of the related Cut-Off Date; (b) the original term to stated maturity of such
Subsequent Home Loans may not exceed 25 years; (c) each such Subsequent Home
Loan will have an interest rate of not less than 10.135%; (d) such Subsequent
Home Loans will be underwritten, re-underwritten or reviewed, as applicable, in
accordance with the underwriting guidelines of the Transferor (see 'The
Transferor and Servicer--Underwriting Criteria') or originated in a manner
similar to the Initial Home Loans; and (e) following the purchase of such
Subsequent Home Loans by the Trust, the Home Loans included in the Home Loan
Pool (including the Subsequent Home Loans) will have a weighted average interest
rate and a weighted average remaining term to maturity as of each respective
Cut-Off Date comparable to those of the Initial Home Loans included in the
Initial Home Loan Pool. Within 45 days after each Subsequent Transfer Date, the
Indenture Trustee will perform an initial review of certain related loan file
documentation for such Home Loan and issue an initial certification for which
the required documentation in such loan files has been received with respect to
each such Subsequent Loan. Following the transfer of such Subsequent Home Loans
to the Trust, the aggregate statistical characteristics of the Home Loans then
held in the Home Loan Pool may, and likely will, vary from those of the Initial
Home Loans included in the Initial Home Loan Pool. See 'Risk Factors--
Acquisition of Subsequent Home Loans from Pre-Funding Account' herein.
FHA INSURANCE HOLDER
PSB Receivables IV Corp. (the 'FHA Insurance Holder') is a Nevada
corporation, organized in 1997 and is a wholly owned subsidiary of PSB Lending.
The FHA Insurance Holder was formed as a limited purpose finance company to
effect the securitization of conventional property improvement, debt
consolidation and other consumer loans, property improvement and manufactured
housing loans partially insured by the FHA under the Title I Program, and other
types of assets.
THE TRANSFEROR AND SERVICER
GENERAL
The Transferor and the Servicer with respect to the Home Loans is PSB
Lending Corp., a Nevada corporation ('PSB Lending'), which is a wholly-owned
subsidiary of PSB Consumer Finance Corp., a Nevada corporation, which is a
wholly-owned subsidiary of Pacific Southwest Bank, a federal savings bank.
PSB Lending is primarily engaged in the business of purchasing,
underwriting, acquiring, selling and/or servicing home loans, including property
improvement, debt consolidation and other consumer loans. As of October 31,
1997, PSB Lending employed 149 persons. As of December 31, 1996, the audited
financial statements of PSB Lending set forth total assets of $18.66 million,
total liabilities of $16.21 million, and total stockholders' equity of $2.45
million. As of September 30, 1997, the unaudited financial statements of PSB
S-32
<PAGE>
Lending, set forth total assets of $112.665 million, total liabilities of
$92.276 million and total stockholders' equity of $20.389 million. To the extent
that home loans securitized and/or serviced by the Servicer sustain
delinquencies, defaults and losses in excess of the levels initially anticipated
by the Servicer, the financial condition of Servicer will be adversely affected.
However, any credit or other problems associated with the Home Loans, which have
been recently acquired by PSB Lending, would not become apparent until sometime
in the future. Consequently, the historical results of the operations of PSB
Lending, which commenced its lending operations in July 1996, are of limited
relevance in predicting the future financial condition of PSB Lending.
PSB Lending, as Servicer, will service the Home Loans pursuant to the Sale
and Servicing Agreement and will be entitled to receive the Servicing Fee and
certain additional servicing compensation for serving as the Servicer. In
addition, on the Closing Date, PSB Lending will contract with the FHA Insurance
Holder and the Indenture Trustee to act as FHA Claims Administrator pursuant to
the FHA Claims Administration Agreement. The FHA Claims Administrator, as agent
and attorney-in-fact for the FHA Insurance Holder, will handle all aspects of
administering, processing and submitting FHA Claims with respect to the Title I
Loans on behalf and in the name of the FHA Insurance Holder, and will record and
monitor the FHA Insurance with respect to the Title I Loans for the FHA
Insurance Holder. PSB Lending will not be entitled to any fees, other than the
Servicing Fees and certain additional compensation, for serving as FHA Claims
Administrator on behalf of the FHA Insurance Holder and the Indenture Trustee as
described herein. See '--Servicing and FHA Claims Experience' below and
'Description of the Transfer and Servicing Agreements--Servicing' herein.
UNDERWRITING CRITERIA
Generally, the underwriting standards of the Transferor place a greater
emphasis on the creditworthiness of the borrower than on the underlying
collateral in evaluating the likelihood that a borrower will be able to repay a
Conventional Loan. The Transferor re-underwrites all of the Home Loans that it
purchases through its correspondent network to assure that such Home Loans have
been originated in accordance with the Transferor's underwriting requirements.
Generally, the Home Loans acquired by the Transferor will have been made to
borrowers that typically have limited access to consumer financing for a variety
of reasons, such as high levels of debt service-to-income, unfavorable past
credit experience, insufficient home equity value, lower income or a limited
credit history. With respect to Home Loans acquired by the Transferor, the
collection of loan payments from each borrower with respect to a Home Loan is
subject to various risks, including, without limitation, the risk that such
borrower will not be able to make payments of interest and principal on the loan
and that the realizable value of the related Mortgaged Property will not be
sufficient to repay the outstanding interest and principal owed on such Home
Loan. The Transferor uses its own credit evaluation criteria to classify the
borrowers of loans by risk class. Loans are classified by the Transferor into
four graduations of quality designated as 'AA+', 'AA', 'AB' and 'AC' credits.
These criteria include, as a significant component, the credit score (the
'Credit Score') derived based on a methodology developed by Fair, Isaac and
Company, a consulting firm specializing in creating default predictive models
through scoring mechanisms. The Credit Scores, which are obtained from national
credit reporting organizations, are numerical representations of borrowers'
estimated default probability, and generally range from a low of 200 to a high
of 800. A borrower with a Credit Score of 720 or higher would be assigned the
highest classification for credit quality by the Transferor. Additional criteria
include the borrower's debt-to-income ratio, mortgage credit history, consumer
credit history, prior bankruptcies, prior foreclosures, notices of default,
deeds-in-lieu of foreclosure and repossessions. The Transferor believes that the
most important credit characteristics are the borrower's Credit Score and
debt-to-income ratio, the latter of which, generally may not exceed 45% of the
borrower's gross income, but depending on certain compensating factors, may be
increased to 50% of the borrower's income for 'B' or higher credits.
The Transferor has put into place a credit policy that provides a number of
guidelines to assist underwriters in the credit review and decision process and
that provides for the computer automation of certain underwriting procedures
during the credit review and decision process. The Transferor's underwriting
guidelines provide for the evaluation of a loan applicant's creditworthiness
through the use of a consumer credit report, verification of employment and a
review of the debt service-to-income ratio of the applicant. Income is verified
through various means, including without limitation applicant interviews,
written verifications with employers, review of pay stubs or tax returns. The
borrower must demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
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<PAGE>
In response to changes and developments in the consumer finance area as
well as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time, which in certain instances, may result in more
stringent and in other instances less stringent, underwriting requirements.
Depending upon the date on which the Home Loans were purchased by the
Transferor, such Home Loans included in the Home Loan Pool may have been
purchased by the Transferor under different underwriting requirements, and
accordingly, certain Home Loans included in the Home Loan Pool may be of a
different credit quality and have different loan characteristics from other Home
Loans. Furthermore, to the extent that certain Home Loans were purchased by the
Transferor under less stringent underwriting requirements, such Home Loans may
be more likely to experience higher rates of delinquencies, defaults and losses
than those Home Loans purchased under more stringent underwriting requirements.
The following table summarizes the underlying borrower characteristics for
each classification used by the Transferor.
<TABLE>
<CAPTION>
CLASSIFICATION CREDIT HISTORY CREDIT SCORE DEBT SERVICE RATIO(1)
- -------------- -------------- ------------ ---------------------
<S> <C> <C> <C>
'A+' Credit No late payments; No bankruptcy 720+ Generally 45% or less; may be up to 50%
if compensating factors exist
'A' Credit Max. of one 30-day late payments in the 680+ Generally 45% or less; may be up to 50%
last 12 months and no 60-day late if compensating factors exist
payments in the last 6 months; Bankruptcy
discharged for at least 5 years will
reestablish credit prior to closing
'B' Credit Max. of two 30-day late payments in last 640+ Generally 45% or less; may be up to 50%
12 months and no 60-day late payments in if compensating factors exist
the last 6 months; Bankruptcy discharged
for at least 3 years with reestablished
credit prior to closing
'C' Credit Max. of three 30-day late payments in 600+ 45% or less
last 12 months and no 60-day late
payments in the last 90 days; Bankruptcy
discharged for at least 24 months with
reestablished credit prior to closing
</TABLE>
- ------------------
(1) Calculated by dividing the borrower's debt obligations (after any debt
consolidation) by their monthly gross earnings.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
The Servicer will have the option, subject to certain conditions, after the
Closing Date: (i) to remove any Home Loans and substitute Qualified Substitute
Home Loans therefor, and (ii) either to repurchase any Home Loan incident to
foreclosure, default or imminent default thereof or to remove such Home Loan and
substitute a Qualified Substitute Home Loan therefor. The Transferor will also
be obligated either to repurchase any Defective Home Loan or to remove such
Defective Home Loan and substitute a Qualified Substitute Home Loan therefor.
The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties made with respect to a Defective Home Loan, or (ii) on or before the
Determination Date next succeeding the end of such 60-day period, to repurchase
such Defective Home Loan at a price (the 'Purchase Price') equal to the
Principal Balance of such Defective Home Loan as of the date of repurchase, plus
all accrued and unpaid interest on such Defective Home Loan to and including the
date of repurchase computed at the applicable Home Loan Rate. In lieu of
repurchasing a Defective Home Loan, the Transferor may replace such Defective
Home Loan with one or more Qualified Substitute Home Loans. If the
S-34
<PAGE>
aggregate outstanding principal balance of the Qualified Substitute Home Loan(s)
is less than the outstanding principal balance of the Defective Home Loan(s),
the Transferor will also remit for payment and distribution to the Security
Owners an amount (a 'Substitution Adjustment') equal to such shortfall, which
will result in a prepayment of principal on the Offered Notes for the amount of
such shortfall. The Transferor is also required to repurchase any Title I Loan,
the FHA Insurance Amount in respect of which has not been transferred on the
books and records of the FHA from the Transferor to the Seller within 150 days
after the Closing Date, in the case of Initial Loans, and the Subsequent
Transfer Date, in the case of Subsequent Loans. As used herein, a 'Qualified
Substitute Home Loan' is a home loan that (i) has an interest rate which differs
from the Home Loan Rate for the Defective Home Loan which it replaces (each, a
'Deleted Home Loan') by no more than one percentage point; (ii) matures not more
than one year later than and not more than one year earlier than the Deleted
Home Loan; (iii) has a principal balance (after application of all payments
received on or prior to the date of such substitution) equal to or less than the
Principal Balance of the Deleted Home Loan as of such date; (iv) has a lien
priority no lower than the Deleted Home Loan; (v) complies as of the date of
substitution with each representation and warranty set forth in the Sale and
Servicing Agreement with respect to the Home Loans; (vi) has a borrower with a
comparable credit grade classification to that of the borrower with respect to
the Deleted Home Loan, and (vii) in the case of a Deleted Home Loan which is a
Title I Loan, is the same type of loan as the Deleted Home Loan and is covered
by FHA Insurance under the Title I Program; provided that with respect to a
substitution of multiple loans on a given date, items (i); (ii) and (iii) above
may be considered on an aggregate or weighted average basis.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Home Loans or
substituting Qualified Substitute Home Loans for Defective Home Loans in the
manner described above. If the Transferor repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of asset backed
securities, the financial ability of the Transferor to repurchase Defective Home
Loans from the Trust may be adversely affected. In addition, other events
relating to the Transferor and its mortgage lending and consumer finance
operations can occur that would adversely affect the financial ability of the
Transferor to repurchase Defective Home Loans from the Trust, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If the Transferor is unable to repurchase or replace a Defective
Home Loan, the Servicer, on behalf of the Trust, will pursue other customary and
reasonable efforts, if any, to recover the maximum amount possible with respect
to such Defective Home Loan. If the Servicer is unable to collect all amounts
due to the Trust with respect to such Defective Home Loan, the resulting loss
will be borne by the Security Owners to the extent that such loss is not
otherwise covered by amounts available from the credit enhancement provided for
the Offered Notes. See 'Risk Factors--Adequacy of Credit Enhancement' and
'--Limitations on Repurchase or Replacement of Defective Home Loans by
Transferor' herein. The Depositor will have no obligation to cure, purchase or
substitute another loan for any Defective Home Loan.
SERVICING AND FHA CLAIMS EXPERIENCE
PSB Lending began acquiring and servicing home loans in July of 1996, and
from such date to the present, has substantially increased the volume of home
loans that it has acquired and serviced. As a result, PSB Lending does not have
any relevant historical servicing experience with respect to the performance,
including the delinquency and loss experience and the rate of prepayments, of
the Home Loans and other loans included in its entire portfolio. Accordingly,
the prepayment scenarios set forth under 'Prepayment and Yield Considerations--
Weighted Average Life of the Offered Notes' herein may not be indicative of the
performance of the Home Loans included in the Home Loan Pool. Prospective
investors should make their investment determination based on the Home Loan
underwriting criteria, the availability of the Credit Enhancement described
herein, the characteristics of the Initial Home Loans and other information
provided herein, and not based on any prior delinquency experience and loan loss
and liquidation experience information set forth herein or any rate of
prepayments assumed herein.
In addition, the rate of delinquencies, defaults and losses with respect to
the Home Loans will also be affected by, among other things, interest rate
fluctuations and general and regional economic conditions. See 'Risk
Factors--Additional Factors Affecting Delinquencies, Defaults and Losses on Home
Loans' herein.
S-35
<PAGE>
THE MASTER SERVICER
Norwest will act as Master Servicer under the Sale and Servicing Agreement.
Norwest is a national banking association with executive offices located at
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its master
servicing offices are located at 11000 Broken Land Parkway, Columbia Maryland
21044.
The Master Servicer is engaged in the business of master servicing, on
behalf of third party investors, single family residential mortgage loans
secured by properties located in all 50 states and the District of Columbia. As
of October 31, 1997, the Master Servicer was master servicing more than 220,000
mortgage loans representing an aggregate outstanding principal balance of
approximately $25.0 billion. No specific delinquency or foreclosure data
relating to the Master Servicer's master servicing portfolio is provided herein
because the Master Servicer has limited master servicing experience with respect
to loans such as the Title I Loans and the Conventional Loans.
The foregoing information regarding Norwest has been provided by Norwest
and neither the Seller nor the Servicer makes any representations or warranties
as to the accuracy and completeness of such information.
The Master Servicer will be responsible for performing the loan servicing
functions with respect to the Home Loans pursuant to the Sale and Servicing
Agreement, but the daily loan servicing functions will be performed on its
behalf by the Servicer. In consideration for the performance of its duties as
Master Servicer under the Sale and Servicing Agreement, the Master Servicer will
be entitled to a monthly fee (the 'Master Servicing Fee'), equal to 0.08% (8
basis points) per annum of the Pool Principal Balance (as adjusted for
Liquidated Home Loans) as of the first day of the immediately preceding Due
Period. In certain limited circumstances, the Master Servicer may resign or be
removed, in which event a third-party servicer will be appointed as a successor
Master Servicer.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Securities will be provided by (A)
the subordination of (i) the Residual Interest to the Certificates; (ii) the
Certificates to the Notes; and (iii) the Class M-2 Notes and Class M-1 Notes,
respectively, to each Class of Notes having a higher priority to the extent
described below under '--Subordination and Allocation of Losses,' and (B) the
overcollateralization feature described below under '--Overcollateralization.'
The Securities will not be insured by a financial guaranty insurance policy.
SUBORDINATION AND ALLOCATION OF LOSSES
On each Payment Date, payments of interest on the Notes will be made first
to the Senior Notes, second to the Class M-1 Notes, third to the Class M-2
Notes, and fourth to the Certificates, such that no interest will be paid on the
Class M-1 Notes until all required interest payments have been made on the
Senior Notes, no interest will be paid on the Class M-2 Notes until all required
payments have been made on the Senior Notes and the Class M-1 Notes and no
interest will be paid on the Certificates until all required payments have been
made on all Classes of Notes. In addition, payments of principal of the
Securities will be made sequentially, such that on each Payment Date no Class of
Notes will receive any payments of principal until the Class Principal Balances
of all Classes of Notes of higher priority (in the case of the Class M-1 Notes,
all Classes of Senior Notes, in the case of the Class M-2 Notes, the Class M-1
Notes and all Classes of Senior Notes and in the case of the Certificates, all
Classes of Notes) have received all required payments of principal. All
Allocable Loss Amounts not applied to the Class Principal Balance of each Class
of Certificates as described below will be applied first in reduction of the
Class Principal Balance of the Class M-2 Notes, and second in reduction to the
Class Principal Balance of the Class M-1 Notes, until the respective Class
Principal Balances thereof have been reduced to zero. Allocable Loss Amounts
will not be applied to the Senior Notes. The rights of the holders of the
Certificates to receive distributions of interest and principal on each Payment
Date generally will be subordinated to the rights of the holders of the Notes to
receive payments of interest and principal, respectively, on each Payment Date.
In addition, no Allocable Loss Amounts will be applied to the reduction of the
Class Principal Balance of any Class of Mezzanine Notes until the application
thereof to the Class Principal Balance of each Class of the Certificates has
been reduced to zero. The rights of the holders of the Residual Interest to
receive any distributions on any Payment Date generally will be subordinated to
the rights of the Security Owners. The subordination described
S-36
<PAGE>
above is intended to enhance the likelihood of the regular receipt of interest
and principal due to the holders of certain Classes of Securities and to afford
such holders protection against losses on the Home Loans, with the greatest
amount of such enhancement and protection being provided to the Senior Notes, a
lesser amount of such enhancement and protection being provided to the Mezzanine
Notes and the least amount of such enhancement and protection being provided to
the Certificates. See 'Risk Factors--Adequacy of Credit Enhancement' herein.
On each Payment Date, the 'Allocable Loss Amount' will be equal to the
excess, if any, of (a) the aggregate of the outstanding principal balances of
the Securities (after giving effect to all payments and distributions on such
Payment Date) over (b) the sum of (i) the Pool Principal Balance as of the end
of the preceding Due Period and (ii) the amount, if any, on deposit in the
Pre-Funding Account on such Payment Date (after giving effect to all withdrawals
from such account on such Payment Date). As described herein, the 'Pool
Principal Balance' at any time will be equal to the aggregate of the Principal
Balances of all Home Loans as of the last day of the immediately preceding Due
Period, and the 'Principal Balance' of a Home Loan on any day is equal to its
Cut-Off Date Principal Balance minus all principal reductions credited against
the Principal Balance of such Home Loan since the Cut-Off Date; provided,
however, that the Principal Balance of a Liquidated Home Loan shall be zero.
OVERCOLLATERALIZATION
For the definitions of certain of the capitalized terms used in the
following subsection, see 'Description of the Securities--Related Definitions'
below.
As of each Payment Date, the 'Overcollateralization Amount' will be an
amount (not less than zero) equal to the excess of (a) the sum of (i) the Pool
Principal Balance as of the end of the preceding Due Period and (ii) the amount,
if any, on deposit in the Pre-Funding Account as of the end of such Due Period
over (b) the aggregate of the Class Principal Balances of all Classes of Notes
and the Class Principal Balances of all Classes of Certificates, after giving
effect, unless otherwise specified, to all payments on the Notes and
distributions in respect of the Certificates and the Residual Interest on such
Payment Date. On the Closing Date, the Overcollateralization Amount will be
equal to zero. A limited acceleration of the principal amortization of the
Securities relative to the principal amortization of the Home Loans has been
designed to increase the Overcollateralization Amount over time by making
additional sequential payments and distributions of principal to the Security
Owners from the payment of Excess Spread, until the Overcollateralization Amount
is equal to the Required Overcollateralization Amount. The 'Required
Overcollateralization Amount' for any Payment Date occurring prior to the
Overcollateralization Stepdown Date will equal the greater of (a) 3.25% of the
Assumed Pool Principal Balance and (b) the Net Delinquency Calculation Amount.
On any other Payment Date, the Required Overcollateralization Amount will be
equal to the greater of (a) 6.50% of the Pool Principal Balance as of the end of
the preceding Due Period and (b) the Net Delinquency Calculation Amount;
provided however, that on any Payment Date the Required Overcollateralization
Amount will in no event be less than 0.50% of the Assumed Pool Principal
Balance. The 'Net Delinquency Calculation Amount' for any Payment Date will
equal the excess, if any, of (i) the product of 1.7 and the Rolling Six-Month
Delinquency Average over (ii) the aggregate amounts of Excess Spread for the
three preceding Payment Dates. The 'Rolling Six-Month Delinquency Average' for
any Payment Date will equal the average of the 60-Day Delinquency Amounts for
each of the six immediately preceding Due Periods.
If on any Payment Date, an Overcollateralization Deficiency Amount exists,
payments of Excess Spread, if any, with respect to such Payment Date will be
applied to make additional payments or distributions of principal to the
Securities in the order of priority set forth under 'Description of the
Securities--Payments and Distributions on the Securities' herein. Such payments
of Excess Spread are intended to accelerate the amortization of the Class
Principal Balances of all Classes of Notes and the Class Principal Balances of
all Classes of Certificates relative to the amortization of the Home Loans,
thereby increasing the Overcollateralization Amount until such amount reaches
the Required Overcollateralization Amount. The relative percentage of the
aggregate of the Class Principal Balances of all Classes of Notes and the Class
Principal Balances of all Classes of Certificates to the Pool Principal Balance
will decrease as a result of the application of such Excess Spread to reduce the
Class Principal Balance of the Notes and the Class Principal Balances of all
Classes of Certificates.
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<PAGE>
On any Payment Date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, Excess Spread otherwise payable or
distributable to the Security Owners as described above will instead be paid,
first, to the Mezzanine Notes in payment of their respective Deferred Amounts,
if any, until such Deferred Amounts have been paid in full, then to the
Certificates in respect of any Loss Reimbursement Deficiency, if any, until such
Loss Reimbursement Deficiency has been paid in full, then to the holders of the
Residual Interest. On the Overcollateralization Stepdown Date and on each
Payment Date thereafter as to which the Overcollateralization Amount is, or
after taking into account all other payments to be made on such Payment Date,
would be at least equal to the Required Overcollateralization Amount, amounts
otherwise payable as principal to the Security Owners on such Payment Date in
reduction of the Class Principal Balances of the Notes or the Class Principal
Balances of the Certificates may instead be paid, first, to the Class M-1 Notes
and the Class M-2 Notes, in that order, in payment of their respective Deferred
Amounts, until such Deferred Amounts have been paid in full, then, to the Class
B-1 Certificates and Class B-2 Certificates, in that order, in payment of their
respective Loss Reimbursement Deficiency, until such Loss Reimbursement
Deficiency has been paid in full, and then to the holders of the Residual
Interest, thereby reducing the rate of and under certain circumstances delaying
the principal amortization of the Securities until the Overcollateralization
Amount is reduced to the Required Overcollateralization Amount.
While the payment and distribution of Excess Spread to the Security Owners
and the holders of the Residual Interest in the manner specified above has been
designed to produce and maintain a given level of overcollateralization, there
can be no assurance that Excess Spread will be generated in sufficient amounts
to ensure that such overcollateralization level will be achieved or maintained
at all times. In particular, a high rate of delinquencies on the Home Loans
during any Due Period could cause the amount of interest received on the Home
Loans during such Due Period to be less than the amount of interest payable or
distributable on the Offered Notes on the related Payment Date. In such a case,
the Class Principal Balances of the Notes and the Certificates would decrease at
a slower rate relative to the Pool Principal Balance, resulting in a reduction
of the Overcollateralization Amount and, in some circumstances, an Allocable
Loss Amount. In addition, loan losses on the Home Loans will be applied to
reduce the Overcollateralization Amount to zero before Allocable Loss Amounts
are applied in reduction of the Class Principal Balances of the Certificates or
the Class Principal Balances of the Mezzanine Notes. See 'Risk Factors--Adequacy
of Credit Enhancement' herein.
FHA INSURANCE FOR TITLE I LOANS
General. Under the Title I coinsurance program (the 'Title I Program') and
subject to the regulations, rules and procedures promulgated by the FHA (the
'FHA Regulations'), approved lenders ('Title I Lenders') may obtain insurance
payments against approximately 90% of certain losses incurred with respect to
eligible Title I loans up to the amount of insurance in such Title I Lender's
FHA insurance coverage reserve account (such account, an 'FHA Reserve'). Under
the Title I Program, the FHA maintains an FHA Reserve for each Title I Lender
and the amount of insurance therein is limited to a maximum of 10% of the amount
disbursed, advanced or expended by the Title I Lender in originating or
purchasing each eligible loan registered with the FHA for Title I insurance,
with certain adjustments permitted or required by the FHA Regulations. The FHA
will recognize the FHA Insurance Holder as the owner of the Title I Loans for
purposes of the related FHA Insurance Amount. The FHA will not recognize the
Depositor, the Trust or the Security Owners as the owners of the Title I Loans,
or any portion thereof, and the Security Owners will not be entitled to submit
FHA Claims to the FHA, but will be dependent upon the FHA Insurance Holder and
the FHA Claims Administrator to submit, process and administer FHA Claims with
respect to the Title I Loans. Accordingly, the Trust and the Security Owners
will have no direct right to receive FHA Insurance Proceeds with respect to the
Title I Loans. See 'Risk Factors--Adequacy of Credit Enhancement--Additional
Limitations on FHA Insurance' and 'Certain Legal Aspects of the Title I Loans'
herein.
Although Title I Loans are available for several types of properties, the
Title I Loans will include primarily one- to four-family property improvement
loans. A majority of the Title I Loans included in the Initial Home Loan Pool
will be direct loans, as a result of the inclusion of the Title I Loans
purchased by the Transferor from unaffiliated lenders. A portion of the Title I
Loans among the Initial Home Loans will be dealer loans. For a general
description of the Title I Program and the FHA Insurance provided thereunder for
the Title I Loans see 'Certain Legal Aspects of the Title I Program' herein.
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Transfer of FHA Insurance. To accomplish the transfer of the FHA Insurance
Amount for the Title I Loans, as soon as practicable after the Closing Date, the
Transferor will prepare and submit a Transfer Report to the FHA regarding the
assignment of legal title to the Title I Loans to the FHA Insurance Holder at
such time as the Transferor has determined that the FHA has registered
substantially all of the insurance coverage for the Title I Loans within the
Transferor's FHA Reserve, including such insurance for any Title I Loans
acquired from any other Title I Lenders. The Transferor will convey its
beneficial ownership interest in such FHA insurance coverage for the Title I
Loans to the Depositor and in turn to the Trust, however, for purposes of the
records of the FHA, such FHA insurance coverage will be recorded in the FHA
Reserve for the FHA Insurance Holder. See 'Summary of Terms--Servicing of the
Home Loans and FHA Claims Administration' herein. On each Transfer Date, the FHA
Claims Administrator, on behalf the FHA Insurance Holder will allocate on the
FHA Insurance Holder's books and records that portion of the insurance coverage
within the FHA Insurance Holder's FHA Reserve equal to the FHA Insurance Amount
transferred by the FHA with respect to the related Title I Loans as available
for FHA Claims relating to the Title I Loans. Also, as soon as practicable after
the final Transfer Date, the FHA Insurance Holder or the FHA Claims
Administrator is required to certify to the Rating Agencies and the Indenture
Trustee as to the actual amount of the initial FHA Insurance Amount. With
respect to the transfer of the FHA Insurance Amount, see 'Risk Factors--Adequacy
of Credit Enhancement' and 'Certain Legal Aspects of the Title I Program'
herein.
The FHA Insurance Amount to be transferred from the Transferor's FHA
Reserve to the FHA Insurance Holder's FHA Reserve for the Title I Loans is
expected to equal not less than 10% of the Cut-Off Date Principal Balances of
the Title I Loans that are expected to be conveyed to the Trust including any
Subsequent Home Loans. If the FHA Insurance Amount so transferred is less than
10% of the Cut-Off Date Principal Balances of the Title I Loans that are
actually conveyed to the Trust, then the Required Overcollateralization Level
will be increased by the amount of such shortfall.
On the final Transfer Date, the FHA Insurance Amount will be the maximum
amount of insurance coverage in the FHA Insurance Holder's FHA Reserve that will
be available for the submission of claims on the Title I Loans, and thereafter,
such FHA Insurance Amount will be decreased as a result of payments by the FHA
in respect of FHA Claims submitted for the Title I Loans after the Transfer
Dates and as a result of the repurchase or substitution of Title I Loans by the
Transferor. Except in connection with the conveyance to the Trust of any
Subsequent Home Loans that are Title I Loans and the substitution of Title I
Loans, the FHA Insurance Amount for the Title I Loans will not be increased for
any other Title I loans, either previously or subsequently owned by the Seller
and reported for insurance in the FHA Insurance Holder's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that will
have been transferred from the Transferor's FHA Reserve to the FHA Insurance
Holder's FHA Reserve may be less than 10% of the aggregate unpaid principal
balance or Transferor's purchase price of the Title I Loans, since Title I
claims may have been paid out of the Transferor's FHA Reserve in respect of
Title I Loans prior to the final Transfer Date. However, if individual Title I
Loans are repurchased from the Trust by the Transferor or the Servicer, then
with respect to any individual Title I Loan, the amount of FHA insurance
coverage that will be transferred from the FHA Insurance Holder's FHA Reserve,
in all likelihood, will equal 10% of the unpaid principal balance or the
purchase price, if less, of such Title I Loans until such time as the Seller's
FHA Reserve has been reduced to a balance which is less than 10% of the
aggregate unpaid principal balance or purchase price, if less, of the Title I
Loans. Accordingly, the transfer of insurance coverage from the Seller's FHA
Reserve as the result of the repurchase of Title I Loans may cause a
disproportionately larger reduction to the FHA Insurance Amount for each
individual Title I Loan, and if a significant amount of Title I Loans are
repurchased, the transfer of FHA reserve amounts could result in a substantial
reduction of the FHA Insurance Amount and the relative percentage of such FHA
Insurance Amount to the principal balance of the remaining Title I Loans.
The Sale and Servicing Agreement provides that the FHA Claims Administrator
then acting as its agent and attorney-in-fact shall submit an FHA Claim with
respect to any Title I Loan that goes into default if the default cannot be
cured. If, as a result of the delay in the transfer of the FHA Insurance
described above, the FHA Insurance is not available with respect to any
defaulted Title I Loan at the time it goes into default, then the amount
required to make interest payments to the Security Owners with respect to the
principal amount thereof, until such FHA Insurance becomes available and a claim
for insurance can be made, if at all, will be paid from other amounts, if any,
available in the Note Payment Account.
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Submission of FHA Claims. The FHA Insurance Holder and the Indenture
Trustee will contract with the Servicer to serve as FHA Claims Administrator and
as such to handle all aspects of administering, processing and submitting FHA
Claims with respect to the Title I Loans, in the name and on behalf of the FHA
Insurance Holder. The Servicer (acting as FHA Claims Administrator) will file
all FHA Claims and monitor the FHA Insurance Amount with respect to the Title I
Loans. In the event it is determined that any FHA Claims Administrator is no
longer able to perform its duties, the Indenture Trustee or its designee will
perform the obligations and duties of the FHA Claims Administrator until a
successor has assumed the FHA Claims Administrator's responsibilities and
obligations under the Sale and Servicing Agreement. The Servicer will not be
entitled to any additional compensation for performing its duties as FHA Claims
Administrator. However, in the event that the Servicer resigns or is terminated
as FHA Claims Administrator and a successor FHA Claims Administrator is
appointed, such successor FHA Claims Administrator will be entitled to receive a
per claim fee equal to the greater of (i) $300 per Title I Insurance claim or
(ii) the then current market rate for processing Title I Insurance claims,
payable from the Servicing Fee.
If (a) the FHA Insurance Holder were to hold loans insured under the Title
I Program on behalf of another trust, (b) the FHA were to determine that
insurance claims were paid in respect of loans ineligible for insurance that
related to such other trust fund and (c) such other trust, on behalf of the FHA
Insurance Holder, was unable or otherwise failed to repurchase the ineligible
loans, then the FHA could offset the amount of the repurchase obligation against
insurance proceeds payable with respect to one or more Title I Loans. If the FHA
Insurance Holder or the FHA Claims Administrator were unable to recover the
amount of such offset from the other trust, the Trust could experience a loss as
a result. Accordingly, claims paid to the FHA Insurance Holder or the FHA Claims
Administrator by the FHA with respect to Title I loans other than the Title I
Loans may reduce the FHA Insurance Amount.
In no event will the FHA Insurance Holder or any FHA Claims Administrator
submit any FHA Claim if the amount of such FHA Claim would exceed the FHA
Insurance Amount. In addition, the FHA Insurance Holder or any FHA Claims
Administrator will not submit any claim for FHA insurance relating to a Title I
loan not part of the assets of the Trust if the effect thereof would be to
reduce the FHA Insurance Amount.
POOL FACTORS AND TRADING INFORMATION
The 'Note Pool Factor' for each Class of Notes will be a seven-digit
decimal which the Indenture Trustee will compute prior to each distribution with
respect to such Class of Notes indicating the remaining outstanding principal
balance of such Class of Notes, as of the applicable Payment Date (after giving
effect to payments to be made on such Payment Date), as a fraction of the
initial outstanding principal balance of such Class of Notes. The 'Certificate
Pool Factor' for each Class of Certificates will be a seven-digit decimal which
the Servicer will compute prior to each distribution with respect to such Class
of Certificates indicating the remaining Class Principal Balance of such Class
of Certificates, as of the applicable Payment Date (after giving effect to
distributions to be made on such Payment Date), as a fraction of the initial
Class Principal Balance of such Class of Certificates. Each Note Pool Factor and
each Certificate Pool Factor will initially be 1.0000000 and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable Class of Notes, or the reduction of the Class Principal Balance of
the applicable Class of Certificates, as the case may be. A Noteholder's portion
of the aggregate outstanding principal balance of the related Class of Notes is
the product of (i) the original denomination of such Noteholder's Note and (ii)
the applicable Note Pool Factor. A Certificateholder's portion of the aggregate
outstanding Class Principal Balance for the related Class of Certificates is the
product of (a) the original denomination of such Certificateholder's Certificate
and (b) the applicable Certificate Pool Factor.
DESCRIPTION OF THE SECURITIES
GENERAL
The PSB Lending Home Loan Owner Trust 1997-4 (the 'Trust') will issue the
Notes pursuant to the Indenture dated as of December 1, 1997, between the Trust
and the Indenture Trustee. The Trust will also issue the Certificates pursuant
to the terms of a Trust Agreement dated as of December 1, 1997, among the
Depositor,
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the Owner Trustee and the Co-Owner Trustee. The Notes will be secured by the
assets of the Trust pursuant to the Indenture. The Certificates will represent
an undivided ownership interest in the Trust.
On the 20th day of each month, or, if such day is not a Business Day, the
first Business Day immediately following, commencing in January 1998 (each such
date, a 'Payment Date'), the Indenture Trustee or its designee and the Owner
Trustee or its designee will pay or distribute to the persons in whose names the
Notes and Certificates, respectively, are registered on the last day of the
month immediately preceding the month of the related Payment Date (the 'Record
Date'), the portion of the aggregate payment to be made to each Noteholder and
of the aggregate distribution to be made to each Certificateholder as described
below. Prior to Book Entry Termination, distributions on the Offered Notes will
be made to Security Owners only through DTC and its DTC Participants.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof. Beneficial ownership interests in the Certificates will also be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof.
BOOK-ENTRY REGISTRATION
Each Class of Offered Notes will be represented by one or more certificates
registered in the name of Cede & Co. ('Cede'), as nominee of DTC. Security
Owners may hold beneficial interests in Offered Notes through DTC directly if
they are participants of DTC, or indirectly through organizations which are
participants of DTC.
No Security Owner will be entitled to receive a certificate representing
such person's interest in the Offered Notes, except as set forth below. Unless
and until Offered Notes of a Class are issued in fully registered certificated
form ('Definitive Securities') under the limited circumstances described below,
all references herein to actions by Noteholders, Certificateholders or Security
Owners shall refer to actions taken by DTC upon instructions from DTC
Participants, and all references herein to distributions, notices, reports and
statements to Noteholders, Certificateholders or Security Owners shall refer to
distributions, notices, reports and statements to Cede, as the registered holder
of the Offered Notes, for distribution to Security Owners in accordance with DTC
procedures. As such, it is anticipated that the only Noteholder,
Certificateholder or Security Owner will be Cede, as nominee of DTC. Security
Owners will not be recognized by the Indenture Trustee or the Owner Trustee as
Noteholders, Certificateholders or Security Owners as such terms will be used in
the relevant agreements, and Security Owners will only be permitted to exercise
the rights of holders of Offered Notes of the related Class indirectly through
DTC and DTC Participants, as further described below.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a 'banking organization' within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a 'clearing corporation'
within the meaning of the New York UCC and a 'clearing agency' registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold sections
for its participating members ('DTC Participants') and to facilitate the
clearance and settlement of securities transactions between DTC Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. DTC Participants include securities brokers and
dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Offered Notes of any Class.
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
'Indirect DTC Participants'). The rules applicable to DTC and DTC Participants
are on file with the Commission.
Security Owners that are not DTC Participants or Indirect DTC Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Offered Notes may do so only through DTC Participants and Indirect
DTC Participants. DTC Participants will receive a credit for the Offered Notes
on DTC's records. The ownership interest of each Security Owner will in turn be
recorded on respective records of the DTC Participants and Indirect DTC
Participants. Security Owners will not receive written confirmation from DTC of
their purchase, but Security Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect DTC
Participant through which the Security Owner entered into the transaction.
Transfers of ownership interests in the Offered Notes of any Class will be
accomplished by entries made on the books of DTC Participants acting on behalf
of Security Owners.
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To facilitate subsequent transfers, all Offered Notes deposited by DTC
Participants with DTC will be registered in the name of Cede, a nominee of DTC.
The deposit of Offered Notes with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of the
actual Security Owners and its records will reflect only the identity of the DTC
Participants to whose accounts such Offered Notes are credited, which may or may
not be the Security Owners. DTC Participants and Indirect DTC Participants will
remain responsible for keeping account of their holdings on behalf of their
customers. While the Offered Notes are held in book-entry form, Security Owners
will not have access to the list of Security Owners, which may impede the
ability of Security Owners to communicate with each other.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect DTC Participants and by DTC Participants and
Indirect DTC Participants to Security Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among DTC
Participants on whose behalf it acts with respect to the Offered Notes and is
required to receive and transmit distributions of principal of and interest on
the Offered Notes. DTC Participants and Indirect DTC Participants with which
Security Owners have accounts with respect to the Offered Notes similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Security Owners.
DTC's practice is to credit DTC Participants' accounts on each Distribution
Date in accordance with their respective holdings shown on its records, unless
DTC has reason to believe that it will not receive payment on such Distribution
Date. Payments by DTC Participants and Indirect DTC Participants to Security
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in 'street name,' and will be the responsibility of such DTC
Participant and not of DTC, the Indenture Trustee or Owner-Trustee (or any
paying agent appointed thereby), the Depositor or the Servicer, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal of and interest on each Class of Offered Notes to DTC will
be the responsibility of the Indenture Trustee, Co-Owner Trustee or Owner
Trustee (or any paying agent), disbursement of such payments to DTC Participants
will be the responsibility of DTC and disbursement of such payments to the
related Security Owners will be the responsibility of DTC Participants and
Indirect DTC Participants. As a result, under the book-entry format, Security
Owners may experience some delay in their receipt of payments. DTC will forward
such payments to its DTC Participants which thereafter will forward them to
Indirect DTC Participants or Security Owners.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a Security
Owner to pledge Offered Notes to persons or entities that do not participate in
the DTC system, or otherwise take actions with respect to such Offered Notes,
may be limited due to the lack of a physical certificate for such Offered Notes.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Security Owner only at the direction of one or more DTC Participants
to whose account with DTC the Offered Notes are credited. Additionally, DTC has
advised the Depositor that it will take such actions with respect to specified
percentages of the Security Owners' interest only at the direction of and on
behalf of DTC Participants whose holdings include undivided interests that
satisfy such specified percentages. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of DTC Participants whose holdings include such undivided interests.
Neither DTC nor Cede will consent or vote with respect to the Offered
Notes. Under its usual procedures, DTC will mail an 'Omnibus Proxy' to the
Indenture Trustee or Owner Trustee as soon as possible after any applicable
Record Date for such a consent or vote. The Omnibus Proxy will assign Cede's
consenting or voting rights to those DTC Participants to whose accounts the
related Offered Notes are credited on that record date (which record date will
be identified in a listing attached to the Omnibus Proxy).
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DEFINITIVE SECURITIES
The Offered Notes will be issued in the form of Definitive Securities to
Noteholders or their respective nominees, rather than to DTC or its nominee
('Book Entry Termination'), only if (i) DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to such
Offered Notes and the Depositor is unable to locate a qualified successor (ii)
the Depositor, at its option, elects to terminate the book-entry system through
DTC or (iii) after the occurrence of an Event of Default or a Servicer Default
with respect to such Offered Notes, holders representing at least a majority of
the outstanding principal amount of the Notes or the Certificates, as the case
may be, acting together as a single Class, advise the Indenture Trustee or the
Owner Trustee, as applicable, through DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) with respect to such
Notes or Certificates is no longer in the best interest of the holders of such
Offered Notes.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Owner Trustee or Indenture Trustee will be required to notify all
applicable Security Owners through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the definitive certificates
representing the corresponding Offered Notes and receipt of instructions for
re-registration, the Owner Trustee or Indenture Trustee will reissue such
Offered Notes as Definitive Securities to such Security Owners.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by or on behalf of the Indenture Trustee or the Owner
Trustee, as applicable, in accordance with the procedures set forth in the
Indenture or the Trust Agreement, as applicable, directly to holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the applicable Record Date. Such distributions will
be made by check mailed to the address of such holder as it appears on the
register maintained by the applicable Trustee. The final payment on any such
Definitive Security, however, will be made only upon presentation and surrender
of such Definitive Security at the office or agency specified in the notice of
final distribution to the applicable Security Owners. The applicable Trustee
will provide such notice to the applicable Security Owners not less than 15 nor
more than 30 days prior to the date on which such final distribution is expected
to occur.
Definitive Securities will be transferable and exchangeable at the offices
of the applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
PAYMENTS AND DISTRIBUTIONS ON THE SECURITIES
For the definitions of certain of the capitalized terms used in the
following subsection, see '--Related Definitions' below.
Available Collection Amount. The Indenture Trustee will calculate the
Available Collection Amount on the 5th Business Day prior to each Payment Date
(each such day, a 'Determination Date'). With respect to each Payment Date, the
'Available Collection Amount' is the sum of (i) all amounts received in respect
of the Home Loans or paid by the Servicer, the Transferor or the Seller
(exclusive of amounts not required to be deposited in the Collection Account),
during the related Due Period (and, in the case of amounts required to be paid
by the Transferor in connection with the purchase or substitution of a Defective
Home Loan, deposited in the Collection Account on or before the related
Determination Date), as reduced by any portion thereof that may not be withdrawn
therefrom pursuant to an order of a United States bankruptcy court of competent
jurisdiction imposing a stay pursuant to Section 362 of the United States
Bankruptcy Code; (ii) in the case of a Payment Date relating to a Due Period
that ends prior to the end of the Funding Period, an amount from the Capitalized
Interest Account sufficient to fund any shortfall in the Interest Payment Amount
attributable to the amounts in the Pre-Funding Account; (iii) in the case of the
Payment Date following the Due Period in which the Funding Period ends, amounts,
if any, remaining in the Pre-Funding Account at the end of the Funding Period
(net of reinvestment income, which must be transferred to the Capitalized
Interest Account); and (iv) with respect to the final Payment Date, or an early
retirement of the Offered Notes by the Servicer or the Master Servicer, the
Termination Price or the proceeds from the sale of the Home Loans.
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Payments and Distributions of Interest. Interest on the Class Principal
Balance of each Class of Offered Notes and Mezzanine Notes and the Class
Principal Balance of each Class of Certificates will accrue during the Due
Period at the respective per annum Note Interest Rates or Pass-Through Rates, as
applicable, and will be payable to the holders of the Securities on each Payment
Date, commencing in January 1998. Interest on each Class of the Offered Notes,
the Mezzanine Notes and the Certificates will be calculated on the basis of a
360-day year of twelve 30-day months.
The Note Rate for the Class A-1 Notes with respect to each Payment Date
will be a per annum rate equal to LIBOR for the related Accrual Period (as
defined herein) plus 0.20%, subject to the Net Weighted Average Rate (as defined
herein). The 'Accrual Period' with respect to the Class A-1 Notes will be the
period beginning on 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, beginning on the Closing Date) and ending on the day preceding such
Payment Date. Interest on the Class A-1 Notes will be calculated on the basis of
a 360-day year and the actual number of days elapsed in each Accrual Period.
'LIBOR' for each Accrual Period will be the rate for United States dollar
deposits for one month that appears on Telerate Screen Page 3750 as of 11:00
a.m., London time, on the second LIBOR Business Day before the first day of such
Accrual Period. 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 reasonably
selected by the Indenture Trustee), LIBOR for the applicable Accrual Period will
be the Reference Bank Rate (as defined in the Sale and Servicing Agreement). If
no such quotations can be obtained and no Reference Bank Rate is available,
LIBOR will be LIBOR applicable to the preceding Accrual Period.
The 'Net Weighted Average Rate' with respect to any Accrual Period will be
the per annum rate equal to the weighted average (by principal balance) of the
Home Loan Rates as of the first day of the related Due Period, as reduced by
1.135%.
The Note Interest Rate or Pass-Through Rate, as applicable, for each Class
of Securities outstanding (other than the Class A-1 Notes) will increase by
0.50% for the Due Periods beginning after the Optional Termination Date.
Payments and distributions of interest on the Securities will be made from
the Available Collection Amount remaining after the payment of the Trust Fees
and Expenses and previously unreimbursed Servicing Advances (such remaining
amount, the 'Available Funds'). On each Payment Date, interest payments will be
made first, to the Classes of Senior Notes, pro rata, second, to the Class M-1
Notes, third, to the Class M-2 Notes and, fourth, interest will be distributed
to the Certificates. Under certain circumstances the amount available for
interest payments and distributions on any Payment Date could be less than the
amount of interest payable on all of the Securities on such date. Such an
interest shortfall could occur, for example, if delinquencies or losses realized
on the Home Loans were exceptionally high or were concentrated in a particular
month. In such event, any such interest deficiency with respect to any Class of
Notes or Certificates will be carried forward as a Noteholders' Interest
Carry-Forward Amount or a Certificateholders' Interest Carry-Forward Amount, as
applicable, and will be paid or distributed to holders of each affected Class of
Notes or Certificates on subsequent Payment Dates to the extent that sufficient
funds are available therefor. The Issuer will remain obligated to pay interest
deficiencies on the Notes that are carried forward until such deficiencies have
been paid; provided that such obligation shall be a nonrecourse obligation of
the Issuer. See 'Rights of Noteholders Upon Occurrence of Event of Default'
herein.
Payments and Distributions of Principal. Payments and distributions of
principal will be made to the holders of the Securities on each Payment Date in
an amount generally equal to the excess of (a) the sum of (i) the Regular
Principal Payment Amount and (ii) any Excess Spread for such Payment Date paid
or distributed to Security Owners as described below, over (b) the
Overcollateralization Surplus Amount, if any. Furthermore, in the case of the
Payment Date following the Due Period in which the Funding Period ends, if the
amount remaining in the Pre-Funding Account at the end of the Funding Period
(net of reinvestment income, which shall be transferred to the Capitalized
Interest Account) is greater than $100,000, such amount will be paid or
distributed to reduce, on a pro rata basis, the outstanding Class Principal
Balances of each Class of Notes and the Outstanding Class Principal Balances of
each Class of Certificates. If such amount is less than or equal to
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$100,000, such amount will be paid sequentially to each Class of Notes to reduce
the respective Class Principal Balances thereof. Notwithstanding the foregoing,
if an event of default has occurred under the Indenture, such remaining amount
will be included in the Regular Principal Payment Amount and will be paid on a
pro rata basis to the Classes of Notes in reduction of their Class Principal
Balances. Principal payments on the Notes will be made from the Available Funds
remaining after the payment of the Noteholders' Interest Payable Amount.
On each Payment Date, principal distributions on the Certificates will be
made from the Available Funds remaining after all principal and interest payable
on the Notes on such Payment Date has been paid in full.
PAYMENT AND DISTRIBUTION PRIORITIES
A. On each Payment Date, the Regular Payment Amount will be applied in the
following order of priority:
(i) to pay to the holders of the Senior Notes, pro rata, the
applicable portion of the Noteholders' Interest Payable Amount required to
be paid in respect of the Senior Notes;
(ii) to pay to the holders of the Class M-1 Notes the applicable
portion of the Noteholders' Interest Payable Amount required to be paid in
respect of the Class M-1 Notes on such Payment Date;
(iii) to pay to the holders of the Class M-2 Notes the applicable
portion of the Noteholders' Interest Payable Amount required to be paid in
respect of the Class M-2 Notes on such Payment Date;
(iv) to distribute to the holders of the Class B-1 Certificates, the
applicable portion of the Certificate-holders' Interest Distributable
Amount required to be distributed in respect of the Class B-1 Certificates
on such Payment Date;
(v) to distribute to the holders of the Class B-2 Certificates, the
applicable portion of the Certificateholders' Interest Distributable Amount
required to be distributed in respect of the Class B-2 Certificates on such
Payment Date;
(vi) to pay to the holders of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Notes, in that order, the amount necessary to
reduce the aggregate of the Class Principal Balances of the Senior Notes to
the Senior Optimal Principal Balance;
(vii) to pay to the holders of the Class M-1 Notes the amount
necessary to reduce the Class Principal Balance thereof to the Class M-1
Optimal Principal Balance;
(viii) to pay to the holders of the Class M-2 Notes the amount
necessary to reduce the Class Principal Balance thereof to the Class M-2
Optimal Principal Balance;
(ix) to distribute to the holders of the Class B-1 Certificates the
amount necessary to reduce the Class Principal Balance thereof to the Class
B-1 Optimal Principal Balance;
(x) to pay to the holders of the Class B-2 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the Class B-2
Optimal Principal Balance;
(xi) to pay to the holders of the Class M-1 Notes and the Class M-2
Notes, in that order, their respective Deferred Amounts, if any, until such
Deferred Amounts have been paid in full;
(xii) to distribute to the holders of the Class B-1 and the Class B-2
Certificates, in that order, amounts in respect of the related Loss
Reimbursement Deficiency, if any, until such Loss Reimbursement Deficiency
has been paid in full; and
(xiii) to distribute any remaining amount to the holders of the
Residual Interest.
B. On each Payment Date, the Excess Spread, if any, will be paid or
distributed in the following order of priority (in each case after giving effect
to all payments and distributions specified in paragraph A. above):
(i) in an amount equal to the Overcollateralization Deficiency Amount,
if any, as follows:
(A) to pay to the holders of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Notes, in that order, the amount necessary to
reduce the aggregate of the Class Principal Balances of the Senior Notes
to the Senior Optimal Principal Balance;
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(B) to pay to the holders of the Class M-1 Notes the amount
necessary to reduce the Class Principal Balance thereof to the Class M-1
Optimal Principal Balance;
(C) to pay to the holders of the Class M-2 Notes the amount
necessary to reduce the Class Principal Balance thereof to the Class M-2
Optimal Principal Balance;
(D) to distribute to the holders of the Class B-1 Certificates, the
amount necessary to reduce the Class Principal Balance thereof to the
Class B-1 Optimal Principal Balance;
(E) to distribute to the holders of the Class B-2 Certificates, the
amount necessary to reduce the Class Principal Balance thereof to the
Class B-2 Optimal Principal Balance;
(ii) to pay to the holders of the Class M-1 Notes and the Class M-2
Notes, in that order, their respective Deferred Amounts, if any, until such
Deferred Amounts have been paid in full;
(iii) to distribute to the holders of the Class B-1 Certificates and
the Class B-2 Certificates, in that order, their respective Loss
Reimbursement Deficiency, if any, until such Loss Reimbursement Deficiency
has been paid in full;
(iv) to reimburse the Master Servicer or the Servicer for any
Servicing Advances previously made by the Master Servicer or the Servicer
and not previously reimbursed (the 'Servicing Advance Reimbursement
Amount'); and
(v) to distribute any remaining amount to the holders of the Residual
Interest.
RELATED DEFINITIONS
'60-Day Delinquency Amount' means, with respect to any Due Period, the
aggregate of the Principal Balances of all Home Loans that are 60 or more days
delinquent in the scheduled monthly payments of principal and interest, in
foreclosure or REO Property as of the end of such Due Period, excluding any
Liquidated Home Loan.
'Assumed Pool Principal Balance' means, as of any date of determination,
the sum of (i) the Initial Pool Principal Balance; (ii) the Cut-Off Date
Principal Balance of each Subsequent Home Loan and (iii) the amount, if any, on
deposit in the Pre-Funding Account as of such date (not including any such
amount representing investment earnings).
'Business Day' means any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in New York City or in the city in which the
corporate trust office of the Indenture Trustee or the servicing office of the
Master Servicer or the Servicer is located are authorized or obligated by law or
executive order to be closed.
'Certificateholders' Interest Carry-Forward Amount' means, with respect to
any Payment Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Payment Date and any outstanding
Certificateholders' Interest Carry-Forward Amount on such preceding Payment
Date, over the amount in respect of interest that is actually deposited in the
Certificate Distribution Account on such preceding Payment Date.
'Certificateholders' Interest Distributable Amount' means, with respect to
any Payment Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Payment Date and the Certificateholders' Interest
Carry-Forward Amount for such Payment Date; provided however, that on the
Payment Date, if any, on which the Class Principal Balance of each Class of
Certificates is reduced to zero through application of the Allocable Loss
Amount, the amount of the Certificateholders' Interest Distributable Amount will
be equal to the Certificateholders' Interest Distributable Amount calculated
without giving effect to this proviso, minus the portion, if any, of the
Allocable Loss Amount that otherwise would be applied to the Classes of
Mezzanine Notes on such date in the absence of this proviso.
'Certificateholders' Monthly Interest Distributable Amount' means, with
respect to any Payment Date, interest accrued for the related Due Period on each
Class of Certificates at the respective Pass Through Rate for such Class on the
Class Principal Balance immediately preceding such Payment Date (or, in the case
of the first Payment Date, on the Closing Date).
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'Class B-1 Optimal Principal Balance' means, with respect to any Payment
Date prior to the Overcollateralization Stepdown Date, zero; and with respect to
any other Payment Date, the Pool Principal Balance as of the preceding
Determination Date minus the sum of (i) the aggregate of the Class Principal
Balances of the Notes (after taking into account any payments made on such
Payment Date in reduction of the Class Principal Balances thereof) and (ii) the
greater of (x) 6.50% of the Pool Principal Balance as of the preceding
Determination Date plus the Required Overcollateralization Amount for such
Payment Date (calculated without giving effect to the proviso in the definition
thereof) and (y) 0.50% of the Assumed Pool Principal Balance.
'Class B-2 Optimal Principal Balance' means, with respect to any Payment
Date prior to the Overcollateralization Stepdown Date, zero; and with respect to
any other Payment Date, the Pool Principal Balance as of the preceding
Determination Date minus the sum of (i) the aggregate of the Class Principal
Balances of the Notes and Class B-1 Certificates (after taking into account any
payments made on such Payment Date in reduction of the Class Principal Balances
thereof) and (ii) the Required Overcollateralization Amount for such Payment
Date.
'Class M-1 Optimal Principal Balance' means, with respect to any Payment
Date prior to the Overcollateralization Stepdown Date, zero; and with respect to
any other Payment Date, the Pool Principal Balance as of the preceding
Determination Date minus the sum of (i) the aggregate of the Class Principal
Balances of the Senior Notes (after taking into account payments made on such
Payment Date in reduction of the Class Principal Balances thereof) and (ii) the
greater of (x) 40.00% of the Pool Principal Balance as of the preceding
Determination Date plus the Required Overcollateralization Amount for such
Payment Date (calculated without giving effect to the proviso in the definition
thereof) and (y) 0.50% of the Assumed Pool Principal Balance.
'Class M-2 Optimal Principal Balance' means, with respect to any Payment
Date prior to the Overcollateralization Stepdown Date, zero; and with respect to
any other Payment Date, the Pool Principal Balance as of the preceding
Determination Date minus the sum of (i) the aggregate of the Class Principal
Balances of each Class of Senior Notes and the Class M-1 Notes (after taking
into account any payments made on such Payment Date in reduction of such Class
Principal Balances) and (ii) the greater of (x) 25.50% of the Pool Principal
Balance as of the preceding Determination Date plus the Required
Overcollateralization Amount for such Payment Date (calculated without giving
effect to the proviso in the definition thereof) and (y) 0.50% of the Assumed
Pool Principal Balance.
'Deferred Amount' means, as of any Payment Date and as to any Class of
Mezzanine Notes, the amount of Allocable Loss Amounts previously applied in
reduction of the Class Principal Balance thereof (and not previously reimbursed)
plus interest accrued on the unreimbursed portion thereof at the applicable Note
Interest Rate from the Payment Date when so applied through the end of the Due
Period immediately preceding such Payment Date.
'Excess Spread' means, with respect to any Payment Date, the excess of (a)
the Available Funds over (b) the Regular Payment Amount.
'Insurance Proceeds' on each Payment Date will be equal to, with respect to
any Home Loan, the proceeds paid to the Indenture Trustee or the Servicer by any
insurer pursuant to any insurance policy covering a Home Loan, Mortgaged
Property or REO Property or any other insurance policy that relates to a Home
Loan, net of any expenses which are incurred by the Indenture Trustee or the
Servicer in connection with the collection of such proceeds and not otherwise
reimbursed to the Indenture Trustee or the Servicer, but excluding any FHA
Insurance Proceeds and proceeds of any insurance policy that are to be applied
to the restoration or repair of the Mortgaged Property or released to the
borrower in accordance with customary loan servicing procedures.
'Liquidated Home Loan' is a defaulted Home Loan as to which the Servicer
has determined that all recoverable liquidation and insurance proceeds have been
received, which will be deemed to occur upon the earlier of: (a) the liquidation
of the related Mortgaged Property acquired through foreclosure or similar
proceedings; (b) the Servicer's determination in accordance with customary
servicing practices that no further amounts are collectible from the Home Loan
and any related security, or (c) any portion of a scheduled monthly payment of
principal and interest is in excess of 180 days past due.
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'Loss Reimbursement Deficiency' means, as of any date of determination and
as to each Class of Certificates, the amount of Allocable Loss Amounts applied
to the reduction of the Class Principal Balance of each such Class.
'Net Delinquency Calculation Amount' means with respect to any Payment
Date, the excess, if any, of (a) the product of 1.7 and the Rolling Six-Month
Delinquency Average over (b) the aggregate of the amounts of Excess Spread for
the three preceding Payment Dates.
'Net Liquidation Proceeds' on each Payment Date will be equal to any cash
amounts received from Liquidated Home Loans, whether through trustee's sale,
foreclosure sale, disposition of REO, whole loan sales or otherwise (other than
Insurance Proceeds and Released Mortgaged Property Proceeds), and any other cash
amounts received in connection with the management of the Mortgaged Properties
from defaulted Home Loans, in each case, net of any reimbursements to the
Servicer made from such amounts for any unreimbursed Servicing Advances made and
any other fees and expenses paid in connection with the foreclosure,
conservation and liquidation of the related Liquidated Home Loans or Mortgaged
Properties.
'Noteholders' Interest Carry-Forward Amount' means, with respect to any
Payment Date, the excess of the Noteholders' Monthly Interest Payable Amount for
the preceding Payment Date and any outstanding Noteholders' Interest
Carry-Forward Amount on such preceding Payment Date, over the amount in respect
of interest that is actually deposited in the Note Payment Account on such
preceding Payment Date.
'Noteholders' Interest Payable Amount' means, with respect to any Payment
Date, the sum of the Noteholders' Monthly Interest Payable Amount for such
Payment Date and the Noteholders' Interest Carry-Forward Amount for such Payment
Date.
'Noteholders' Monthly Interest Payable Amount' means, with respect to any
Payment Date, interest accrued for the related Due Period on each Class of Notes
at the respective Note Interest Rate for such Class on the Class Principal
Balance thereof immediately preceding such Payment Date (or, in the case of the
first Payment Date, on the Closing Date).
'Overcollateralization Amount' means, with respect to any Payment Date, an
amount (not less than zero) equal to the excess of (a) the sum of (i) the Pool
Principal Balance as of the end of the preceding Due Period and (ii) the amount,
if any, on deposit in the Pre-Funding Account as of the end of such Due Period
over (b) the aggregate of the Class Principal Balance of all Classes of Notes
and the Class Principal Balances of all Classes of Certificates, after giving
effect, unless otherwise specified, to all payments on the Notes and all
distributions in respect of the Certificates and the Residual Interest on such
Payment Date.
'Overcollateralization Deficiency Amount' means, with respect to any
Payment Date, the excess, if any, of the Required Overcollateralization Amount
for such Payment Date over the Overcollateralization Amount (the
Overcollateralization Amount to be determined, for purposes of this definition,
before giving effect to payments and distributions on such Payment Date pursuant
to paragraph B. under '--Payment and Distribution Priorities' above).
'Overcollateralization Surplus Amount' means, with respect to any Payment
Date, the excess, if any, of the Overcollateralization Amount for such Payment
Date over the Required Overcollateralization Amount for such Payment Date.
'Overcollateralization Stepdown Date' means the first Payment Date
occurring after December 20, 2000 as to which the aggregate of the Class
Principal Balances of each Class of Senior Notes has been reduced to an amount
that is less than or equal to the excess of (i) the Pool Principal Balance as of
the preceding Determination Date over (ii) the greater of (a) 70.50% of the Pool
Principal Balance as of the preceding Determination Date plus the Required
Overcollateralization Amount for such Payment Date (calculated without giving
effect to the proviso in the definition thereof) and (b) 0.50% of the Assumed
Principal Balance.
'Regular Payment Amount' means, with respect to any Payment Date, the
lesser of (a) the Available Funds and (b) the sum of (i) the Noteholders'
Interest Payable Amount; (ii) the Certificateholders' Interest Distributable
Amount and (iii) the Regular Principal Payment Amount.
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'Regular Principal Payment Amount' means, with respect to each Payment
Date, an amount equal to the lesser of:
(A) the sum of (i) each scheduled payment of principal collected by
the Servicer in the related Due Period (excluding partial payments held in
escrow due to FHA Regulations); (ii) all partial and full principal
prepayments applied by the Servicer during such Due Period; (iii) the
principal portion of all Net Liquidation Proceeds, FHA Insurance Proceeds,
Insurance Proceeds and Released Mortgaged Property Proceeds received by the
Servicer during the related Due Period in respect of any Home Loan, to the
extent received on or prior to the date on which such Home Loan became a
Liquidated Home Loan; (iv) that portion of the Purchase Price of any
repurchased Home Loan which represents principal; and (v) the principal
portion of any Substitution Adjustments required to be deposited in the
Collection Account as of the related Determination Date; and
(B) the aggregate of the outstanding principal balances of the Offered
Notes immediately prior to such Payment Date.
'Released Mortgaged Property Proceeds' on each Payment Date will be equal
to, with respect to any Home Loan, the proceeds received by the Servicer in
connection with (i) a taking of an entire Mortgaged Property by exercise of the
power of eminent domain or condemnation or (ii) any release of part of the
Mortgaged Property from the lien of the related Mortgage, whether by partial
condemnation, sale or otherwise, which in either case are not released to the
borrower in accordance with applicable law, customary mortgage servicing
procedures and the Sale and Servicing Agreement.
'Required Overcollateralization Amount' means, with respect to any Payment
Date occurring prior to the Overcollateralization Stepdown Date, an amount equal
to the greater of (a) 3.25% of the Assumed Pool Principal Balance and (b) the
Net Delinquency Calculation Amount; with respect to any other Payment Date, an
amount equal to the greater of (a) 6.50% of the Pool Principal Balance as of the
end of the related Due Period and (b) the Net Delinquency Calculation Amount;
provided, however, that the Required Overcollateralization Amount will in no
event be less than 0.50% of the Assumed Pool Principal Balance.
'Rolling Six-Month Delinquency Average' mean with respect to any Payment
Date, the average of the 60-Day Delinquency Amounts for each of the six
immediately preceding Due Periods.
'Senior Optimal Principal Balance' means, with respect to any Payment Date
occurring prior to the Overcollateralization Stepdown Date, zero; with respect
to any other Payment Date, an amount equal to the Pool Principal Balance as of
the preceding Determination Date minus the greater of (a) 70.50% of the Pool
Principal Balance as of the preceding Determination Date plus the Required
Overcollateralization Amount for such Payment Date (without giving effect to the
proviso in the definition thereof) and (b) 0.50% of the Assumed Pool Principal
Balance.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied in reduction of the Class Principal
Balances of the Class B-2 and Class B-1 Certificates, in that order, until their
respective Class Principal Balances have been reduced to zero, and then, to the
Class Principal Balances of the Class M-2 Notes and the Class M-1 Notes, in that
order, until their respective Class Principal Balances have been reduced to
zero. The Class Principal Balances of the Senior Notes will not be reduced by
any application of Allocable Loss Amounts. The reduction of the Class Principal
Balance of any Class of Mezzanine Notes by the application of Allocable Loss
Amounts will entitle such Class to reimbursement in an amount equal to the
applicable Deferred Amount, in accordance with the payment priorities specified
herein. The reduction of the Class Principal Balance of any Class of
Certificates by the application of Allocable Loss Amounts will entitle such
Class of Certificates to reimbursement in an amount equal to the applicable Loss
Reimbursement Deficiency in accordance with the payment priorities set forth
herein. Distributions in respect of Loss Reimbursement Deficiencies will not
reduce the Class Principal Balance of any Class of the Certificates and payments
of Deferred Amounts will not reduce the Class Principal Balance of either Class
of the Mezzanine Notes.
The Deferred Amount with respect to either Class of the Mezzanine Notes
will remain outstanding and the Issuer will remain obligated to pay such
Deferred Amount until such amount has been paid in full to the holders
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of such Class; provided that such obligation will be nonrecourse to the Issuer.
The Loss Reimbursement Deficiency with respect to each Class of Certificates
will remain outstanding until the earlier of (x) the payment in full of such
amount to the holders thereof and (y) the occurrence of the applicable Final
Scheduled Payment Date (although there is no requirement that such amounts be
paid on such date).
PAYMENT OF DEFERRED AMOUNTS AND LOSS REIMBURSEMENT DEFICIENCIES
Any Deferred Amounts payable to the holders of either Class of the
Mezzanine Notes and any amounts in respect of a Loss Reimbursement Deficiency
distributable to the holders of the Certificates pursuant to clauses B. (ii) and
(iii) under '--Payment and Distribution Priorities' above will be paid to the
holder of record of the related Class of Mezzanine Notes or the Certificates as
of the applicable Record Date, or, in the case of a Class of Mezzanine Notes or
Certificates that have been redeemed or retired, to the last holder of record,
without regard to when the losses for which such reimbursement is being paid
actually occurred. In making the foregoing payments in respect of Deferred
Amounts, amounts attributable to accrued and unpaid interest in respect of such
Deferred Amounts shall be paid prior to amounts attributable to principal.
OPTIONAL REDEMPTION OF THE NOTES; OPTIONAL PREPAYMENT OF THE CERTIFICATES
The Master Servicer or the Servicer may, at its option, effect an early
redemption or termination of the Offered Notes on any Payment Date on or after
any Payment Date on which the Pool Principal Balance declines to 10% or less of
the Assumed Pool Principal Balance, by purchasing the Home Loans for a price
equal to the Termination Price. The 'Termination Price' with respect to an
optional redemption or termination of the Securities will be an amount equal to
the greater of (I) the sum of (A) the then outstanding aggregate Class Principal
Balances of the Notes plus all accrued and unpaid interest thereon at the
applicable Note Interest Rates, (B) the then outstanding aggregate Class
Principal Balances of the Certificates plus all accrued and unpaid interest
thereon at the Pass-Through Rate, (C) any Trust Fees and Expenses due and unpaid
on such date and (D) any unreimbursed Servicing Advances, and (II) as determined
by the Indenture Trustee and the Person exercising the optional redemption or
termination, the fair market value of the Home Loans. All proceeds from any such
sale of the Home Loans will be distributed (i) to the Indenture Trustee for
payment of the outstanding Trust Fees and Expenses; (ii) to the Servicer and the
Master Servicer for payment of unreimbursed Servicing Advances, including such
Servicing Advances deemed to be nonrecoverable; (iii) to the Noteholders in an
amount equal to the then outstanding aggregate Class Principal Balance of the
Notes, plus all accrued and unpaid interest thereon at the applicable Note
Interest Rate; (iv) to the Certificateholders in an amount equal to the then
outstanding aggregate Class Principal Balances of the Certificates, plus all
accrued and unpaid interest thereon at the applicable Pass-Through Rate; (v) to
the holders of the Class M-1 Notes and Class M-2 Notes, in that order, in
amounts equal to their respective Deferred Amounts, if any; (vi) to the holders
of the Class B-1 Certificates and Class B-2 Certificates, in that order, in
amounts equal to their respective Loss Reimbursement Deficiency, if any, and
(vii) to the holders of the Residual Interest, in an amount equal to the amount
of proceeds remaining, if any, after the payments and distributions specified in
clauses (i) through (vi) above.
THE INDENTURE
Modification of Indenture. The Indenture Trustee and the Issuer may, with
the consent of holders of not less than a majority of the outstanding principal
amount of the Notes, enter into a supplemental indenture for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of, the Indenture or of modifying in any manner the rights of the
Noteholders (except as provided below).
Without the consent of the holder of each outstanding Note affected thereby
no supplemental indenture will: (i) change the date of any installment of
principal of or interest on any such Note or reduce the principal amount
thereof, the interest rate thereon or the redemption price with respect thereto
or change the provisions of the Indenture relating to the application of
collections on, or the proceeds of the sale of, the Trust to payment of
principal or interest on the Notes, or change any place of payment where, or the
coin or currency in which, any such Note or any interest thereon is payable, or
impair the right to institute suit for the enforcement of certain provisions of
the Indenture regarding payment; (ii) reduce the percentage of the aggregate
principal amount of the outstanding Notes, the consent of the holders of which
is required for any such supplemental indenture or the consent of the holders of
which is required for any waiver of compliance with certain provisions of the
Indenture
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or certain defaults thereunder and their consequences as provided for in such
Indenture; (iii) modify or alter the provisions of the Indenture regarding the
definition of the term 'outstanding'; (iv) reduce the percentage of the
aggregate principal amount of the outstanding Notes, the consent of the holders
of which is required to direct the Indenture Trustee to sell or liquidate the
Trust if the proceeds of such sale would be insufficient to pay the principal
amount and accrued but unpaid interest on the outstanding Notes; (v) modify the
sections of the Indenture which specify the applicable percentage of aggregate
principal amount of the outstanding Notes necessary to amend such Indenture or
certain other related agreements; (vi) modify the provisions of the Indenture in
such a manner as to affect the calculation of the amount of any payment of
interest or principal due on any Note on any Payment Date or to affect the
rights of the Noteholders to the benefit of any provisions for the mandatory
redemption of the Notes; or (vii) permit the creation of any lien ranking prior
to or on a parity with the lien of the Indenture with respect to any part of the
Trust or, except as otherwise permitted or contemplated in such Indenture,
terminate the lien of such Indenture on any such property or deprive the holder
of any such Note of the security provided by the lien of such Indenture.
The Indenture Trustee and the Issuer may also enter into supplemental
indentures, without the consent of the Noteholders of such Series, for the
purpose of, among other things adding any provisions to, or changing in any
manner or eliminating any of the provisions of, the Indenture or modifying in
any manner the rights of the Noteholders, provided that such action shall not
adversely affect in any material respect the interests of any Noteholder.
Certain Covenants. The Indenture will provide that the Issuer will not
consolidate with or merge into any other entity, unless (i) the entity formed by
or surviving such consolidation or merger is organized under the laws of the
United States, any state or the District of Columbia, (ii) such entity expressly
assumes the Issuer's obligation to make due and punctual payments upon the Notes
and the performance or observance of every agreement and covenant of the Issuer
under the Indenture, (iii) no Event or Default shall have occurred and be
continuing immediately after such merger or consolidation, (iv) the Issuer has
been advised that the rating of the Notes then outstanding would not be reduced
or withdrawn by the Rating Agencies as a result of such merger or consolidation
and (v) 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 related Noteholder.
The Issuer will not, among other things, (i) except as expressly permitted
by the Indenture or the Sale and Servicing Agreement, sell, transfer, exchange
or otherwise dispose of any of the properties or assets of the Issuer, unless
directed to do so by the Indenture Trustee, (ii) claim any credit on, or make
any deduction from the principal or interest payable in respect of, the Notes
(other than amounts properly withheld under the code or applicable state law) or
assert any claim against any present or former Noteholder by reason of the
payment of tax levied or assessed upon any part of the Trust; (iii) engage in
any business or activity other than as permitted by the Trust Agreement; (iv)
permit the validity or effectiveness of the Indenture to be amended,
hypothecated, subordinated, terminated or discharged or permit any person to be
released from any covenants or obligations with respect to such Notes under such
Indenture except as may be expressly permitted thereby; or (v) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance (other
than the lien of the Indenture) to be created on or extend to or otherwise arise
upon or burden the Trust or any part thereof, or any interest therein or the
proceeds thereof.
Annual Compliance Statement. The Issuer will be required to deliver to the
Indenture Trustee, within 120 days after the end of each fiscal year of the
Issuer, an officer's certificate with respect to the fulfillment of the Issuer's
obligations under the Indenture during the immediately preceding fiscal year.
Indenture Trustee's Annual Report. If required by TIA Section 313(a),
within 60 days after each May 15, the Indenture Trustee shall mail to each
Noteholder as required by TIA Section 313(c) a brief report dated as of such
date that complies with TIA Section 313(a). The Indenture Trustee also shall
comply with TIA Section 313(b) to the extent applicable to the Notes.
Satisfaction and Discharge Indenture. The Indenture will cease to be of
further effect with respect to the Notes, upon the delivery to the Indenture
Trustee for cancellation of all Notes or, with certain limitations, upon deposit
with such Indenture Trustee of funds sufficient for the payment in full of all
such Notes.
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EVENTS OF DEFAULT; RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
'Events of Default' under the Indenture will consist of: (i) subject to the
following paragraph, a default in the payment of any interest on any such Note
when the same becomes due and payable, and such default shall continue for a
period of five days; (ii) a default in the payment of the principal of or any
installment of the principal of any such Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture or the Trust Agreement; or any
representation or warranty of the Issuer made in the Indenture, the Sale and
Servicing Agreement or the Trust Agreement or in any certificate or other
writing delivered pursuant thereto in connection therewith having been proven
incorrect in any material respect as of the time made, and such default shall
have continued and not been cured, or the circumstance or condition in respect
of which such misrepresentation or warranty was incorrect shall not have been
eliminated or otherwise cured, for a period of 30 days after notice thereof is
given to the Issuer by the Indenture Trustee or to Issuer and the Indenture
Trustee by the holders of at least 25% of the aggregate principal amount of the
Highest Priority Class (defined below) of Notes then outstanding; or (iv)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Issuer or any substantial part of the property of the Trust (the 'Trust
Estate'). However, the amount of principal required to be paid to Noteholders
under the Indenture will generally be limited to amounts available to be
deposited in the Collection Account. Therefore, the failure to pay principal on
a Class of Notes generally will not result in the occurrence of an Event of
Default until the final scheduled Payment Date for such Class of Notes.
Under the Indenture, a failure to pay the full amount of the portion of the
Noteholders' Interest Payable Amount payable to the Senior Notes or, if the
Senior Notes have been paid in full, a failure to pay the portion of such amount
payable to the Class of Notes then outstanding that has the highest priority of
payment (the 'Highest Priority Class') within five days of the Payment Date on
which such payment is due (without regard to the amount of Available Funds) will
constitute an Event of Default. However, an Event of Default will not occur
solely due (i) to the failure to pay the full amount of the Noteholders'
Interest Payable Amount allocable to any Class of Notes then outstanding not
then having the highest priority of payment (a 'Non-Priority Class') or (ii) to
an allocation of Allocable Loss Amounts to a Non-Priority Class, until all the
Classes of Notes having a higher priority of payment have been paid in full
(including all Noteholders' Interest Carry-Forward Amounts and Deferred Amounts
payable with respect thereto), and then only if all Noteholders' Interest
Carry-Forward Amounts and Deferred Amounts payable to such Non-Priority Class
have not been paid. Until the Notes have been declared due and payable upon an
Event of Default, the holders of any Non-Priority Class may not request the
Indenture Trustee to take any action, other than the application of Available
Funds to principal and interest as provided herein, and may not otherwise take
or cause any action to be taken to enforce the obligation of the Issuer to pay
principal and interest on such Non-Priority Class.
If an Event of Default shall have occurred and be continuing, the Indenture
Trustee may, and at the direction of the Controlling Noteholders (defined below)
shall, do one or more of the following: (i) institute proceedings to collect
amounts due, (ii) foreclose on property in the Trust Estate, (iii) exercise
remedies as a secured party under the UCC; and (iv) sell the related Trust
Estate. The Indenture Trustee is prohibited from selling the Trust Estate
following an Event of Default, unless (i) all of the Controlling Noteholders
consent to such sale, (ii) the proceeds of such sale are sufficient to discharge
in full all amounts then due and unpaid upon such Notes for principal and
interest, or (iii) the Indenture Trustee determines that the Trust Estate will
not continue to provide sufficient funds for payment of principal and of
interest on the Notes as they would become due if the Notes were not declared
due and payable and the Indenture Trustee obtains the consent of 66 2/3% of the
Controlling Noteholders principal amount of all Notes then outstanding. If the
Notes have been declared to be due and payable following an Event of Default,
the Indenture Trustee may, but need not, elect to maintain possession of the
Trust Estate.
Upon the occurrence of an Event of Default, the 'Controlling Noteholders'
will be the holders of Senior Notes representing more than 50% of the aggregate
of the Class Principal Balances of the Senior Notes then outstanding or if the
aggregate outstanding Class Principal Balance of the Senior Notes has been
reduced to zero, the holders of the Highest Priority Class representing more
than 50% of the Class Principal Balance of such Class of Notes. These remedies
of the Controlling Noteholders upon an Event of Default under the Indenture
include the right to cause the payments of accrued interest to be paid pro rata
in accordance with the amount of unpaid accrued interest, and to cause payments
of principal on the outstanding Notes to be paid (either in lump sum from
proceeds of the sale of the assets pledged to secure the Notes or from monthly
collections on the Home Loans),
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pro rata out of remaining Available Funds, regardless of the allocation, or
sequential nature, of principal payments which would otherwise apply as
described above, based upon the Principal Balance of the Notes on the related
Determination Date (an 'acceleration'). On each Payment Date on and after any
such acceleration of the Notes, and following the reduction to zero of the
Principal Balance of all Classes of Notes, any remaining Available Funds will be
applied in repayment of Deferred Amounts on the Notes. Such remedies also will
include the right to direct the Indenture Trustee's actions under the Indenture
unless such right is otherwise granted to holders of the Notes after an
acceleration of the Notes and to consent to the sale of the assets pledged to
secure the Notes. Should an Event of Default occur, prior to a declaration that
the Notes are due and payable, payments will be applied on each Payment Date in
accordance with the priorities, described above, which would otherwise be
applicable on such Payment Date had an Event of Default not occurred.
If the Indenture Trustee has or acquires a conflicting interest as defined
in the TIA, the Indenture requires the Indenture Trustee to eliminate such
conflict or resign to the extent and in the manner provided by the TIA. In the
Indenture, the Issuer will agree that if an Event of Default thereunder is
continuing and there are Senior Notes outstanding, then, within 60 days of such
Event of Default the Issuer will appoint a separate trustee for the benefit of
the holders of any Non-Priority Class, and the Indenture Trustee will act as
trustee only for the benefit of such Senior Notes. If the Issuer fails to
appoint such a separate trustee, the Indenture Trustee will petition a court of
competent jurisdiction to appoint one.
Subject to the provisions for indemnification and certain limitations
contained in the Indenture, the Controlling Noteholders will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee, and may, in certain cases, waive any past
default and its consequences, except a default in the payment of interest on any
of the Notes or in respect of a covenant or provision of the Indenture that
cannot be modified or amended without the consent of the holders of each such
outstanding Note.
No holder of a Note will have the right to institute any proceeding,
judicial or otherwise, with respect to the Indenture, unless (i) such holder has
previously given written notice to the Indenture Trustee of continuing Event of
Default, (ii) the Controlling Noteholders have made written request to the
Indenture Trustee to institute such proceeding in respect of such Event of
Default in its own name as Indenture Trustee, (iii) such holder or holders have
offered to the Indenture Trustee reasonable indemnity against the costs,
expenses and liabilities to be incurred in complying with such request, (iv) the
Indenture Trustee for 60 days after its receipt of such notice, request and
offer of indemnity failed to institute such proceeding and (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the Controlling Noteholders.
In addition, the Indenture Trustee, by entering into the Indenture, and the
Noteholders, by accepting the Notes, will covenant that they will not at any
time institute against the Issuer or the Servicer, or join in any institution
against the Issuer or the Servicer, of any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings, or other proceeding under
any United States federal or state bankruptcy or similar law in connection with
any obligations relating to the Notes, the Indenture or certain related
documents.
The Notes shall be non-recourse obligations of the Issuer and shall be
limited in right of payment to amounts available from the Trust Estate and any
amounts received by the Indenture Trustee under any Credit Enhancement in
respect of the Notes, as provided in the Indenture. The Issuer shall not
otherwise be liable for payments on the Notes.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, the Sale
and Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the 'Transfer and Servicing Agreements'). The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Transfer and Servicing Agreements.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Transferor will sell the Initial Home Loans to the
Depositor, and the Depositor will sell the Initial Home Loans to the Trust. The
Trust will, concurrently with the sale of the Initial Home Loans and the deposit
of funds in the Pre-Funding Account and the Capitalized Interest Account,
deliver or cause to be delivered the Offered Notes to the Depositor in exchange
for the Initial Home Loans, the Pre-Funding Account Deposit and the Capitalized
Interest Account Deposit. The Trust will pledge and assign the Initial Home
Loans, Pre-Funding Account and the Capitalized Interest Account to the Indenture
Trustee in exchange for the Notes. Each Initial Home Loan will be identified in
a schedule appearing as an exhibit to the Sale and Servicing Agreement delivered
to the Indenture Trustee (the 'Home Loan Schedule').
Following the Closing Date, the funds in the Pre-Funding Account will be
used to purchase from the Depositor, from time to time prior to the end of the
Funding Period, subject to the availability thereof, Subsequent Home Loans
having characteristics that are generally similar to the characteristics of the
Initial Home Loans. See 'The Home Loan Pool--Conveyance of Subsequent Home
Loans' herein. In connection with each purchase of such Subsequent Home Loans,
the Trust will be required to pay to the Depositor from the Pre-Funding Account
a cash purchase price of 100% of the principal balance thereof. In connection
with any purchase of Subsequent Home Loans by the Trust after the Closing Date,
the Transferor will sell such Subsequent Home Loans to the Depositor, and the
Depositor in turn will sell such Subsequent Home Loans to the Trust. The Trust
will pledge and assign such Subsequent Home Loans to the Indenture Trustee.
The Transferor will represent and warrant to the Indenture Trustee, among
other things, that (i) the information with respect to each Home Loan set forth
in the Home Loan Schedule attached to the Sale and Servicing Agreement is true
and correct in all material respects; (ii) immediately prior to the sale to the
Depositor, the Transferor has good and marketable title to the Home Loans
included in the Trust and such other items comprising the corpus of the Trust
are free and clear of any lien, mortgage, pledge, charge, security interest or
other encumbrance; (iii) at the date of initial issuance of the Offered Notes,
no payment in respect of a Home Loan is 30 or more days delinquent and there are
no delinquent tax or assessment liens against the related Mortgaged Property, if
any; and (iv) at origination, each Home Loan complied in all material respects
with applicable state and federal laws, including, without limitation, consumer,
usury, truth-in-lending, consumer credit protection, equal credit opportunity
and disclosure laws and with respect to any Title I Loans, the FHA Regulations.
In addition, to the extent set forth in the Sale and Servicing Agreement, the
Transferor will make additional representations and warranties with respect to
the Home Loans, which are based upon the type of loan product included in the
Home Loan Pool, and certain of which may be qualified to the extent of the
Transferor's knowledge.
In addition, the Transferor will, as to each Home Loan, deliver to the
Indenture Trustee the related mortgage note endorsed to the order of the
Indenture Trustee without recourse, any assumption and modification agreements
and 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 the name of the Indenture Trustee in recordable form, and any
intervening assignments of the Mortgage (each, an 'Indenture Trustee's Home Loan
File'). Subject to confirmation by the Rating Agencies, with respect to the Home
Loans secured by Mortgaged Properties located in certain states, the Transferor
will not be required to record assignments to the Indenture Trustee of the
Mortgages in the real property records of these states for such Home Loans. See
'Risk Factors--Additional Factors Affecting Delinquencies, Defaults and Losses
on Home Loans--Non-recordation of Assignments' herein. In such circumstances,
the Transferor will deliver to the Indenture Trustee the assignments of the
Mortgages in the name of the Indenture Trustee and in recordable form, and the
Transferor, in its capacity as the Servicer, will retain the record title to
such Mortgages under the applicable real property records, on behalf of the
Trust, the Indenture Trustee and the Security Owners. In all other circumstances
with respect to the Home
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Loans, assignments to the Indenture Trustee of the Mortgages will be recorded in
the real property records for those states in which such recording is deemed
necessary to protect the Trust and the Indenture Trustee's interest in the Home
Loans against the claims of certain creditors of the Transferor or subsequent
purchasers. In these circumstances, the Transferor will deliver to the Indenture
Trustee after recordation the assignments to the Indenture Trustee of the
Mortgages. In the event that, with respect to any Home Loan as to which
recordation of the related assignment is required, the Transferor cannot deliver
the Mortgage or any assignment with evidence of recording thereon concurrently
with the conveyance thereof under the Sale and Servicing Agreement because they
have not yet been returned by the public recording office, the Transferor will
deliver to the Indenture Trustee a certified true photocopy of such Mortgage or
assignment. The Transferor will deliver to the Indenture Trustee any such
Mortgage or assignment with evidence of recording indicated thereon upon receipt
thereof from the public recording office. The Indenture Trustee will agree, for
the benefit of the Security Owners, to review (or cause to be reviewed) each
Indenture Trustee's Home Loan File within 45 days after the conveyance of the
related Home Loan to the Trust to ascertain that all required documents have
been executed and received, subject to the applicable cure period in the
Transfer and Servicing Agreements.
The transfer of the beneficial ownership of any Title I Loans from the
Depositor will not be reported to the FHA and, accordingly, the FHA will
continue to regard the FHA Insurance Holder as the owner of the Title I Loans
and the related FHA insurance benefits.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
If any document is not delivered or is found to be defective in any
material respect and the Transferor cannot deliver such document or cure such
defect within 60 days after notice thereof (which the Indenture Trustee will
undertake to give within 45 days of the delivery of such documents), and if any
other party obligated to deliver such document or cure such defect has not done
so and has not substituted or repurchased the affected Home Loan, then the
Transferor will, not later than the Determination Date next succeeding the end
of such 60-day period (a) remove the affected Home Loan from the Trust and
substitute one or more other Home Loans therefor or (b) repurchase the Home Loan
from the Indenture Trustee for a price equal to 100% of its principal balance
plus interest thereon to the date of repurchase, plus the amount of unreimbursed
servicing advances made by the Master Servicer or the Servicer with respect to
such Home Loan. Such purchase price will be deposited in the Collection Account
on such Determination Date and such repurchase and, if applicable, substitution
obligation will constitute the sole remedy available to Security Owners or the
Indenture Trustee against the Transferor for a material defect in a document
relating to a Loan Asset.
PRE-FUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$60,000,000 (the 'Pre-Funding Account Deposit') will be deposited in an Eligible
Account (the 'Pre-Funding Account'), which account will be part of the Trust and
will be maintained as an Eligible Account with the Indenture Trustee, in its
corporate trust department for the purchase of Subsequent Home Loans. The
Pre-Funding Account Deposit will be increased or decreased by an amount equal to
the aggregate of the principal balances of any home loans removed from or added
to, respectively, the Home Loan Pool prior to the Closing Date, provided that
any such increase or decrease will not exceed 10% of the Initial Pool Principal
Balance. During the period (the 'Funding Period') from the Closing Date until
the earlier of (i) the date on which the amount on deposit in the Pre-Funding
Account is reduced to $50,000 or less, and (ii) January 30, 1998, the amount on
deposit in the Pre-Funding Account will be reduced in accordance with the
applicable provisions of the Sale and Servicing Agreement by amounts used to
purchase Subsequent Home Loans; provided that the Funding Period will be subject
to an earlier termination if insufficient funds are on deposit in the
Capitalized Interest Account on any Determination Date to cover any interest
shortfall for payments and distributions to the Security Owners on the
immediately following Payment Date. Subsequent Home Loans purchased by and added
to the Trust on any Subsequent Transfer Date must satisfy the criteria set forth
in the Sale and Servicing Agreement. See 'The Home Loan Pool--Conveyance of
Subsequent Home Loans' herein.
Assuming that all funds on deposit in the Pre-Funding Account are used to
purchase Subsequent Home Loans, then the Cut-Off Date Pool Principal Balance is
expected to consist of approximately 97% to 99% Conventional Loans and
approximately 1% to 3% Title I Loans.
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On the Payment Date following the Due Period in which such Funding Period
ends, if the amount remaining in the Pre-Funding Account at the end of the
Funding Period (net of reinvestment income, which is required to be transferred
to the Capitalized Interest Account) is greater than $100,000, such amount will
be applied to reduce on a pro rata basis the outstanding Class Principal
Balances of the Notes and the outstanding Class Principal Balance of the
Certificates, thus reducing the weighted average lives of the Offered Notes. If
such remaining amount is less than or equal to $100,000, such amount will be
included in the Regular Principal Payment Amount and will be paid sequentially
to each Class of Notes in reduction of the respective Class Principal Balances
thereof. Notwithstanding the foregoing, if an Event of Default has occurred
under the Indenture, such remaining amount will be included in the Regular
Principal Payment Amount and will be paid on a pro rata basis to the Classes of
Notes in reduction of their Class Principal Balances. See 'Prepayment and Yield
Considerations' herein.
Amounts on deposit in the Pre-Funding Account will be invested in certain
types of investments set forth in the Sale and Servicing Agreement that have
been approved by the Rating Agencies (the 'Permitted Investments') at the
direction of the Servicer. The Sale and Servicing Agreement requires that no
Permitted Investment shall evidence either the right to receive (a) only
interest with respect to the obligations underlying such Permitted Investment or
(b) both principal and interest payments derived from obligations underlying
such Permitted Investment where the interest and principal payments with respect
to such Permitted Investment provide a yield to maturity at par greater than
120% of the yield to maturity at par of the underlying obligations. Further, no
Permitted Investment may be purchased at a price greater than par if such
Permitted Investment may be prepaid or called at a price less than its purchase
price prior to stated maturity. Permitted Investments with respect to amounts on
deposit in the Pre-Funding Account are required to mature or otherwise be
available for withdrawal no later than one Business Day prior to a Subsequent
Transfer Date. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be transferred to the Capitalized
Interest Account.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, at the direction of the Depositor, an amount intended
to cover the projected interest shortfall during the Funding Period (the
'Capitalized Interest Account Deposit'), as approved by the Rating Agencies,
will be deposited in an Eligible Account maintained by and in the name of the
Indenture Trustee (the 'Capitalized Interest Account') from a portion of the
sales proceeds from the Offered Notes. The amount on deposit in the Capitalized
Interest Account will be specifically allocated to cover shortfalls in interest
(the 'Interest Shortfall') on the Offered Notes that may arise as a result of
the utilization of the Pre-Funding Account for the purchase by the Trust of
Subsequent Home Loans after the Closing Date and will be so applied by the
Indenture Trustee for the payment and distribution of interest to Security
Owners. Any amounts remaining in the Capitalized Interest Account on any
Determination Date that are not required to cover the anticipated Interest
Shortfall described above, will be distributed to the holders of the Residual
Interest, including any net reinvestment income thereon, and such amounts will
not thereafter be available for payment and distribution to the Security Owners.
Amounts on deposit in the Capitalized Interest Account will be invested in
Permitted Investments at the direction of the Servicer. All such Permitted
Investments are required to mature no later than one Business Day prior to the
applicable Payment Date as specified in the Sale and Servicing Agreement. All
interest and any other investment earnings on amounts on deposit in the
Capitalized Interest Account will be available to cover any Interest Shortfall.
FHA INSURANCE PREMIUM ACCOUNT
To provide for the payment of the FHA Premium Amount on each Title I Loan,
the Servicer will establish and maintain an Eligible Account (the 'FHA Insurance
Premium Account') in the name of the Indenture Trustee into which an initial
deposit will be made on the Closing Date in the amount required under the Sale
and Servicing Agreement and into which will be deposited on a monthly basis an
amount equal to one-twelfth of the product of the original principal balance of
each outstanding Title I Loan multiplied by the appropriate annual premium rate
applicable to each such Title I Loan (the 'FHA Insurance Premium Deposit
Amount'). Amounts may be withdrawn from the FHA Insurance Premium Account on
each Payment Date to reimburse the Transferor
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or FHA Claims Administrator, or any Person acting on either of their behalf, for
any amounts advanced to the FHA by such entity in respect of the FHA Premium
Amount relating to any Title I Loan in lieu of withdrawals from the FHA
Insurance Premium Account. In addition, monies in excess of that required to be
maintained in the FHA Insurance Premium Account as of the Payment Date occurring
in October of each year commencing in 1998 will be transferred to the Note
Payment Account.
The Servicer's Monthly Remittance Report will indicate the FHA Premium
Amount for each Title I Loan outstanding as of the first day of the immediately
preceding Due Period. The FHA Premium Amount for each Title I Loan is an annual
premium that ranges from 0.50% to 1.00% of the original principal balance of
each such Title I Loan, depending on the type of loan and its term to maturity.
For the Title I Loans that are property improvement loans with maturities in
excess of 25 months, which comprise substantially all of the Title I Loans, the
annual premium rate is .50% of the original principal balance of each such Home
Loan. On or before the 23rd day of each calendar month and in accordance with
the FHA Regulations, the Indenture Trustee will withdraw from the FHA Insurance
Premium Account and pay to the FHA an amount equal to the FHA Premium Amount for
each Title I Loan as to which such FHA Premium Amount is payable to the FHA
during such calendar month.
TRUST FEES AND EXPENSES
As compensation for their services pursuant to the applicable Transfer and
Servicing Agreements, the Indenture Trustee is entitled to the Indenture Trustee
Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the Master
Servicer is entitled to the Master Servicing Fee. As compensation for its
services pursuant to the Sale and Servicing Agreement, the Servicer is entitled
to the Servicing Compensation and reimbursements as described below.
SERVICING
The Servicer will perform the loan servicing functions with respect to the
Home Loans on behalf of the Master Servicer pursuant to the terms of a servicing
agreement (the 'Servicing Agreement') between the Servicer and the Master
Servicer. In consideration for the performance of the daily loan servicing
functions for the Home Loans, the Servicer is entitled to a monthly fee (the
'Servicing Fee'), equal to 1.00% (100 basis points) per annum (the 'Servicing
Fee Rate) of the Pool Principal Balance as of the first day of the immediately
preceding Due Period. The Servicing Fee will be reduced on any Home Loan with a
Loan Rate below 10.135% per annum. See 'Risk Factors--Additional Factors
Affecting Delinquencies, Defaults and Losses on Home Loans--Dependence on Master
Servicer and Servicer for Servicing Home Loans' herein. In addition to the
Servicing Fee, the Servicer is entitled to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, insufficient funds charges, prepayment penalties, late payment charges,
any other servicing-related penalties and fees, and investment income from
amounts on deposit from time to time in the Collection Account (collectively
such additional compensation and Servicing Fee, the 'Servicing Compensation').
In the event of a delinquency or a default with respect to a Home Loan,
neither the Master Servicer nor the Servicer will have an obligation to advance
scheduled monthly payments of principal and interest with respect to such Home
Loan. However, the Servicer, or if it fails to do so, the Master Servicer will
make reasonable and customary expense advances with respect to the Home Loans
(each, a 'Servicing Advance') in accordance with its servicing obligations under
the Sale and Servicing Agreement and will be entitled to receive the Servicing
Advance Reimbursement Amount for such Servicing Advances as described herein.
For example, such Servicing Advances may include costs and expenses advanced for
the preservation, restoration and protection of any Mortgaged Property,
including advances to pay delinquent real estate taxes and assessments. Any
Servicing Advances by the Servicer or the Master Servicer will be reimbursable
from the Available Collection Amount after all prior payments and distributions
as described under '--Collection Account, Note Payment Account and Certificate
Distribution Account' below or with respect to any Liquidated Home Loan from the
Liquidation Proceeds received therefrom.
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COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT AND CERTIFICATE DISTRIBUTION ACCOUNT
Pursuant to the Servicing Agreement, the Servicer is required to use its
best efforts to deposit in an Eligible Account (the 'Collection Account'),
within one Business Day and in any event to deposit within two Business Days of
receipt, all payments received after each Cut-Off Date on account of principal
and interest on the related Home Loans, all Net Liquidation Proceeds, Insurance
Proceeds, Released Mortgaged Property Proceeds, FHA Insurance Proceeds, any
amounts payable in connection with the repurchase or substitution of any Home
Loan and any amount required to be deposited in the Collection Account in
connection with the termination of the Offered Notes. The foregoing requirements
for deposit in the Collection Account will be exclusive of payments on account
of principal and interest collected on the Home Loans on or before the
applicable Cut-Off Date. Withdrawals will be made from the Collection Account
only for the purposes specified in the Servicing Agreement. The Collection
Account may be maintained at any depository institution which satisfies the
requirements set forth in the definition of Eligible Account in the Sale and
Servicing Agreement. Initially, the Collection Account will be maintained with
PSB, an affiliate of the Transferor, Servicer and the FHA Insurance Holder. The
Sale and Servicing Agreement has similar provisions regarding a 'Collection
Account.' References herein to the 'Collection Account' shall mean either the
Collection Account under the Servicing Agreement or the Collection Account under
the Sale and Servicing Agreement, as applicable. The Collection Account under
the Sale and Servicing Agreement will be maintained with the Indenture Trustee.
Amounts on deposit in the Collection Account will be invested in Permitted
Investments at the direction of the Servicer. All such Permitted Investments are
required to mature no later than one Business Day prior to the applicable
Payment Date or, in the case of a Permitted Investment that is an obligation of
the Indenture Trustee, on the applicable Payment Date, as specified in the Sale
and Servicing Agreement. All interest and any other investment earnings on
amounts on deposit in the Collection Account will be distributed to the Servicer
on each Payment Date as additional servicing compensation. The Indenture Trustee
will not in any way be held liable by reason of any insufficiency in any
Collection Account resulting from any loss on any Permitted Investment.
The Master Servicer will establish and maintain with the Indenture Trustee
an account, in the name of the Indenture Trustee on behalf of the Noteholders,
into which amounts released from the Collection Account or the Pre-Funding
Account for payment to the Noteholders will be deposited and from which all
payments to the Noteholders will be made (the 'Note Payment Account'). The
Master Servicer will also establish and maintain with the Indenture Trustee an
account, in the name of the Co-Owner Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account or
the Pre-Funding Account for distribution to the Certificateholders will be
deposited and from which all distributions to the Certificateholders will be
made (the 'Certificate Distribution Account'). The Note Payment Account and the
Certificate Distribution Account are referred to herein collectively as the
'Payment Accounts.'
On each Payment Date (provided that the Collection Account maintained under
the Sale and Servicing Agreement is maintained with the Indenture Trustee), the
Indenture Trustee will deposit into the Payment Accounts the applicable portions
of the Available Collection Amount by making appropriate withdrawals from the
Collection Account, the Pre-Funding Account and the Capitalized Interest
Account, as applicable. On each Payment Date, the Indenture Trustee will make
withdrawals from the Payment Accounts for application of the amounts specified
below in the following order of priority:
(i) to provide for the payment of the Trust Fees and Expenses in the
following order; (a) to the FHA Insurance Premium Account, an amount equal
to the FHA Insurance Premium Deposit Amount; (b) to the Servicer, an amount
equal to the Servicing Compensation and all unpaid Servicing Compensation
from prior Due Periods; (c) to the Master Servicer, an amount equal to the
Master Servicing Fee and all unpaid Master Servicing Fees from prior Due
Periods; (d) to the Indenture Trustee, an amount equal to the Indenture
Trustee Fee and all unpaid Indenture Trustee Fees from prior Due Periods,
and (e) to the Owner Trustee, an amount equal to the Owner Trustee Fee and
all unpaid Owner Trustee Fees from prior Due Periods;
(ii) to provide for reimbursement to the Servicer or the Master
Servicer for any voluntary Servicing Advances previously made by the
Servicer and not previously reimbursed; and
(iii) to the extent of any amounts remaining from the Pre-Funding
Account Deposit at the end of the Funding Period (net of reinvestment
income) to reduce the Class Principal Balances of each Class of Notes
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and Certificates pro rata; provided, however, that if such remaining amount
is less than or equal to $100,000, or if an event of default has occurred
under the Indenture, such remaining amount will be paid only in reduction
of the Class Principal Balances of each Class of Notes; and
(iv) to provide for payments to the holders of the Offered Notes of
the amounts specified herein under 'Description of the Securities--Payments
and Distributions on the Securities.'
INCOME FROM ACCOUNTS
So long as no Event of Default shall have occurred and be continuing,
amounts on deposit in the Note Payment Account and the Certificate Distribution
Account (sometimes referred to herein, together with the Collection Account, as
an 'Account') will be invested by the Indenture Trustee, as directed by the
Servicer, in one or more Permitted Investments (as defined in the Sale and
Servicing Agreement) bearing interest or sold at a discount. The Indenture
Trustee will not in any way be held liable by reason of any insufficiency in any
Account resulting from any loss on any Permitted Investment. So long as no Event
of Default shall have occurred and be continuing, amounts on deposit in the
Collection Account will be invested at the direction of the Servicer, in one or
more Permitted Investments bearing interest or sold at a discount. No such
investment in any Account will mature later than the Business Day immediately
preceding the next Payment Date; provided, that any Permitted Investment that is
an obligation of the Indenture Trustee may mature on such Payment Date. All
income or other gain from investments in any Account will be deposited in such
Account immediately on receipt, unless otherwise specified herein.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement will provide that on or before a specified date
after the end of each of the Servicer's fiscal years elapsing during the term of
its appointment, beginning with the first fiscal year ending after the Closing
Date, the Servicer, at its expense will furnish to the Indenture Trustee and
certain other Persons (i) an opinion by a firm of independent certified public
accountants on the financial position of the Servicer at the end of the relevant
fiscal year and the results of operations and changes in financial position of
the Servicer for such year then ended on the basis of an examination conducted
in accordance with generally accepted auditing standards, and (ii) a statement
from such independent certified public accountants to the effect that based on
an examination of certain specified documents and records relating to the
servicing of the Servicer's mortgage loan portfolio conducted substantially in
compliance with the audit program for mortgages serviced for the United States
Department of Housing and Urban Development Mortgage Audit Standards, or the
Uniform Single Attestation Program for Mortgage Bankers (the 'Applicable
Accounting Standards'), such firm is of the opinion that such servicing has been
conducted in compliance with the Applicable Accounting Standards except for (a)
such exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
LIST OF RECORD HOLDERS
Upon written request of the Indenture Trustee, the Issuer will provide to
the Indenture Trustee, within thirty days after receipt of such request, a list
of the names and addresses of all holders of record of the Offered Notes as of
the most recent Record Date for payment of distributions to holders of Offered
Notes. Upon written request of three or more holders of record of Offered Notes
for purposes of communicating with other holders with respect to their rights
under the Trust Agreement or Indenture, the Indenture Trustee will afford such
holders access during business hours to the most recent list of holders held by
the Indenture Trustee. With respect to Book Entry Securities, the only named
holder on the Note Register or the Certificate Register will be Cede.
The Trust Agreement and the Indenture do not provide for the holding of any
annual or other meetings of holders of Offered Notes.
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REPORTS TO SECURITY OWNERS
Concurrently with each payment or distribution on the Offered Notes, the
Indenture Trustee will furnish to the related Security Owners or the Clearing
Agency, in the case of Book Entry Securities, a statement, based in part on
information to be provided by the Master Servicer or the Servicer, generally
setting forth, among other things:
(a) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(b) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
(c) the aggregate principal balance of each Class of the Securities
after giving effect to distributions on such Payment Date;
(d) certain performance information regarding the Home Loans,
including delinquency, default, liquidation and foreclosure information,
specified in the Sale and Servicing Agreement;
(e) the amount of coverage then remaining under any Credit
Enhancement; and
(f) all other information required to be provided pursuant to the
Indenture, Trust Agreement or Sale and Servicing Agreement.
The Servicer or the Indenture Trustee will also furnish annually customary
information deemed necessary for holders of the Offered Notes to prepare their
tax returns. Such obligation of the Indenture Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall be
prepared and furnished by the Indenture Trustee to Bondholders pursuant to any
requirements of the Code as are in force from time to time. The Clearing Agency
will make such reports and information available to Security Owners.
EVENTS OF DEFAULT
Events of Default under the Sale and Servicing Agreement will consist of
(i) any failure by the Master Servicer to deposit, or cause the Servicer to
deposit, in the Collection Account in accordance with the Sale and Servicing
Agreement any payments in respect of the Home Loans received by the Master
Servicer no later than the second business day after they were received, (ii)
any failure by the Master Servicer to duly observe or perform in any material
respect any of its covenants or agreements in the Sale and Servicing Agreement
which continues unremedied for 30 days after the giving of written notice of
such failure to the Master Servicer by the Indenture Trustee or the Issuer or to
the Master Servicer or the Indenture Trustee or Issuer by any Security Owner;
(iii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by the Master
Servicer indicating its insolvency, reorganization or inability to pay its
obligations or to perform its obligations as Master Servicer under the Sale and
Servicing Agreement, and (iv) expected losses on the Home Loans, as calculated
in accordance with the Sale and Servicing Agreement, exceed certain levels.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Sale and Servicing Agreement
remains unremedied by the Master Servicer, the Issuer, or the Controlling
Noteholders or, if the Notes have been paid in full, the holders of Certificates
evidencing interests aggregating not less than 51% of the then outstanding
principal balance of the Certificates, may terminate all of the rights and
obligations of the Master Servicer under the Sale and Servicing Agreement,
whereupon the Indenture Trustee, or a new Master Servicer appointed pursuant to
such Sale and Servicing Agreement, will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under such Sale and Servicing
Agreement and will be entitled to similar compensation arrangements.
Notwithstanding its termination as Master Servicer, the Master Servicer will be
entitled to receive amounts earned by it under the Sale and Servicing Agreement
prior to such termination. If at the time of any such termination the Master
Servicer is also serving as the Administrator, the Master Servicer's status as
Administrator will be simultaneously terminated by the Indenture Trustee and the
Master Servicer's responsibilities as such shall be transferred to the successor
servicer (if such person is then qualified to so act) or to another successor
Administrator retained by the
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Indenture Trustee, or to the Indenture Trustee itself if a successor
Administrator cannot be retained in a timely manner. If at the time of any such
termination, the Master Servicer is also serving as FHA Claims Administrator,
the Master Servicer's status as FHA Claims Administrator will be simultaneously
terminated by the Indenture Trustee and the Master Servicer's responsibilities
as such shall be transferred to the Indenture Trustee, as successor FHA Claims
Administrator (if the Indenture Trustee is then qualified to so act), or to
another successor FHA Claims Administrator retained by the Indenture Trustee.
Unless and until a successor servicer is appointed, the Indenture Trustee will
be required to fulfill the duties of the Master Servicer.
No Security Owner will have any right under the Sale and Servicing
Agreement to institute any proceeding with respect to such Sale and Servicing
Agreement, unless such holder previously has given to the Indenture Trustee
written notice of default and unless the holders of Notes as specified in the
applicable Sale and Servicing Agreement have made written request to the
Indenture Trustee to institute such proceeding in its own name as trustee
thereunder and have offered to the Indenture Trustee reasonable indemnity and
the Indenture Trustee for 60 days has neglected or refused to institute any such
proceedings. However, the Indenture Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Indenture, Trust
Agreement, Sale and Servicing Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the Security
Owners, unless such Security Owners have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
The Sale and Servicing Agreement may be amended by the parties thereto
without the consent of the Security Owners, to cure any error or ambiguity, to
correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Sale and Servicing
Agreement, provided that such action will not adversely affect in any material
respect the interests of any Security Owners. An amendment described above shall
not be deemed to adversely affect in any material respect the interests of the
Security Owners if either (a) an opinion of counsel satisfactory to the
Indenture Trustee is obtained to such effect, or (b) the person requesting the
amendment obtains a letter from each of the rating agencies then rating the
Offered Notes to the effect that the amendment, if made, would not result in a
downgrading or withdrawal of the rating then assigned by it to such Offered
Notes.
The Sale and Servicing Agreement may also be amended by the Depositor, the
Servicer, the FHA Insurance Holder and the Trust and Indenture Trustee with the
consent of the Security Owners evidencing interests aggregating in excess of 50%
of the then outstanding principal balance of the Offered Notes for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of the Sale and Servicing Agreement or of modifying in any manner the
rights of Security Owners; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments received on the Home Loans or distributions which are required to be
made on any Offered Security without the consent of the holders of 100% of each
Class of Securities affected thereby, (ii) adversely affect in any material
respect the interests of the holders of any Class of Securities in any manner
other than as described in clause (i), without the consent of 100% of the
holders of Securities, or (iii) reduce the aforesaid percentage of Securities of
any Class required to consent to any such amendment, without the consent of the
holders of Securities evidencing 100% of the then outstanding principal balance
of such Class.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Offered Notes in their own names or as pledgees. For the
purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of such an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Owner Trustee by the Sale and
Servicing Agreement and the Trust Agreement and the Indenture Trustee by the
Indenture will be conferred or imposed upon the Owner Trustee and the Indenture
Trustee, respectively, and in each such case such separate trustee or co-trustee
jointly, or, in any jurisdiction in which the Owner Trustee or Indenture Trustee
will be incompetent or unqualified to perform certain acts, singly
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upon such separate trustee or co-trustee who will exercise and perform such
rights, powers, duties and obligations solely at the direction of the Owner
Trustee or the Indenture Trustee, respectively.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Issuer will be obligated to appoint a successor thereto. The
Controlling Noteholders may also remove the Owner Trustee or the Indenture
Trustee if either ceases to be eligible to continue as such under the Trust
Agreement or the Indenture, as the case may be, becomes legally unable to act or
becomes insolvent. In such circumstances, the Issuer will be obligated to
appoint a successor Owner Trustee or a successor Indenture Trustee, as
applicable. Any resignation or removal of the Owner Trustee or Indenture Trustee
and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor.
The Sale and Servicing Agreement will provide that the Servicer will pay or
cause to be paid, the fees and expenses of the Owner Trustee and the Indenture
Trustee in connection with their respective duties under the Trust Agreement and
Indenture, respectively. The Trust Agreement and Indenture will further provide
that each of the Owner Trustee, the Co-Owner Trustee, the Master Servicer, the
FHA Insurance Holder and the Indenture Trustee will be entitled to
indemnification by the Transferor for, and will be held harmless against, any
loss, liability or expense incurred by the Owner Trustee, the Co-Owner Trustee,
the Master Servicer, the FHA Insurance Holder or the Indenture Trustee not
resulting from its own willful misfeasance, bad faith or negligence (other than
by reason of a breach of any of its representations or warranties to be set
forth in the Trust Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or of any Home Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes, the Certificates or the Home Loans, or the investment of
any monies by the Servicer before such monies are deposited into the Collection
Account, the Note Payment Account or the Certificate Distribution Account. So
long as no Event of Default has occurred and is continuing, the Owner Trustee
will be required to perform only those duties specifically required of it under
the Trust Agreement. Generally, those duties will be limited to the receipt of
the various certificates, reports or other instruments required to be furnished
to the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The Owner Trustee will not be charged with knowledge of
a failure by the Servicer to perform its duties under the Trust Agreement, the
Sale and Servicing Agreement or the Administration Agreement which failure
constitutes an Event of Default unless the Owner Trustee obtains actual
knowledge of such failure as will be specified in the Trust Agreement.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Certificateholders, unless such Certificateholders have offered to the Owner
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby. Subject to the rights or
consent of the Noteholders and Indenture Trustee, no Certificateholder will have
any right under the Trust Agreement to institute any proceeding with respect to
the Trust Agreement, unless such holder previously has given to the Owner
Trustee written notice of the occurrence of an Event of Default and (i) the
Event of Default arises from the Servicer's failure to remit payments when due
or (ii) the holders of Certificates evidencing not less than 25% of the voting
interests of the Certificates have made written request upon the Owner Trustee
to institute such proceeding in its own name as the Owner Trustee thereunder and
have offered to the Owner Trustee reasonable indemnity and the Owner Trustee for
30 days has neglected or refused to institute any such proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or of any Home Loans or related documents,
and will not be accountable for the use or application by the Depositor, the
Servicer or the Owner Trustee of any funds paid to the Depositor, the Servicer
or the Owner Trustee in respect of the Notes, the Certificates or the Home
Loans, or the investment of any monies by the Servicer before such monies are
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deposited into the Collection Account or the Note Payment Account. So long as no
Event of Default under the Indenture has occurred and is continuing, the
Indenture Trustee will be required to perform only those duties specifically
required of it under the Transfer and Servicing Agreements. Generally, those
duties will be limited to the receipt of the various certificates, reports or
other instruments required to be furnished to the Indenture Trustee under the
Indenture, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Indenture. The Indenture Trustee
will not be charged with knowledge of a failure by the Servicer to perform its
duties under the Trust Agreement, Sale and Servicing Agreement or Administration
Agreement which failure constitutes an Indenture Event of Default unless the
Indenture Trustee obtains actual knowledge of such failure as will be specified
in the Indenture.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. See 'Description of the
Securities--Events of Default; Rights of Noteholders Upon Occurrence of Event of
Default' herein.
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise described herein, no principal payments will be made on
any Class of Senior Notes until the Class Principal Balance of each Class of
Senior Notes having a lower numerical designation has been reduced to zero, no
principal payments will be made on the Class M-1 Notes until all required
payments have been made in respect of the Senior Notes, and no principal
payments will be made on the Class M-2 Notes until all required payments have
been made in respect of the Senior Notes and the Class M-1 Notes. In addition,
except as otherwise described herein, no distributions of principal with respect
to the Certificates will be made until the required payments have been made in
respect of all Classes of Notes. See 'Description of the Securities--Payments
and Distributions on the Securities' herein. As the rate of payment of principal
of each Class of Notes and Certificates depends primarily on the rate of payment
(including prepayments) of the principal balance of the Home Loans, final
payment of any Class of Notes and the final distribution in respect of any Class
of Certificates could occur significantly earlier than their Maturity Dates and
Final Scheduled Payment Date, respectively. Holders of the Securities will bear
the risk of being able to reinvest principal payments on the Securities at
yields at least equal to the yield on their respective Offered Notes. No
prediction can be made as to the rate of prepayments on the Home Loans in either
stable or changing interest rate environments. Any reinvestment risk resulting
from the rate of prepayment of the Home Loans and the payment and distribution
of such payments to the Security Owners will be borne entirely by the Security
Owners.
The subordination of the Residual Interest and the Certificates to the
Notes and of the Mezzanine Notes to each Class of Notes having a higher priority
will provide limited protection to the Noteholders against losses on the Home
Loans. The yields on the Certificates and the Mezzanine Notes will be
particularly sensitive to the loss experience of the Home Loans and the timing
of any such losses. If the actual rate and amount of losses experienced by the
Home Loans exceed the rate and amount of such losses assumed by an investor, the
yield to maturity on the Certificates or the Mezzanine Notes may be lower than
anticipated.
The Home Loans are either (i) 'simple interest' or (ii) 'actuarial method'
loans. With respect to a Home Loan that is a 'simple interest' loan, if a
payment is received more than one month after the previous payment, a smaller
portion of such payment will be applied to principal and a greater portion will
be applied to interest than would have been the case had the payment been
received precisely one month after the previous payment, resulting in such Home
Loan having a longer weighted average life than would have been the case had the
payment been made as scheduled. Conversely, if a payment on a Home Loan is
received less than one month after the previous payment, more of such payment
will be applied to principal and less to interest than would have been the case
had the payment been received precisely one month after the previous payment,
resulting in such Home Loan having a shorter weighted average life than would
have been the case had the payment been made as scheduled. See 'The Home Loan
Pool--Payments on the Home Loans' herein.
The effective yield to the Security Owners will be lower than the yield
otherwise produced by the applicable Note Interest Rate or Pass Through Rate,
because the payment and distribution of the interest accrued during
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each Due Period (a calendar month consisting of thirty days) will not be made
until the Payment Date occurring in the month following such Due Period. See
'Description of the Offered Notes--Payments and Distributions on the Securities'
herein. This delay will result in funds being passed through to the Security
Owners approximately 20 days after the end of the monthly accrual period, during
which 20-day period no interest will accrue on such funds. As discussed in
greater detail below, greater than anticipated payments and distributions of
principal can also affect the yield on Offered Notes purchased at a price
greater or less than par.
The rate of principal payments on the Offered Notes, the aggregate amount
of each interest payment on the Offered Notes and the yield to maturity on the
Offered Notes will be directly related to and affected by the rate and timing of
principal reductions on the Home Loans. The principal reductions on such Home
Loans may be in the form of scheduled amortization payments or unscheduled
payments or reductions, which may include prepayments, repurchases and
liquidations or write-offs due to default, casualty, insurance or other
dispositions.
The 'weighted average life' of an Offered Security refers to the average
amount of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Offered Security is repaid. The weighted average
lives of the Offered Notes will be influenced by, among other factors, the rate
at which principal reductions occur on the Home Loans, the rate at which Excess
Spread is distributed to Security Owners as described herein, and the extent to
which any Excess Spread is distributed to the holders of the Residual Interest
as described herein. If substantial principal prepayments on the Home Loans are
received from unscheduled prepayments, liquidations or repurchases, then the
payments and distributions to the Security Owners resulting from such
prepayments may significantly shorten the actual weighted average lives of the
Offered Notes. If the Home Loans experience delinquencies and defaults in the
payment of principal, then the Security Owners will similarly experience a delay
in the receipt of principal payments and distributions attributable to such
delinquencies and defaults which in certain instances may result in longer
actual average weighted lives of the Offered Notes than would otherwise be the
case. However, to the extent that principal in respect of Liquidated Home Loans
is included in the principal payments and distributions on the Securities as a
result of delinquencies and defaults on the Home Loans (and at such time that
the Overcollateralization Amount has been reduced to zero), then the Security
Owners will experience an acceleration in the receipt of principal payments and
distributions which in certain instances may result in shorter actual weighted
average lives of the Offered Notes than would otherwise be the case. Interest
shortfalls on the Home Loans due to principal prepayments in full and
curtailments and any resulting shortfall in amounts distributable on the Offered
Notes will be covered to the extent of amounts available from the applicable
credit enhancement provided for the Offered Notes. See 'Risk Factors--Adequacy
of Credit Enhancement' herein.
The rate and timing of principal reductions on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors. These
factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
'due-on-sale' clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Substantially all
of the Home Loans contain due-on-sale provisions and the Master Servicer
intends, except under circumstances described under 'Risk Factors--Prepayment
and Yield Considerations,' to enforce such provisions unless (i) the Master
Servicer, in a manner consistent with its servicing practices, permits the
purchaser of the related Mortgaged Property to assume the Home Loan, or (ii)
such enforcement is not permitted by applicable law. A substantial majority of
the Initial Home Loans are subject to prepayment penalties, which may reduce the
amount or the likelihood of prepayments on such Initial Home Loans. The
remaining Initial Home Loans may be prepaid in full or in part at any time
without penalty. As with fixed rate obligations, generally, the rate of
prepayment on a pool of loans is affected by prevailing market interest rates
for similar types of loans of a comparable term and risk level. If prevailing
interest rates were to fall significantly below the respective Home Loan Rates
on the Home Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing interest rates were to rise significantly
above the respective Home Loan Rates on the Home Loans, the rate of prepayment
on the Home Loans would be expected to decrease. In addition, depending on
prevailing market interest rates, the future outlook for market interest rates
and economic conditions generally, some borrowers may sell or refinance
mortgaged properties in order to realize their equity (if any) in the mortgaged
properties, to meet cash flow needs or to make other investments. In addition,
any future limitations on the rights of borrowers to deduct interest payments on
mortgage loans for Federal income tax purposes may result in a higher rate of
prepayment on the
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Home Loans. The Depositor and the Transferor make no representations as to the
particular factors that will affect the prepayment of the Home Loans, as to the
relative importance of such factors, or as to the percentage of the principal
balance of the Home Loans that will be paid as of any date.
Payments and distributions of principal to Security Owners at a faster rate
than anticipated will increase the yield on Offered Notes purchased at a
discount but will decrease the yield on Offered Notes purchased at a premium,
which payments and distributions of principal may be attributable to scheduled
payments and prepayments of principal on the Home Loans, to Excess Spread and to
amounts remaining on deposit in the Pre-Funding Account at the expiration of the
Funding Period. The effect on an investor's yield due to payments and
distributions of principal to the Security Owners (including without limitation
prepayments on the Home Loans) occurring at a rate that is faster (or slower)
than the rate anticipated by the investor during any period following the
issuance of the Offered Notes will not be entirely offset by a subsequent like
reduction (or increase) in the rate of such payments and distributions of
principal during any subsequent period.
The rate of delinquencies and defaults on the Home Loans, and the
recoveries, if any, on defaulted Home Loans and foreclosed properties, will also
affect the rate and timing of principal payments on the Home Loans, and
accordingly, the weighted average lives of the Offered Notes, and could cause a
delay in the payment of principal or a slower rate of principal amortization to
the holders of Offered Notes. Certain factors may influence such delinquencies
and defaults, including origination and underwriting standards, loan-to-value
ratios and delinquency history. In general, defaults on Home Loans are expected
to occur with greater frequency in their early years, although little data is
available with respect to the rate of default on similar types of home loans.
The rate of default on Home Loans with high loan-to-value ratios, secured by
junior liens, may be higher than that of home loans with lower loan-to-value
ratios or secured by first liens on comparable properties. 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 or the related borrower is
residing. See 'The Home Loan Pool' herein. The risk of delinquencies and loss is
greater and voluntary principal 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.
Because principal payments are paid to certain Classes of Securities before
other Classes, holders of the Certificates and, to a lesser extent, the Classes
of Mezzanine Notes bear a greater risk of losses from delinquencies and defaults
on the Home Loans than holders of the Classes of Notes having earlier priorities
for payment of principal. See 'Description of Credit Enhancement--Subordination
and Allocation of Losses' herein.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
may 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, and there can be no
assurance that the Home Loans will achieve or fail to achieve any particular
rate of principal prepayment. A number of factors suggest that the prepayment
experience of the Home Loan Pool may be significantly different from that of a
pool of conventional first-lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the principal balance of
the average Home Loan is smaller than that of the average conventional
first-lien mortgage loan. A smaller principal balance may be easier for a
borrower to prepay than a larger balance and, therefore, a higher prepayment
rate may result for the Home Loan Pool than for a pool of first-lien mortgage
loans, irrespective of the relative average interest rates and the general
interest rate environment. In addition, in order to refinance a first-lien
mortgage loan, the borrower must generally repay any junior liens. However, a
small principal balance may make refinancing a Home Loan at a lower interest
rate less attractive to the borrower as the perceived impact to the borrower of
lower interest rates on the size of the monthly payment may not be significant.
Other factors that might be expected to affect the prepayment rate of the Home
Loan Pool include general economic conditions, the amounts of and interest rates
on the underlying senior mortgage loans, and the tendency of borrowers to use
real property mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include the
direct or indirect financing of home improvements, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at origination
the majority of the Home Loans had combined loan-to-value ratios that
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approached or exceeded 100%, the related borrowers for these Home Loans will
generally have significantly less opportunity to refinance the indebtedness
secured by the related Mortgaged Properties, including these Home Loans, and,
therefore, a lower prepayment rate may result for the Home Loan Pool than for a
pool of mortgage (including first or junior lien) loans that have combined
loan-to-value ratios less than 100%. Given these characteristics, the Home Loans
may experience a higher or lower rate of prepayment than first-lien mortgage
loans.
SUBORDINATION OF THE CLASS M-1 AND CLASS M-2 NOTES AND THE CERTIFICATES
As described under 'Description of the Securities--Payments and
Distributions on the Securities' herein, on each Payment Date, the holders of
any higher ranking Class of Securities will have a preferential right to receive
amounts of interest and principal due to them on such Payment Date before any
payments or distributions of interest or principal, respectively, are made on
any Class of Securities subordinate to such Class. As a result, the yields to
maturity and the aggregate amount of payments on the Certificates and each Class
of Mezzanine Notes will be more sensitive than the yields of higher ranking
Notes to the rate of delinquencies and defaults on the Home Loans.
As more fully described herein, Allocable Loss Amounts will be allocated
first to the Class B-2 and the Class B-1 Certificates, in that order, until the
Class Principal Balances thereof have been reduced to zero, then to the Class
M-2 Notes and the Class M-1 Notes, in that order, until the Class Principal
Balances thereof have been reduced to zero. Any Deferred Amounts will be paid to
the Class M-1 Notes and the Class M-2 Notes, in that order, until such Deferred
Amounts have been paid in full. The Class B-1 Certificates and Class B-2
Certificates, in that order, will be entitled to receive amounts attributable to
Loss Reimbursement Deficiencies after all Deferred Amounts have been paid in
full with respect to the Mezzanine Notes.
PAYMENTS AND DISTRIBUTIONS OF EXCESS SPREAD
The overcollateralization feature has been designed to accelerate the
principal amortization of the Securities then entitled to payments of principal
relative to the principal amortization of the Home Loans. If on any Payment Date
the Required Overcollateralization Amount exceeds the Overcollateralization
Amount, any Excess Spread generally will be paid or distributed sequentially to
the Security Owners in the order and amounts specified herein under 'Description
of the Securities--Payments and Distributions on the Securities--Distribution
Priorities.' If on any Payment Date (including an Overcollateralization Stepdown
Date) the Overcollateralization Amount equals or exceeds the Required
Overcollateralization Amount, Excess Spread otherwise payable or distributable
to the Security Owners as described above instead generally will be paid first
to the Class M-1 Notes and the Class M-2 Notes, in that order, in respect of
Deferred Amounts, if any, until the Deferred Amounts have been paid in full,
then to the holders of the Class B-1 Certificates and Class B-2 Certificates, in
that order, in respect of Loss Reimbursement Deficiencies, if any, until the
Loss Reimbursement Deficiencies, have been paid in full, and then to the holders
of the Residual Interest, thereby reducing the rate of and under certain
circumstances delaying the principal amortization with respect to the
Securities, until the Overcollateralization Amount is reduced to the Required
Overcollateralization Amount. Any Excess Spread remaining after the Class
Principal Balances of all Classes of Senior Notes have been reduced to zero on
such Payment Date will be available for payment or distributions to the
Certificates and the Mezzanine Notes as described above. As described herein,
the yield to maturity on an Offered Security purchased at a premium or discount
will be affected by the extent to which any Excess Spread is distributed to the
holders of the Residual Interest in lieu of payment or distribution to the
Security Owners in reduction of their Class Principal Balances of the Notes or
the Class Principal Balances of the Certificates. If such Excess Spread payments
to the holders of the Residual Interest occur sooner than anticipated by an
investor who purchases an Offered Security at a discount, the actual yield to
such investor may be lower than such investor's anticipated yield. If such
Excess Spread distributions to the holders of the Residual Interest occur later
than anticipated by an investor who purchases an Offered Security at a premium,
the actual yield to such investor may be lower than such investor's anticipated
yield.
The amount of Excess Spread, if any, distributable to the holders of the
Residual Interest in reduction of the Overcollateralization Amount on any
Payment Date will be affected by the Required Overcollateralization Amount, and
by the actual default and delinquency experience and principal amortization of
the Home Loans
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during the related Due Period. In particular, high rates of delinquencies on the
Home Loans during any Due Period may cause the amount of interest received on
the Home Loans during such Due Period to be less than the amount of interest
distributable on the Securities on the related Payment Date. Such an occurrence
will cause the Class Principal Balances of the Notes and the Class Principal
Balances of the Certificates to decrease at a slower rate relative to the Pool
Principal Balance, resulting in a reduction of the Overcollateralization Amount
and, in some circumstances, an Allocable Loss Amount.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Securities will
be affected by the rate and timing of principal payments (including prepayments)
in relation to the prevailing interest rates at the time of receipt of such
principal payments. For example, during periods of falling interest rates,
Security Owners are likely to receive an increased amount of principal payments
from the Home Loans at a time when such holders may be unable to reinvest such
payments in investments having a yield and rating comparable to the Securities.
Conversely, during periods of rising interest rates, Security Owners are likely
to receive a decreased amount of principal prepayments from the Home Loans at a
time when such holders may have an opportunity to reinvest such payments in
investments having a higher yield than, and a comparable rating to, the Offered
Notes.
MATURITY DATES; FINAL SCHEDULED PAYMENT DATE
The Maturity Date for each Class of Senior Notes (other than the Class A-5
Notes) is the twelfth Payment Date following the Payment Date on which the Class
Principal Balance of the related Class of Notes would be reduced to zero,
assuming (i) no prepayments are received on the Home Loans; (ii) scheduled
monthly payments of principal and interest on the Home Loans are timely received
by the Master Servicer, and (iii) no Excess Spread is paid or distributed to the
holders of the Securities. The Maturity Date for the Class A-5 Notes and each
Class of Mezzanine Notes and the Final Scheduled Payment Date for each class of
Certificates is May 20, 2024. The weighted average lives of the Securities are
likely to be shorter than would be the case if payments actually made on the
Home Loans conformed to the foregoing assumptions, and the final Payment Dates
with respect to the Securities could occur significantly earlier than the
Maturity Dates of each Class of Notes or the Final Scheduled Payment Date of the
Certificates because (i) prepayments in respect of the Home Loans are likely to
occur; (ii) distributions of Excess Spread to the Security Owners are likely to
occur, and (iii) on or after any Payment Date on which the Pool Principal
Balance declines to 10% or less of the Assumed Pool Principal Balance, the
Master Servicer or the Servicer may effect a redemption of the Notes and
prepayment of the Certificates as described herein. See 'Description of the
Securities--Optional Redemption of the Notes; Optional Prepayment of the
Certificates' herein.
WEIGHTED AVERAGE LIVES OF THE OFFERED NOTES
The following information is given solely to illustrate the effect of
prepayments of the Home Loans on the weighted average lives of the Offered Notes
under certain stated assumptions and is not a prediction of the prepayment rate
that might actually be experienced by the Home Loans. Weighted average life
refers to the average amount of time that will elapse from the date of delivery
of a security until each dollar of principal of such security will be repaid to
the investor. The weighted average lives of the Offered Notes will be influenced
by the rate at which principal of the Home Loans is paid, which may be in the
form of scheduled amortization or prepayments (for this purpose, the term
'prepayment' includes reductions of principal, including without limitation
those resulting from unscheduled full or partial prepayments, refinancings,
liquidations and write-offs due to defaults, casualties or other dispositions,
substitutions and repurchases by or on behalf of the Transferor or the
Depositor), the rate at which Excess Spread is distributed to Security Owners as
described herein, and the extent to which any amounts remaining in the
Pre-Funding Account at the expiration of the Funding Period are paid or
distributed to the Security Owners as described herein.
Prepayments on loans such as the Home Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement
is the prepayment assumption (the 'Prepayment Assumption'), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of loans for the life of such loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ('CPR') of 2% per annum of the
outstanding principal balance of such loans in the
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first month of the life of the loans and an additional approximate 0.9091%
(expressed as a percentage per annum) in each month thereafter until the twelfth
month; beginning in the twelfth month and in each month thereafter during the
life of the loans, a CPR of 12.0% per annum each month is assumed. As used in
the table below, 0% Prepayment Assumption assumes prepayment rates equal to 0%
of the Prepayment Assumption (i.e., no prepayments), which would include a CPR
of 0%. Correspondingly, 75% Prepayment Assumption assumes prepayment rates equal
to 75% 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 loans, including
the Home Loans. Neither the Transferor nor the Depositor makes any
representations about the appropriateness of the Prepayment Assumption or the
CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
following assumptions (the 'Modeling Assumptions') have been made:
(i) all scheduled principal payments on the Home Loans are timely
received on the first day of a Due Period, which will begin on the first
day of each month and end on the thirtieth day of the month, with the first
Due Period commencing on December 1, 1997, no delinquencies or losses occur
on the Home Loans and all Home Loans have a first payment date that occurs
thirty (30) days after the origination thereof;
(ii) the scheduled payments on the Home Loans have been calculated on
the basis of the outstanding principal balance (prior to giving effect to
prepayments), the Home Loan Rate and the remaining term to stated maturity
such that the Home Loans will fully amortize by their remaining term to
stated maturity;
(iii) all scheduled payments of interest and principal in respect of
the Home Loans have been made through the applicable Cut-Off Date;
(iv) the Home Loans in the Home Loan Pool prepay monthly at the
specified percentages of the Prepayment Assumption, no optional or other
early termination of the Offered Notes occurs (except in the case of the
Weighted Average Life assuming an Optional Termination) and no
substitutions or repurchases of the Home Loans occur;
(v) all prepayments in respect of the Home Loans include 30 days of
interest thereon;
(vi) the Closing Date for the Securities is December 16, 1997 and with
respect to the Securities (other than the Class A-1 Notes), each month
consists of 30 days and each year will consist of 360 days;
(vii) cash payments and distributions are received by the holders of
the Offered Certificates on the 20th day of each month, commencing in
January 1998;
(viii) the Required Overcollateralization Amount will equal $7,800,000
and will be reduced in accordance with the terms of the Indenture;
(ix) the Note Interest Rate for each Class of Offered Notes is as set
forth on the cover page hereof, the Note Interest Rate for the Class M-1
Notes is 7.88% and for the Class M-2 Notes is 8.07%, the Pass-Through Rate
for the Class B-1 Certificates is 8.30% and for the Class B-2 Certificates
is 8.50% and the Note Interest Rate for the Class A-1 Notes remains
constant at approximately 6.20% per annum;
(x) the Net Home Loan Rate for the Home Loans is net of the Servicing
Fee and the additional fees deducted from the interest collections in
respect of the Home Loans include the Indenture Trustee Fee and the Master
Servicing Fee;
(xi) no reinvestment income from any Trust account is earned and
available for payment or distribution (other than the Pre-Funding Account,
which accrues interest on the funds therein based on the assumed delivery
of the Home Loans as set forth below); and
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<PAGE>
(xii) the Home Loan Pool consists of Home Loans having the
characteristics set forth in the following table:
<TABLE>
<CAPTION>
NET INITIAL REMAINING
HOME TERM TO ORIGINAL ASSUMED
INITIAL LOAN MATURITY TERM OF DELIVERY
HOME LOAN PRINCIPAL HOME LOAN INTEREST (IN AMORTIZATION OF HOME
NUMBER BALANCE($) INTEREST RATE(%) RATE(%) MONTHS) (IN MONTHS) LOANS
- --------- ------------- ---------------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 1,089,067.98 13.551% 12.551% 65 66 Closing Date
2 6,507,831.10 13.702% 12.702% 120 121 Closing Date
3 52,412,558.23 13.824% 12.824% 179 180 Closing Date
4 57,606,036.49 14.237% 13.237% 239 240 Closing Date
5 62,384,506.19 13.780% 12.780% 299 300 Closing Date
6 363,022.66 13.551% 12.551% 66 66 January 1998
7 2,169,277.03 13.702% 12.702% 121 121 January 1998
8 17,470,852.74 13.824% 12.824% 180 180 January 1998
9 19,202,012.16 14.237% 13.237% 240 240 January 1998
10 20,794,835.42 13.780% 12.780% 300 300 January 1998
</TABLE>
Based on the foregoing assumptions, the tables on the following pages
indicate the percentage of Original Class Principal Balance that would be
outstanding on each of the Payment Dates shown at the specified percentages of
the Prepayment Assumption and the corresponding weighted average life of each
Class of Notes and the Certificates.
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<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-2 NOTES CLASS A-3 NOTES
-------------------------------------------- ---------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ---------------------------- ---- ---- ---- ---- ---- ---- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.............. 100 100 100 100 100 100 100 100 100 100 100 100
December 20, 1998......... 100 100 100 100 100 100 100 100 100 100 100 100
December 20, 1999......... 100 100 89 43 0 0 100 100 100 100 99 65
December 20, 2000......... 100 64 0 0 0 0 100 100 96 45 0 0
December 20, 2001......... 100 0 0 0 0 0 100 96 29 0 0 0
December 20, 2002......... 100 0 0 0 0 0 100 45 0 0 0 0
December 20, 2003......... 100 0 0 0 0 0 100 0 0 0 0 0
December 20, 2004......... 100 0 0 0 0 0 100 0 0 0 0 0
December 20, 2005......... 72 0 0 0 0 0 100 0 0 0 0 0
December 20, 2006......... 31 0 0 0 0 0 100 0 0 0 0 0
December 20, 2007......... 0 0 0 0 0 0 87 0 0 0 0 0
December 20, 2008......... 0 0 0 0 0 0 51 0 0 0 0 0
December 20, 2009......... 0 0 0 0 0 0 9 0 0 0 0 0
December 20, 2010......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2011......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2012......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2013......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2014......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2015......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2016......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2017......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2018......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2019......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2020......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2021......... 0 0 0 0 0 0 0 0 0 0 0 0
December 20, 2022......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2):
No Optional Termination... 8.6 3.3 2.5 2.0 1.7 1.5 11.0 5.0 3.7 3.0 2.5 2.2
Optional Termination...... 8.6 3.3 2.5 2.0 1.7 1.5 11.0 5.0 3.7 3.0 2.5 2.2
</TABLE>
- ------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each payment of principal thereof by the number of
years from the date of issuance to the related Payment Date; (b) summing the
results and (c) dividing the sum by the aggregate payments of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
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<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-4 NOTES CLASS A-5 NOTES
---------------------------------------- --------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ---------------------------------- ----- ---- ---- ---- ---- ---- ----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.................... 100 100 100 100 100 100 100 100 100 100 100 100
December 20, 1998................. 100 100 100 100 100 100 100 100 100 100 100 100
December 20, 1999................. 100 100 100 100 100 100 100 100 100 100 100 100
December 20, 2000................. 100 100 100 100 98 67 100 100 100 100 100 100
December 20, 2001................. 100 100 100 77 39 22 100 100 100 100 100 100
December 20, 2002................. 100 100 78 30 19 11 100 100 100 100 100 100
December 20, 2003................. 100 97 39 19 9 1 100 100 100 100 100 100
December 20, 2004................. 100 65 22 11 1 0 100 100 100 100 100 81
December 20, 2005................. 100 34 15 3 0 0 100 100 100 100 84 64
December 20, 2006................. 100 22 8 0 0 0 100 100 100 92 68 50
December 20, 2007................. 100 16 2 0 0 0 100 100 100 76 54 39
December 20, 2008................. 100 10 0 0 0 0 100 100 90 63 43 30
December 20, 2009................. 100 4 0 0 0 0 100 100 76 51 34 23
December 20, 2010................. 73 0 0 0 0 0 100 94 62 41 26 17
December 20, 2011................. 36 0 0 0 0 0 100 78 50 32 20 12
December 20, 2012................. 20 0 0 0 0 0 100 63 39 24 14 9
December 20, 2013................. 15 0 0 0 0 0 100 54 32 19 11 6
December 20, 2014................. 9 0 0 0 0 0 100 45 26 15 8 5
December 20, 2015................. 2 0 0 0 0 0 100 36 20 11 6 3
December 20, 2016................. 0 0 0 0 0 0 86 27 15 8 4 2
December 20, 2017................. 0 0 0 0 0 0 63 19 10 5 3 0
December 20, 2018................. 0 0 0 0 0 0 53 15 8 4 0 0
December 20, 2019................. 0 0 0 0 0 0 42 11 5 3 0 0
December 20, 2020................. 0 0 0 0 0 0 30 7 4 0 0 0
December 20, 2021................. 0 0 0 0 0 0 16 4 0 0 0 0
December 20, 2022................. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2):
No Optional Termination......... 14.1 8.0 6.2 5.0 4.2 3.6 21.5 17.1 14.9 13.0 11.3 9.9
Optional Termination............ 14.1 8.0 6.2 5.0 4.2 3.6 21.0 16.1 13.7 11.8 10.2 8.8
</TABLE>
- ------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each payment of principal thereof by the number
of years from the date of issuance to the related Payment Date; (b) summing
the results and (c) dividing the sum by the aggregate payments of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
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<PAGE>
The paydown scenarios for the Offered Notes set forth in the foregoing
tables are subject to significant uncertainties and contingencies (including
those discussed above under 'Prepayment and Yield Considerations'). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to be accurate or that
the actual weighted average lives of the Offered Notes will not vary from those
set forth in the foregoing tables, which variations may be shorter or longer,
and which variations may be greater with respect to later years. Furthermore, it
is unlikely that the Home Loans will prepay at a constant rate or that all of
the Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the distributions on the Offered Notes will not
conform to the Modeling Assumptions made in preparing the above tables. In fact,
the characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See 'The Home Loan Pool' herein. To the
extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Offered Notes are likely to have weighted
average lives that are shorter or longer than those set forth in the foregoing
tables. See 'Risk Factors--Prepayment and Yield Considerations' herein.
In light of the uncertainties inherent in the foregoing paydown scenarios,
the inclusion of the weighted average lives of the Offered Notes in the
foregoing tables should not be regarded as a representation by the Servicer, the
Depositor, the Underwriter or any other person that such weighted average lives
will be achieved or that any of the foregoing paydown scenarios will be
experienced.
CERTAIN LEGAL ASPECTS OF THE TITLE I PROGRAM
GENERAL
Sections 1 and 2(a) of the National Housing Act of 1934, as amended (the
'Act'), authorize the creation of the FHA and the Title I Program. The Title 1
Loans are insured under the Title I Program. FHA Regulations contain the
requirements under which approved Title I Lenders may obtain insurance against a
portion of losses incurred with respect to eligible loans that have been
originated and serviced in accordance with FHA regulations, up to the amount of
such Title I Lender's FHA Reserve, as described below, and subject to the terms
and conditions established under the Act and FHA Regulations. While FHA
Regulations permit the Secretary of HUD, subject to statutory limitations, to
waive a Title I Lender's noncompliance with FHA Regulations if enforcement would
impose an injustice on the lender (provided the Title I Lender has acted in good
faith, is in substantial compliance with FHA Regulations and has credited the
borrower for any excess charges), in general, an insurance claim against the FHA
will be denied if the Title I loan to which it relates does not strictly satisfy
the requirements of the Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program are not subject to prior review by the FHA. Under the Title I
Program, the FHA disburses insurance proceeds with respect to defaulted loans
for which insurance claims have been filed by a Title I Lender prior to any
review of such loans. A Title I Lender is required to repurchase a Title I loan
from the FHA that is determined to be ineligible for insurance after insurance
claim payments for such loan have been paid to such lender. Under the FHA
Regulations, if the Title I Lender's obligation to repurchase the Title I loan
is unsatisfied, the FHA is permitted to offset the unsatisfied obligation
against future insurance claim payments owed by the FHA to such lender. FHA
Regulations permit the FHA to disallow an insurance claim with respect to any
Title I loan that does not qualify for insurance for a period of up to two years
after the claim is made and to require the Title I Lender that has submitted the
insurance claim to repurchase the loan. Pursuant to a letter ruling issued by
the FHA in October 1994, the FHA has stated that, as a policy, the FHA will
strive to review all insurance claim submissions in a timely manner and limit
the period of time within which it will request the repurchase of a loan to a
period of one year after claim submission. The letter further states, however,
that the FHA may find it necessary with respect to some claim submissions to
apply the foregoing two-year incontestability provision strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed. Title I Program loans may be
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<PAGE>
made directly to the owners of the property to be improved or purchased ('direct
loans') or with the assistance of a dealer or home improvement contractor that
will have an interest in the proceeds of the loan ('dealer loans').
Subject to certain limitations described below, eligible Title I loans are
insured by the FHA for 90% of an amount equal to the sum of (i) the net unpaid
principal amount and the uncollected interest earned to the date of default,
(ii) interest on the unpaid loan obligation from the date of default to the date
of the initial submission of the insurance claim, plus 15 calendar days (the
total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) attorney's fees not to exceed $500, and (v)
expenses for recording the assignment of the security to the United States.
However, the insurance coverage provided by the FHA is limited to the extent of
the balance in the Title I Lender's FHA Reserve maintained by the FHA.
Accordingly if sufficient insurance coverage is available in such FHA Reserve,
then the Title I Lender bears the risk of losses on a Title I loan for which a
claim for reimbursement is paid by the FHA of at least 10% of the unpaid
principal, uncollected interest earned to the date of default, interest from the
date of default to the date of the initial claim submission and certain
expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (an 'FHA Reserve') for each Title I Lender. The amount in each
Title I Lender's FHA Reserve is a maximum of 10% of the amounts disbursed,
advanced or expended by a Title I Lender in originating or purchasing eligible
loans registered with the FHA for Title I insurance, with certain adjustments
permitted or required by FHA Regulations. The balance of such FHA Reserve is the
maximum amount of insurance claims the FHA is required to pay to the related
Title I Lender. Mortgage loans to be insured under the Title I Program will be
registered for insurance by the FHA, and the increase in Title I insurance
coverage to which the Title I Lender is entitled by reason of the reporting of
such loans under the Title I Lender's contract of insurance will be included in
the FHA Reserve for the originating Title I Lender following the receipt and
acknowledgment by the FHA of a transfer of note report on the prescribed form
(the 'Transfer Report') pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, and (ii) the amount
of reduction of the Title I Lender's FHA Reserve by reason of the sale,
assignment or transfer of loans registered under the Title I Lender's contract
of insurance. Such insurance coverage also may be reduced for any FHA insurance
claims previously disbursed to the Title I Lender that are subsequently rejected
by the FHA.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I Lender.
Upon any such transfer, except a transfer with recourse or under a guaranty or
repurchase Agreement, the seller is required to file a Transfer Report with the
FHA reporting the transfer of such loans. Upon notification and approval of such
transfer, the FHA Reserve of the selling Title I Lender is reduced, and the FHA
Reserve of the purchasing Title I Lender is increased, by an amount equal to the
lesser of 10% of the actual purchase price of the loans or the net unpaid
principal balance of the loans, up to the total amount of the selling Title I
Lender's FHA Reserve. Thus, in the event the selling Title I Lender's FHA
Reserve was less than 10% of the unpaid principal balance of its portfolio of
loans reported for insurance under the Title I Program prior to the sale, the
seller's FHA Reserve may be exhausted as the result of a sale of only a portion
of its total portfolio, with the result that its remaining Title I Program
portfolio may be ineligible for Title I Program benefits until the lender
originates or otherwise acquires additional loans reported for insurance under
the Title I Program. Accordingly, the insurance coverage reserves transferred to
the purchasing Title I Lender in such case will be less than 10% of the lesser
of the purchase price or the principal balance of the portfolio of loans
purchased, which may be the case with respect to the Transferor's purchase of
certain Title I Home Loans from certain Title I lenders and the transfer of the
related insurance coverage from such lenders' FHA Reserves. Additionally,
pursuant to FHA Regulations, not more than $5,000 in insurance coverage shall be
transferred to or from a Title I Lender's insurance coverage reserve account
during any October 1 to September 30 fiscal year without the approval of the
Secretary of HUD. Such HUD approval is generally viewed as automatic, provided
the formal requirements for transfer are satisfied, but HUD does have the right
under FHA Regulations to withhold approval.
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Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or 'earmark' the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was made.
For this reason, if a Title I Lender is holding insured loans as a fiduciary on
behalf of multiple non-affiliated beneficiaries, in order for such a lender to
cause its FHA Reserve to be reduced only by an amount to which a particular
beneficiary is entitled by reason of the insured loans beneficially held by it,
the Title I Lender must segregate or 'earmark' its FHA Reserve on its own books
and records according to which beneficiary is entitled to what portion of the
insurance coverage in the Title I Lender's FHA Reserve as if the insurance
coverage were not commingled by the FHA in such FHA Reserve. If such Title I
Lender continues to submit claims with respect to loans held on behalf of a
beneficiary whose portion of insurance coverage in its FHA Reserve has been
exhausted, the FHA will continue to honor such claims until all insurance
coverage in such Title I Lender's FHA Reserve has been exhausted, even though
such FHA Reserve may, in fact, be held by the Title I Lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement. In addition, under certain
FHA administrative offset regulations, the FHA may offset an unsatisfied
obligation of a Title I Lender to repurchase loans that are determined to be
ineligible for insurance against future insurance claim payments owed by the FHA
to such lender.
Accordingly, claims paid to the Indenture Trustee by the FHA with respect
to Title I loans insured under the FHA Insurance Holder's FHA Reserve other than
the Title I Loans may reduce the FHA Insurance Amount. In the Sale and Servicing
Agreement, the FHA Insurance Holder and the Indenture Trustee (and the FHA
Claims Administrator) will agree not to submit claims to the FHA with respect to
Title I loans other than the Title I Loans if the effect thereof would be to
reduce the FHA Insurance Amount. The FHA Insurance Holder has committed to use
its FHA contract of insurance under the Title I Program only to report the
record ownership of loans transferred and assigned to the Trustee pursuant to
the Sale and Servicing Agreement and similar such agreements that may be entered
into by the FHA Insurance Holder in the future.
On the final Transfer Date, such FHA Insurance Amount will be the maximum
amount of insurance coverage in the FHA Insurance Holder's FHA Reserve that will
be available for the submission of claims on the Title I Loans, and thereafter,
such FHA Insurance Amount will be decreased as a result of payments by the FHA
in respect of FHA Claims submitted for the Title I Loans after the Transfer
Dates and as a result of the repurchase or substitution of Title I Home Loans by
the Transferor. Except in connection with the conveyance to the Trust of any
Subsequent Home Loans that are Title I Loans and the substitution of Title I
Loans, the FHA Insurance Amount for the Title I Loans will not be increased for
any other Title I loans, either previously or subsequently owned by the FHA
Insurance Holder and reported for insurance in the FHA Insurance Holder's FHA
Reserve.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS
The proceeds of loans originated under the Title I Program for property
improvements may be used only for improvements that substantially protect or
improve the basic habitability or utility of an eligible property. Although
Title I loans are available for several types of properties, the Title I Loans
will include primarily one-to four-family property improvement loans. FHA
Regulations require that the borrower have at least a one-half interest in (i)
fee simple title to the real property to be improved with the loan proceeds
('Secured Property'), (ii) a lease on the Secured Property for a fixed term that
expires no sooner than six months after the maturity date of the property
improvement loan or (iii) a properly recorded land installment contract for the
purchase of the Secured Property. Any Title I property improvement loan
originated after August 1994 in excess of $7,500 must be secured by a recorded
lien on the improved property which is evidenced by a mortgage or deed of trust
executed by the borrower and all other owners in fee simple. Prior to August
1994, any Title I property improvement loan in excess of $5,000 was required to
be secured by such a recorded lien.
The maximum principal amount of an eligible loan under the Title I Program
must not exceed the actual cost of the project plus any authorized fees and
charges under the Title I Program as provided below; provided that such maximum
principal amount does not exceed $25,000 for a single family property
improvement loan. Generally, the term of a Title I loan that is a property
improvement loan may not be less than six months nor greater than 20 years and
32 days. A borrower may obtain multiple Title I loans with respect to multiple
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properties (subject to the aforementioned limit on loans to a single borrower),
and a borrower may obtain more than one Title I loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
loans on the same property does not exceed the maximum loan amount for the type
of Title I loan thereon having the highest permissible loan amount. There is no
requirement that the owner contribute equity to the property other than fees and
costs that may not be added to the balance of the loan as described below.
Fees and charges that may be added to the balance of property improvement
loans include (i) an origination fee, not to exceed 5% of the net proceeds
disbursed to the borrower or other parties to the loan transaction, (ii) fees
for architectural and engineering services, (iii) building permit costs, (iv)
credit report costs, (v) title examination costs, (vi) fees for determining
whether the property is in a special flood hazard area, (vii) recording fees,
recording taxes, filing fees, and documentary stamp taxes, (viii) fees for
inspection of the property by the lender or its agent, not to exceed $75, and
(ix) such other items as may be specified by the FHA. The Title I Lender is
entitled to recover the following fees and charges in connection with a property
improvement loan from the borrower as part of the borrower's initial payment,
but such fees and charges may not be included in the loan amount or otherwise
financed or advanced by the lender: (i) an origination fee not to exceed 1% of
the loan amount, (ii) discount points to be paid by the borrower to the lender,
but only if the lender can demonstrate a clear relationship between the discount
points being charged and a compensating decrease in the interest rate being
charged, (iii) fees for the services of qualified closing agents acting on
behalf of the lender in closing direct loan transactions, (iv) Title I loan
insurance charges assessed by the lender, (v) premiums for flood insurance that
may be required in connection with a property improvement loan, (vi) premiums
for credit life insurance or credit disability insurance, (vii) title insurance
costs, (viii) current year tax and insurance escrow payments, (ix) fees
necessary to establish the validity of the lien, (x) appraisal fees that are not
eligible to be financed, (xi) survey costs, (xii) handling charges for
refinancing or modification of an existing loan, not to exceed 1% of the new
loan amount, (xiii) fees for approving assumption or preparing assumption
agreements, not to exceed 1% of the unpaid principal balance of the loan, (xiv)
fees for recording a release of the lender's security interest in the property,
if permitted under state law, and (xv) such other items as may be specified by
the FHA. FHA Regulations prohibit the advancement of such fees and charges to
the borrower by any party to the transaction.
FHA Regulations distinguish between 'direct loans' and 'dealer loans.' A
loan is a 'dealer loan' if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a 'direct loan.'
With respect to dealer loans, the dealer-contractor typically enters into a
consumer credit contract or note with the borrower and, after completion of the
financed improvements, assigns the contract or note to the Title I Lender. The
dealer-contractor presents the loan application to the Title I Lender, receives
the check or money order representing the loan proceeds and may accompany the
borrower to the institution for the purpose of receiving payment. As a condition
to the disbursement of the proceeds of a dealer loan, the Title I Lender is
required to obtain a completion certificate signed by the borrower and the
dealer certifying that the improvements have been completed in accordance with
the contract and that the borrower has received no inducement from the dealer to
enter into the transaction other than discount points. The Title I Lender may
enter into an agreement under which the lender has full or partial recourse
against the dealer for a period of three years in the event the Title I Lender
sustains losses with respect to loans originated by such dealer and such loans
do not satisfy FHA Regulations. FHA Regulations require that each dealer meet
certain net worth and experience requirements and be approved by the FHA on an
annual basis. Any Title I Lender that makes dealer loans is required to
supervise and monitor the dealer's activities with respect to loans insured
under the Title I Program and to terminate a dealer's approval if the dealer
does not satisfactorily perform its contractual obligations or comply with Title
I Program requirements.
The note evidencing a property improvement loan insured under the Title I
Program is required to bear a genuine signature of the borrower and any co-maker
and co-signer, must be valid and enforceable, must be complete and regular on
its face and must have interest and principal stated separately. The interest
rate must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on the Title I
loan must accrue from the date of the loan and be calculated according to the
actuarial method, which allocates payments on the loan between principal and
interest such that a payment is applied first to accrued interest and any
remainder is subtracted from, or any deficiency is added to, the unpaid
principal balance.
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Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash flow.
The first and last payments may vary in amount from the regular installment
amount but may not exceed 150% of the regular installment amount. The first
payment may be due no later than two months from the date of the loan (i.e., the
date upon which proceeds are disbursed by the lender). Late charges may be
assessed only after fifteen days and cannot exceed the lesser of 5% of the
installment, up to a maximum of $10 and must be billed as an additional charge
to the borrower. In lieu of late charges, the note may provide for interest to
accrue on late installments on a daily basis at the note rate. The note must
include a provision for acceleration of maturity, at the option of the holder,
upon a default by the borrower and a provision permitting prepayment in part or
in full without penalty. The Title I Lender must assure that the note and all
other documents evidencing the loan are in compliance with applicable Federal,
state and local laws.
A written but unrecorded modification agreement executed by the borrower
may be used in lieu of refinancing a delinquent or defaulted loan to reduce or
increase the installment payment, but not to increase the term or interest rate.
A written modification agreement may also be used to refinance a loan in order
to reduce the interest rate, provided the loan is current. Alternatively, the
lender may negotiate an informal repayment plan for the borrower to cure a
temporary delinquency within a short period of time by sending a letter to the
borrower reciting the terms of the agreement. The lender may not release any
party from liability under the note or any lien securing an insured loan without
prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire and
casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The borrower is required to maintain
flood insurance of at least the unpaid balance of the loan (or the value of the
property if state law so limits the amount of flood insurance).
TITLE I UNDERWRITING REQUIREMENTS
FHA Regulations require that, before making a loan insured under the Title
I Program, a Title I Lender exercise prudence and diligence in determining
whether the borrower and any co-maker or co-signer is solvent and an acceptable
credit risk with a reasonable ability to make payments on the loan obligation.
Prior to loan approval, the Title I Lender is required to satisfy specified
credit underwriting requirements and to keep documentation supporting its credit
determination. As part of its credit underwriting, the Title I Lender must
obtain the following: (i) a dated credit application executed by the borrower,
any co-maker and any co-signer, (ii) written verification of current employment
and current income of the borrower and any co-maker or co-signer, (iii) a
consumer credit report stating the credit accounts and payment history of the
borrower and any co-maker or co-signer, (iv) on loans secured by an interest in
improved property, written evidence that the borrower is not over 30 days
delinquent on any senior lien instruments encumbering such improved property,
(v) verification whether the borrower is in default on any obligation owed to or
insured or guaranteed by the Federal Government and (vi) written verification of
the source of funds for any initial payment required of the borrower if such
payment is in excess of 5% of the loan. Before making a final credit
determination, the lender is required to conduct a face-to-face or telephone
interview with the borrower and any co-maker or co-signer to resolve any
discrepancies in the information on the credit application and to assure that
the information is accurate and complete. The Title I Lender's files must
contain, among other things, the note or other debt instrument, the lien
instrument and a copy of the property improvement contract (in the case of a
dealer loan) or a detailed written description of the work to be performed, the
materials to be furnished and the estimated cost (for a loan not involving a
dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's income
is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of gross
income as published from time to time in the Federal Register. The Title I
Lender is required to document any compensating factors that support the
approval of the loan if such expense-to-income ratios are not satisfied. A Title
I Lender is prohibited from approving a loan under the Title I Program without
the approval of the FHA if the lender has knowledge that the borrower is past
due more than 30 days under the original terms of an obligation owed to or
insured or guaranteed by the Federal Government or the borrower has made
material misstatements of fact on applications for loans or other assistance.
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UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE THE INDIVIDUAL LOAN INSURED THEREUNDER AT THE TIME
OF APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER
FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and reported
for insurance under the Title I Program, a Title I Lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, such Title I Lender is required promptly to
report such finding to the FHA. In such case, provided that the validity of any
lien on the property has not been impaired, the insurance of the loan under the
Title I Program will not be affected unless such material misstatement of facts
or misuse of loan proceeds was caused by (or was knowingly sanctioned by) such
Title I Lender or its employees.
CLAIMS PROCEDURES UNDER TITLE I
The term 'default' is defined under FHA Regulations as the failure of the
borrower to make any payment due under the note for a period of 30 days after
such payment is due. The 'date of default' is considered to be the date 30 days
after the borrower's first failure to make an installment payment on the note
that is not covered by subsequent payments applied to overdue installments in
the order they became due. When a loan reported for insurance under the Title I
Program goes into default, a Title I Lender is required to contact the borrower
and any co-maker and co-signer by telephone or in person to determine the
reasons for the default and to seek a cure. If such Title I Lender is not able
to effect a cure after diligent efforts, it may provide the borrower with a
notice of default stating that the loan will be accelerated in 30 days if the
loan is not brought current or the borrower does not enter into a loan
modification agreement or repayment plan. The notice of default must meet
certain requirements set forth in the FHA Regulations and must conform to
applicable state law provisions. Such Title I Lender is permitted to rescind the
acceleration of maturity of the loan only if the borrower brings the loan
current, executes a modification agreement or agrees to an acceptable repayment
plan.
Following acceleration of maturity of a secured property improvement loan,
a Title I Lender has the option to proceed against the security or make a claim
under its contract of insurance. If a Title I Lender chooses to proceed against
the Secured Property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the Secured Property), (i) the Title I Lender must
proceed against the loan security by foreclosure and acquire good, marketable
title to the property securing the loan and (ii) the Title I Lender must take
all actions necessary under applicable law to preserve its rights, if any, to
obtain a deficiency judgment against the borrower, provided however, the Title I
Lender may still file an FHA Insurance claim, but only with the prior approval
of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession, and where the borrower is in bankruptcy or deceased evidence
that the lender has properly filed proofs of claims. Generally, a Title I Lender
must file its claim of insurance with the FHA not later than nine months after
the date of default. Concurrently with filing the insurance claim, such Title I
Lender is required to assign to the United States of America its entire interest
in the note (or a judgment in lieu of the note), in any securities held and in
any claims filed in any legal proceedings. If, at the time the note is assigned
to the United States, the Secretary of HUD has reason to believe that the note
is not valid or enforceable against the borrower, the FHA may deny the claim and
reassign the note to the Title I Lender. If either such defect is discovered
after the FHA has paid a claim, the FHA may require the Title I Lender to
repurchase the paid claim and to accept an assignment of the loan note. If the
Title I Lender subsequently obtains a valid and enforceable judgment against the
borrower, it may resubmit a new insurance claim with an assignment of the
judgment. The FHA may contest any insurance claim previously paid by it and make
a demand for repurchase of the loan with respect to which the claim was paid at
any time up to two years from the date the claim was certified for payment and
may do so thereafter in the event of fraud or misrepresentation on the part of
the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I Lender
is also required to assign its rights under such recourse agreement. The FHA has
the right to deny any claim for insurance in whole or in part based
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upon a violation of the FHA Regulations unless a waiver of compliance is
granted. The Title I Lender is permitted to appeal any such claim denial and
resubmit the claim within six months of the date of the claim denial, subject to
a reprocessing fee. The Sale and Servicing Agreement provides that the FHA
Claims Administrator shall submit an FHA Claim with respect to any Title I Loan
that goes into default if the default cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance described
above, FHA Insurance is not available with respect to any defaulted Title I Loan
at the time it goes into default, then the amount required to make interest
payments to the Security Owners with respect to the principal amount thereof,
until such FHA Insurance becomes available and a claim for insurance can be
made, if at all, will be paid from other amounts, if any, available in the
Payment Accounts.
NO RIGHTS OF SECURITY OWNERS AGAINST FHA
Because the Trust and the Security Owners will not hold an FHA contract of
insurance, the FHA will not recognize the Trust or the Security Owners as the
owners of the Title I Loans or any portion thereof, entitled to submit FHA
Claims to the FHA. Accordingly, the Trust and the Security Owners will have no
direct right to receive insurance payments from the FHA. In the event the FHA
Claims Administrator submits an FHA Claim to the FHA and the FHA approves
payment of such FHA Claim, the related FHA Insurance Proceeds will be payable
only to the FHA Claims Administrator, as agent and attorney-in-fact for the FHA
Insurance Holder. The Security Owners' rights relating to the receipt of payment
from and the administration, processing and submissions of FHA Claims by the FHA
Claims Administrator, are limited and governed by the Sale and Servicing
Agreement and FHA Claims Administration Agreement and these functions are
obligations of the FHA Claims Administrator, not the FHA.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Andrews & Kurth L.L.P. ('Tax Counsel') for federal income
tax purposes, the Notes will be characterized as debt, and the Trust will not be
characterized as an association (or a publicly traded partnership) or a taxable
mortgage pool taxable as a corporation. Each Noteholder, by the acceptance of a
Note, will agree to treat the Notes as indebtedness, and each Certificateholder,
by the acceptance of a Certificate, will agree to treat the Trust as a
partnership in which the Certificateholders are partners for federal income tax
purposes. Alternative characterizations of the Trust and the Certificates are
possible, but would not result in materially adverse tax consequences to
Certificateholders. See 'Certain Federal Income Tax Considerations--Tax
Characterization of the Trust as a partnership' and '--Tax Consequences to
Holders of the Notes' in the Prospectus for additional information concerning
the application of federal income tax laws to the Trust and the Offered Notes.
The Offered Notes may be treated as having been issued with original issue
discount. As a result, Security Owners may be required to recognize income with
respect to the Offered Notes somewhat in advance of the receipt of cash
attributable to that income. The prepayment assumption that will be used for
purpose of computing original issue discount for federal income tax purposes is
100% of the Prepayment Assumption.
ERISA CONSIDERATIONS
THE NOTES
GENERAL
Title I of the Employee Retirement Income Security Act of 1974, as amended
('ERISA') and section 4975 of the Internal Revenue Code of 1986, as amended (the
'Code'), impose certain restrictions on employee benefit plans and other
retirement plans or arrangements subject thereto ('Plans') and on persons who
are parties in interest or disqualified persons ('Parties in Interest') with
respect to such Plans. Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under section 410(d) of the
Code) are not subject to the restrictions of ERISA, and assets of such plans may
be invested in the Notes without regard to
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the ERISA considerations described below, subject to other applicable Federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire
any of the 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
the Notes. See 'ERISA Considerations' in the Prospectus. Investments by Plans
are also subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement that
a Plan's investments be made in accordance with the documents governing the
Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits Parties in Interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
Parties in Interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION AND THE NOTES
The United States Department of Labor (the 'DOL') has issued regulations
concerning the definition of what constitutes the assets of a Plan for purposes
of ERISA and the prohibited transaction provisions of the Code (the 'Plan Asset
Regulation'). The Plan Asset Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be 'plan
assets' such that any person who exercises control over such assets would be
subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an 'equity interest' in an entity, the assets of the entity will be treated as
assets of the Plan investor unless certain exceptions not applicable here apply.
Under the Plan Asset Regulation, the term 'equity interest' is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under 'applicable local law' and which has no 'substantial equity
features.' If the Notes are not treated as equity interests in the Trust for
purposes of the Plan Asset Regulation, a Plan's investment in the Notes would
not cause the assets of the Trust to be deemed Plan assets. However, the
Depositor, the Transferor, the Servicer, the Indenture Trustee, the Owner
Trustee, the FHA Insurance Holder and the Underwriter may be the sponsor of or
investment advisor with respect to one or more Plans. Because such parties may
receive certain benefits in connection with the sale of Notes, the purchase of
Notes using Plan assets over which any such parties has investment authority
might be deemed to be a violation of the prohibited transaction rules of ERISA
and the Code for which no exemption may be available.
The Notes may not be purchased with the assets of a Plan if the Depositor,
the Transferor, the Servicer, the Indenture Trustee, the Owner Trustee, the FHA
Insurance Holder, the Underwriter or any of their affiliates (a) has investment
or administrative discretion with respect to such Plan assets; (b) has authority
or responsibility to give, or regularly gives, investment advice with respect to
such Plan assets, for a fee and pursuant to an agreement or understanding that
such advice (i) will serve as a primary basis for investment decisions with
respect to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing to such
Plan.
In addition, certain affiliates of the Depositor or the Servicer might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of Certificates or the Residual Interest, because of its activities or
the activities of its respective affiliates, may be deemed to be a Party in
Interest with respect to certain Plans, including but not limited to Plans
sponsored by such holder. In either case, the acquisition or holding of Notes by
or on behalf of such a Plan could be considered to give rise to an indirect
prohibited transaction within the meaning of ERISA and the Code, unless it is
subject to one or more exemptions such as Prohibited Transaction Class Exemption
('PTCE') 84-14, which exempts certain transactions effected on behalf of a Plan
by a 'qualified professional asset manager', PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts, PTCE 91-38,
which exempts certain transactions involving bank collective
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investment funds, PTCE 95-60, which exempts certain transactions involving
insurance company general accounts, or PTCE 96-23, which exempts certain
transactions effected on behalf of a Plan by certain 'in-house asset managers'.
Each purchaser or transferee of a Note that is a Plan or is investing assets of
a Plan shall be deemed to have represented that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
If the Notes are deemed to be equity interests in the Trust, the Trust
could be considered to hold Plan assets by reason of a Plan's investment in the
Notes. In such an event, the Servicer and other persons exercising management or
discretionary control over the assets of the Trust may be deemed to be
fiduciaries with respect to investing Plans and thus subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of section 406 of ERISA, and section 4975 of the Code
with respect to transactions involving the Trust's assets. There can be no
assurance that any statutory or administrative exemption will apply to all
prohibited transactions that might arise in connection with the purchase or
holding of an equity interest in the Trust by a Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the 'Underwriting Agreement') between the Depositor and Bear, Stearns & Co.
Inc. (the 'Underwriter'), the Depositor has agreed to sell to the Underwriter
and the Underwriter has agreed to purchase from the Depositor, all of the
Offered Notes, if any are purchased. The Depositor has been advised by the
Underwriter that it proposes initially to offer the Offered Notes to the public
at the respective offering prices set forth on the cover page hereof and to
certain dealers at such price less a concession not in excess of the respective
amounts set forth in the table below (expressed as a percentage of the
respective Class Principal Balance). The Underwriter may allow and such dealers
may reallow a discount not in excess of the respective amounts set forth in the
table below to certain other dealers.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CONCESSION DISCOUNT
---------- -----------
<S> <C> <C>
Class A-2 Notes.................................. 0.090% 0.070%
Class A-3 Notes.................................. 0.135% 0.100%
Class A-4 Notes.................................. 0.150% 0.100%
Class A-5 Notes.................................. 0.210% 0.150%
</TABLE>
The Depositor is an affiliate of the Underwriter.
The Underwriting Agreement provides that the Depositor will indemnity the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
An affiliate of the Underwriter and the Depositor has significant
contractual relations with the Transferor and provides periodic funding of its
origination of mortgage loans, including the Home Loans. Accordingly, a portion
of the proceeds payable to the Transferor will be paid to such affiliate in
connection with the sale of the Home Loans.
LEGAL INVESTMENT MATTERS
The Offered Notes will not constitute 'mortgage related securities' under
SMMEA because a substantial number of the Home Loans are secured by liens on
real estate that are not first liens. Accordingly, many institutions with legal
authority to invest in 'mortgage related securities' may not be legally
authorized to invest in the Offered Notes.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Notes or to purchase
Offered Notes representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Offered Notes constitute legal investments for such
investors.
S-80
<PAGE>
RATINGS
It is a condition to the issuance of the Offered Notes that they receive
the respective ratings of Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ('Standard & Poor's'), Moody's Investors Service,
Inc. ('Moody's') and Fitch I.B.C.A. Inc. ('Fitch') (collectively, the 'Rating
Agencies') set forth below:
STANDARD
& POOR'S MOODY'S FITCH
-------- -------- -----
Class A-2 Notes........................ AAA Aaa AAA
Class A-3 Notes........................ AAA Aaa AAA
Class A-4 Notes........................ AAA Aaa AAA
Class A-5 Notes........................ AAA Aaa AAA
The ratings on the Offered Notes address the likelihood of the receipt by
the Security Owners of all distributions on the Home Loans to which they are
entitled. The ratings on the Offered Notes also address the structural, legal
and issuer-related aspects associated with the Offered Notes, including the
nature of the Home Loans. In general, the ratings on the Offered Notes address
credit risk and not prepayment risk. The ratings on the Offered Notes do not
represent any assessment of the likelihood that principal prepayments of the
Home Loans will be made by borrowers or the degree to which the rate of such
prepayments might differ from that originally anticipated. As a result, the
initial ratings assigned to the Offered Notes do not address the possibility
that Security Owners might suffer a lower than anticipated yield in the event of
principal payments on the Offered Notes resulting from funds remaining in the
Pre-Funding Account at the end of the Funding Period or rapid prepayments of the
Home Loans, or in the event that the Trust is terminated prior to the Scheduled
Final Payment Dates of each Class of Notes and the Certificates.
The Depositor has not solicited ratings on the Offered Notes with any
rating agency other than the Rating Agencies. 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. Any 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 the Rating Agencies.
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 any
of the Offered Notes by the Rating Agencies are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to such Offered Notes.
LEGAL OPINIONS
Certain legal matters relating to the issuance of the Offered Notes will be
passed upon for the Issuer, the Transferor and the Servicer by Andrews & Kurth
L.L.P., Dallas, Texas and for the Underwriter by Brown & Wood LLP, New York, New
York. Andrews & Kurth L.L.P., Dallas, Texas, will also pass on certain federal
income tax and other legal matters for the Trust.
S-81
<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Account............................................................. S-59
Additional Series................................................... S-11
Assumed Pool Principal Balance...................................... S-46
Available Collection Amount......................................... S-43
Available Funds..................................................... S-44
Balloon Loan........................................................ S-21
Business Day........................................................ S-46
Capitalized Interest Account........................................ S-56
Capitalized Interest Account Deposit................................ S-56
Certificate Distribution Account.................................... S-58
Certificateholders' Interest Carry-Forward Amount................... S-46
Certificateholders' Interest Distributable Amount................... S-46
Certificateholders' Monthly Interest Distributable Amount........... S-46
Code................................................................ S-13
Collection Account.................................................. S-58
Co-Owner Trustee.................................................... S-1
Cut-Off Date........................................................ S-1
Cut-Off Date Principal Balance...................................... S-6
Deleted Home Loan................................................... S-35
Determination Date.................................................. S-2
DTC................................................................. S-5
Due Period.......................................................... S-1
Excess Spread....................................................... S-47
FHA Claims Administrator............................................ S-12
FHA Insurance Amount................................................ S-11
FHA Insurance Premium Account....................................... S-56
FHA Insurance Premium Deposit Amount................................ S-56
FHA Regulations..................................................... S-38
FHA Reserve......................................................... S-11
Funding Period...................................................... S-8
Home Loan Schedule.................................................. S-54
Indenture........................................................... S-2
Indenture Trustee................................................... S-1
Indenture Trustee Fee............................................... S-12
Indenture Trustee's Home Loan File.................................. S-54
Initial Pool Principal Balance...................................... S-5
Insurance Proceeds.................................................. S-47
Interest Shortfall.................................................. S-56
Liquidated Home Loan................................................ S-47
Master Servicing Fee................................................ S-12
Mortgaged Properties................................................ S-7
Mortgages........................................................... S-6
Net Delinquency Calculation Amount.................................. S-48
Net Liquidation Proceeds............................................ S-48
Noteholders' Interest Carry-Forward Amount.......................... S-48
Notes............................................................... S-2
Original Class Principal Balance.................................... S-2
Overcollateralization Amount........................................ S-10
Overcollateralization Stepdown Date................................. S-48
Owner Trustee....................................................... S-1
</TABLE>
S-82
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Owner Trustee Fee................................................... S-12
Plan................................................................ S-13
Preliminary Initial Home Loan Pool.................................. S-7
Pre-Funding Account................................................. S-55
Pre-Funding Account Deposit......................................... S-8
Principal Balance................................................... S-6
Qualified Substitute Home Loan...................................... S-8
Rating Agencies..................................................... S-14
Record Date......................................................... S-2
Released Mortgaged Property Proceeds................................ S-49
Required Overcollateralization Amount............................... S-10
Rolling Six-Month Delinquency Average............................... S-49
Security Owners..................................................... i
Servicer............................................................ S-1
Servicing Advance................................................... S-57
Servicing Compensation.............................................. S-12
Servicing Fee....................................................... S-13
SMMEA............................................................... S-13
Standard & Poor's................................................... S-13
Subsequent Home Loans............................................... S-5
Subsequent Transfer Date............................................ S-8
Termination Price................................................... S-49
Title I Lenders..................................................... S-38
Title I Program..................................................... S-38
Transfer and Servicing Agreements................................... S-54
Transfer Date....................................................... S-11
Transferor.......................................................... S-1
Trust Fees and Expenses............................................. S-12
</TABLE>
S-83
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
Bear Stearns Asset Backed Securities, Inc. (the 'Depositor') may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Notes (the 'Notes') and the Asset-Backed Certificates (the
'Certificates' and, together with the Notes, the 'Securities') which may be sold
from time to time in one or more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and Service
Agreement or a Trust Agreement, as described herein. As specified in the related
Prospectus Supplement, the Notes of a Series will be issued and secured pursuant
to an Indenture and will represent indebtedness of the related Trust Fund. The
Trust Fund for a Series of Securities will include assets purchased from the
seller or sellers specified in the related Prospectus Supplement (the 'Seller')
composed of (a) Primary Assets, which may include one or more pools of (i)
closed-end home equity loans (the 'Mortgage Loans'), secured by mortgages on
one- to four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the 'Home
Improvement Contracts') which are either unsecured or secured by mortgages on
one- to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby (the 'Home
Improvements') and (iii) securities backed or secured by Mortgage Loans and/or
Home Improvement Contracts, (b) all monies due thereunder net, if and as
provided in the related Prospectus Supplement, of certain amounts payable to the
servicer of the Mortgage Loans and/or Home Improvement Contracts (collectively,
the 'Loans'), which servicer may also be the Seller, specified in the related
Prospectus Supplement (the 'Servicer'), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding amounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. The amount initially deposited
in a pre-funding account for a Series of Securities will not exceed fifty
percent of the aggregate principal amount of such series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS
OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
------------------------
SEE 'RISK FACTORS' ON PAGE 15 FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
------------------------
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 OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
BEAR, STEARNS & CO. INC.
NOVEMBER 19, 1997
<PAGE>
(Continued from previous page)
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans or Underlying Loans relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered 'Holders' under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of 'Holders' shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See 'THE AGREEMENTS-- Reports to
Holders' herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Securities. This Prospectus, which forms a part of the
Registration Statement, and the Prospectus Supplement relating to each Series of
Securities contain summaries of the material terms of the documents referred to
herein and therein, but do not contain all of the information set forth in the
Registration Statement pursuant to the Rules and Regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto. Such Registration Statement and exhibits can be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Office located as follows, Midwest
Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and Northeast
Regional Office, Seven World Trade Center, New York, New York 10048.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended. The Depositor intends to cause each Trust Fund to suspend filing
such reports if and when such reports are no longer required under said Act.
No person has been authorized to give any information or to make any
representation 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 nor an offer of the 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.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the 'Exchange Act'), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
4
<PAGE>
SUMMARY OF TERMS
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 Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
<TABLE>
<S> <C>
Securities Offered........................ Asset-Backed Certificates (the 'Certificates') and Asset-Backed Notes
(the 'Notes'). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in Series
pursuant to an Indenture. Each Series of Securities will consist of
one or more Classes, one or more of which may be Classes of Compound
Interest Securities, Planned Amortization Class ('PAC') Securities,
Variable Interest Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities, Participating Securities,
Senior Securities or Subordinate Securities. Each Class may differ
in, among other things, the amounts allocated to and the priority of
principal and interest payments, Final Scheduled Distribution Dates,
Distribution Dates and interest rates. The Securities of each Class
will be issued in fully registered form in the denominations
specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Securities or certain Classes
of such Securities offered thereby may be available in book-entry
form only.
Depositor................................. Bear Stearns Asset Backed Securities, Inc. (the 'Depositor') was
incorporated in the State of Delaware in June 1995, and is a wholly-
owned, special purpose subsidiary of The Bear Stearns Companies Inc.
None of The Bear Stearns Companies Inc. nor any other affiliate of
the Depositor, the Servicer, the Trustee or the Seller has guaranteed
or is otherwise obligated with respect to the Securities of any
Series. See 'THE DEPOSITOR.'
Interest Payments......................... Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related Loans or Underlying Loans relating to the Private Securities,
as applicable and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Interest Only Securities may be
assigned a 'Notional Amount' set forth in the related Prospectus
Supplement which is used solely for convenience in expressing the
calculation of interest and for certain other purposes and does not
represent the right to receive any distributions allocable to
principal. Principal Only Securities may not be entitled to receive
any interest payments or may be entitled to receive only nominal
interest payments. Interest payable on the Securities of a Series on
a Distribution Date will include all interest accrued during the
period
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
specified in the related Prospectus Supplement. See 'DESCRIPTION OF
THE SECURITIES--Payments of Interest.'
Principal Payments........................ All payments of principal of a Series of Securities will be made in
an aggregate amount determined as set forth in the related Prospectus
Supplement and will be paid at the times and will be allocated among
the Classes of such Series in the order and amounts, and will be
applied either on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution Date of the
Securities.............................. The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which principal thereof will be fully
paid and with respect to each Class of Certificates is the date after
which no Certificates of such Class are expected to remain
outstanding, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date of a Class may
equal the maturity date of the Primary Asset in the related Trust
Fund which has the latest stated maturity or will be determined as
described herein and in the related Prospectus Supplement.
The actual final Distribution Date of the Securities of a Series will
depend primarily upon the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the related
Trust Fund. Unless otherwise specified in the related Prospectus
Supplement, the actual final Distribution Date of any Security is
likely to occur earlier and may occur substantially earlier or may
occur later than its Final Scheduled Distribution Date as a result of
the application of prepayments to the reduction of the principal
balances of the Securities and as a result of defaults on the Primary
Assets. The rate of payments on the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the Trust Fund
for a Series will depend on a variety of factors, including certain
characteristics of such Loans or Underlying Loans, as applicable, and
the prevailing level of interest rates from time to time, as well as
on a variety of economic, demographic, tax, legal, social and other
factors. No assurance can be given as to the actual prepayment
experience with respect to a Series. See 'RISK FACTORS--Yield May
Vary' and 'DESCRIPTION OF THE SECURITIES--Weighted Average Life of
the Securities' herein.
Optional Termination...................... One or more Classes of Securities of any Series may be redeemed or
repurchased in whole or in part, at the Depositor's or the Servicer's
option, at such time and under the circumstances specified in the
related Prospectus Supplement, at the price set forth therein. If so
specified in the related Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or such other entity that is
specified in the related Prospectus Supplement, may, at its option,
cause an early termination of the related Trust Fund by repurchasing
all of the Primary Assets remaining in the Trust Fund on or after a
specified date, or on or after such time as the aggregate principal
balance of the Securities of the Series or the Primary Assets
relating
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
to such Series, as specified in the related Prospectus Supplement, is
less than the amount or percentage specified in the related
Prospectus Supplement. See 'DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination.'
In addition, the Prospectus Supplement may provide other
circumstances under which Holders of Securities of a Series could be
fully paid significantly earlier than would otherwise be the case if
payments or distributions were solely based on the activity of the
related Primary Assets.
The Trust Fund............................ The Trust Fund for a Series of Securities will consist of one or more
of the assets described below, as described in the related Prospectus
Supplement.
A. Primary Assets....................... The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in the open market or in
privately negotiated transactions, including transactions with
entities affiliated with the Depositor.
(1) Loans.......................... Primary Assets for a Series will consist, in whole or in part, of
Loans. Some Loans may be delinquent or non-performing as specified in
the related Prospectus Supplement. Loans may be originated by or
acquired from an affiliate of the Depositor and an affiliate of the
Depositor may be an obligor with respect to any such Loan. The Loans
will be conventional contracts or contracts insured by the Federal
Housing Administration ('FHA') or partially guaranteed by the
Veterans Administration ('VA'). See 'The Trust Funds--The Loans' for
a discussion of such guarantees. To the extent provided in the
related Prospectus Supplement, additional Loans may be periodically
added to the Trust Fund, or may be removed from time to time if
certain asset value tests are met, as described in the related
Prospectus Supplement.
The 'Loans' for a Series will consist of (i) closed-end home equity
loans (the 'Mortgage Loans') and (ii) home improvement installment
sales contracts and installment loan agreements (the 'Home
Improvement Contracts'). The Mortgage Loans and the Home Improvement
Contracts are collectively referred to herein as the 'Loans.' Loans
may, as specified in the related Prospectus Supplement, have various
payment characteristics, including balloon or other irregular payment
features, and may accrue interest at a fixed rate or an adjustable
rate. As specified in the related Prospectus Supplement, the Mortgage
Loans will and the Home Improvement Contracts may be secured by
mortgages and deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, which may be subordinated to
one or more senior liens on the Mortgaged Property, as described in
the related Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts may be unsecured or
secured by purchase money security interests in the Home Improvements
financed thereby. The Mortgaged Properties and the Home Improvements
are collectively referred to herein as the 'Properties.'
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
The related Prospectus Supplement will describe certain
characteristics of the Loans for a Series, including, without
limitation, and to the extent relevant: (a) the aggregate unpaid
principal balance of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the
range and weighted average Loan Rate on the Loans and in the case of
adjustable rate Loans, the range and weighted average of the Current
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and the
average outstanding principal balance of the Loans; (d) the weighted
average original and remaining term-to-stated maturity of the Loans
and the range of original and remaining terms-to-stated maturity, if
applicable; (e) the range and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the Loans, computed in the
manner described in the related Prospectus Supplement; (f) the
percentage (by principal balance as of the Cut-off Date) of Loans
that accrue interest at adjustable or fixed interest rates; (g) any
enhancement relating to the Loans; (h) the percentage (by principal
balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the
Loans; (j) the use and type of each Mortgaged Property securing a
Loan; (k) the lien priority of the Loans; and (l) the delinquency
status and year of origination of the Loans.
(2) Private Securities............. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include (a) pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Loans (the 'Underlying Loans') or (b)
collateralized obligations secured by Underlying Loans. Such
pass-through certificates or collateralized obligations will have
previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor
an affiliate thereof at any time during the three preceding months);
provided a period of three years has elapsed since the later of the
date the securities were acquired from the issuer or an affiliate
thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and the Private Securities themselves will
not be so insured or guaranteed. See 'THE TRUST FUNDS--Private
Securities.' Unless otherwise specified in the Prospectus Supplement
relating to a Series of Securities, payments on the Private
Securities will be distributed directly to the Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement for a Series will specify (such
disclosure may be on an approximate basis, as described above and
will be as of the date specified in the related Prospectus
Supplement) to the extent relevant and to the extent such information
is reasonably available to the Depositor and the Depositor reasonably
believes such information to be reliable: (i) the aggregate
approximate principal amount and type of any Private Securities to be
included in the Trust Fund for such Series; (ii) certain
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characteristics of the Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether they are fixed rate
or adjustable rate and whether they provide for fixed level payments,
negative amortization or other payment features), (B) the approximate
aggregate principal amount of such Underlying Loans which are insured
or guaranteed by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to such Underlying Loans, (D)
the minimum and maximum stated maturities of such Underlying Loans at
origination, (E) the lien priority of such Underlying Loans, and (F)
the delinquency status and year of origination of such Underlying
Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity
of the Private Securities; (v) the pass-through or certificate rate
or ranges thereof for the Private Securities; (vi) the sponsor or
depositor of the Private Securities (the 'PS Sponsor'), the servicer
of the Private Securities (the 'PS Servicer') and the trustee of the
Private Securities (the 'PS Trustee'); (vii) certain characteristics
of enhancement, if any, such as reserve funds, insurance policies,
letters of credit or guarantees, relating to the Loans underlying the
Private Securities, or to such Private Securities themselves; (viii)
the terms on which the Underlying Loans may, or are required to, be
repurchased prior to stated maturity; and (ix) the terms on which
substitute Underlying Loans may be delivered to replace those
initially deposited with the PS Trustee. See 'THE TRUST
FUNDS--Additional Information' herein.
B. Collection and Distribution
Accounts............................. Unless otherwise provided in the related Prospectus Supplement, all
payments on or with respect to the Primary Assets for a Series will
be remitted directly to an account (the 'Collection Account') to be
established for such Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be required to apply a
portion of the amount in the Collection Account, together with
reinvestment earnings from eligible investments specified in the
related Prospectus Supplement, to the payment of certain amounts
payable to the Servicer under the related Agreement and any other
person specified in the Prospectus Supplement, and to deposit a
portion of the amount in the Collection Account into a separate
account (the 'Distribution Account') to be established for such
Series, each in the manner and at the times established in the
related Prospectus Supplement. All amounts deposited in such
Distribution Account will be available, unless otherwise specified in
the related Prospectus Supplement, for (i) application to the payment
of principal of and interest on such Series of Securities on the next
Distribution Date, (ii) the making of adequate provision for future
payments on certain Classes of Securities and (iii) any other purpose
specified in the related Prospectus Supplement. After applying the
funds in the Collection Account as described above, any funds
remaining in the Collection Account may be paid over to the Servicer,
the Depositor, any provider of Enhancement with respect to such
Series (an 'Enhancer') or any other person entitled thereto
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in the manner and at the times established in the related Prospectus
Supplement.
C. Pre-Funding and Capitalized Interest
Accounts............................. If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding
Account') established and maintained with the Trustee for the related
Series. If so specified, on the closing date for such Series, a
portion of the proceeds of the sale of the Securities of such Series
(such amount, the 'Pre-Funded Amount') will be deposited in the
Pre-Funding Account and may be used to purchase additional Primary
Assets during the period of time, not to exceed six months, specified
in the related Prospectus Supplement (the 'Pre-Funding Period'). The
Primary Assets to be so purchased will be required to have certain
characteristics specified in the related Prospectus Supplement. If
any Pre-Funded Amount remains on deposit in the Pre-Funding Account
at the end of the Pre-Funding Period, such amount will be applied in
the manner specified in the related Prospectus Supplement to prepay
the Notes and/or the Certificates of the applicable Series. The
amount initially deposited in a pre-funding account for a Series of
Securities will not exceed fifty percent of the aggregate principal
amount of such Series of Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established
and maintained with the Trustee for the related Series. On the
closing date for such Series, a portion of the proceeds of the sale
of the Securities of such Series will be deposited in the Capitalized
Interest Account and used to fund the excess, if any, of (x) the sum
of (i) the amount of interest accrued on the Securities of such
Series and (ii) if specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding Period such as
trustee fees and credit enhancement fees, over (y) the amount of
interest available therefor from the Primary Assets in the Trust
Fund. Any amounts on deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not necessary for such
purposes will be distributed to the person specified in the related
Prospectus Supplement.
Enhancement............................... If stated in the Prospectus Supplement relating to a Series, the
Depositor will obtain an irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy or other form of
credit support (collectively, 'Enhancement') in favor of the Trustee
on behalf of the Holders of such Series and any other person
specified in such Prospectus Supplement from an institution
acceptable to the rating agency or agencies identified in the related
Prospectus Supplement as rating such Series of Securities
(collectively, the 'Rating Agency') for the purposes specified in
such Prospectus Supplement. The Enhancement will support the payments
on the Securities and may be used for other purposes, to the extent
and under the conditions specified in such Prospectus Supplement. See
'ENHANCEMENT.' Enhancement for a Series may include one or more of
the following types of Enhancement, or such other type of Enhancement
specified in the related Prospectus Supplement.
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A. Subordinate Securities............... If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinate Securities.
The rights of Holders of such Subordinate Securities to receive
distributions on any Distribution Date will be subordinate in right
and priority to the rights of holders of Senior Securities of the
Series, but only to the extent described in the related Prospectus
Supplement.
B. Insurance............................ If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting payments on the
Securities.
C. Reserve Funds........................ If stated in the Prospectus Supplement, the Depositor may deposit
cash, a letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve
funds to be established in the name of the Trustee (each a 'Reserve
Fund'), which will be used, as specified in such Prospectus
Supplement, by the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any other
purpose specified in the Agreement, with respect to such Series, to
the extent that funds are not otherwise available. In the alternative
or in addition to such deposit, a Reserve Fund for a Series may be
funded through application of all or a portion of the excess cash
flow from the Primary Assets for such Series, to the extent described
in the related Prospectus Supplement.
D. Minimum Principal Payment
Agreement............................ If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment
agreement (the 'Minimum Principal Payment Agreement') with an entity
meeting the criteria of the Rating Agency, pursuant to which such
entity will provide funds in the event that aggregate principal
payments on the Primary Assets for such Series are not sufficient to
make certain payments, as provided in the related Prospectus
Supplement. See 'ENHANCEMENT--Minimum Principal Payment Agreement.'
E. Deposit Agreement.................... If stated in the Prospectus Supplement, the Depositor and the Trustee
will enter into a guaranteed investment contract or an investment
agreement (the 'Deposit Agreement') pursuant to which all or a
portion of amounts held in the Collection Account, the Distribution
Account or in any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The Trustee will be entitled
to withdraw amounts so invested, plus interest at a rate equal to the
Assumed Reinvestment Rate, in the manner specified in the Prospectus
Supplement. See 'ENHANCEMENT--Deposit Agreement.'
Servicing............................... The Servicer will be responsible for servicing, managing and making
collections on the Loans for a Series. In addition, the Servicer, if
so specified in the related Prospectus Supplement, will act as
custodian and will be responsible for maintaining custody of the
Loans and related documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal or
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interest on a Loan will be made by the Servicer only to the extent
described in the related Prospectus Supplement. Such advances will be
intended to provide liquidity only and, unless otherwise specified in
the related Prospectus Supplement, reimbursable to the Servicer from
scheduled payments of principal and interest, late collections, or
from the proceeds of liquidation of the related Loans or from other
recoveries relating to such Loans (including any insurance proceeds
or payments from other credit support). In performing these
functions, the Servicer will exercise the same degree of skill and
care that it customarily exercises with respect to similar
receivables or Loans owned or serviced by it. Under certain limited
circumstances, the Servicer may resign or be removed, in which event
either the Trustee or a third-party servicer will be appointed as
successor servicer. The Servicer will receive a periodic fee as
servicing compensation (the 'Servicing Fee') and may, as specified
herein and in the related Prospectus Supplement, receive certain
additional compensation. See 'SERVICING OF LOANS--Servicing
Compensation and Payment of Expenses' herein.
Federal Income Tax Considerations
A. Debt Securities and REMIC Residual
Securities........................... If (i) an election is made to treat all or a portion of a Trust Fund
for a Series as a 'real estate mortgage investment conduit' (a
'REMIC') or (ii) so provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes of taxable debt
obligations under the Internal Revenue Code of 1986, as amended (the
'Code'). Stated interest with respect to such Classes of Securities
will be reported by a Holder in accordance with the Holder's method
of accounting except that, in the case of Securities constituting
'regular interests' in a REMIC ('Regular Interests'), such interest
will be required to be reported on the accrual method regardless of a
Holder's usual method of accounting. Securities that are Compound
Interest Securities, Zero Coupon Securities or Interest Only
Securities will, and certain other Classes of Securities may, be
issued with original issue discount that is not de minimis. In such
cases, the Holder will be required to include original issue discount
in gross income as it accrues, which may be prior to the receipt of
cash attributable to such income. If a Security is issued at a
premium, the Holder may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated
as REMIC 'residual interests' ('Residual Interest'). A Holder of a
Residual Interest will be required to include in its income its pro
rata share of the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to REMIC taxable income
for a particular period in excess of cash distributions for such
period or have an after-tax return that is less than the after-tax
return on comparable debt instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual Interest (i) may not
be subject to offset by losses from other activities or investments,
(ii) for a Holder that is subject to tax under the Code on unrelated
business taxable income, may be treated as unrelated
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business taxable income and (iii) for a foreign holder, may not
qualify for exemption from or reduction of withholding. In addition,
(i) Residual Interests are subject to transfer restrictions and (ii)
certain transfers of Residual Interests will not be recognized for
federal income tax purposes. Further, individual holders are subject
to limitations on the deductibility of expenses of the REMIC. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.'
B. Non-REMIC Pass-Through Securities.... If so specified in the related Prospectus Supplement, the Trust Fund
for a Series will be treated as a grantor trust and will not be
classified as an association taxable as a corporation for federal
income tax purposes and Holders of Securities of such Series
('Pass-Through Securities') will be treated as owning directly rights
to receive certain payments of interest or principal, or both on the
Primary Assets held in the Trust Fund for such Series. All income
with respect to a Stripped Security (as defined herein) will be
accounted for as original issue discount and, unless otherwise
specified in the related Prospectus Supplement, will be reported by
the Trustee on an accrual basis, which may be prior to the receipt of
cash associated with such income.
C. Owner Trust Securities............... If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income
tax. Each Noteholder, by the acceptance of a Note of a given Series,
will agree to treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate of a given
Series, will agree to treat the related Trust as a partnership in
which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust and
such Certificates are possible, but would not result in materially
adverse tax consequences to Certificateholders. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
ERISA Considerations...................... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
'ERISA CONSIDERATIONS.'
Legal Investment.......................... Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute 'mortgage related
securities' under 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 Securities constitute legal
investments for them. See 'LEGAL INVESTMENT.'
Use of Proceeds........................... The Depositor will use the net proceeds from the sale of each Series
for one or more of the following purposes: (i) to purchase the
related Primary Assets, (ii) to repay indebtedness which has been
incurred to obtain funds to acquire such Primary Assets, (iii) to
establish any Reserve Funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring and issuing such
Securities, including
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the costs of obtaining Enhancement, if any. If so specified in the
related Prospectus Supplement, the purchase of the Primary Assets for
a Series will be effected by an exchange of Securities with the
Seller of such Primary Assets. See 'USE OF PROCEEDS.'
Ratings................................... It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related Prospectus
Supplement be rated by at least one Rating Agency in one of its four
highest applicable rating categories. The rating or ratings
applicable to Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related
Prospectus Supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities. A
securities rating is not a recommendation to buy, hold or sell
securities and does not address the effect that the rate of
prepayments on Loans or Underlying Loans relating to Private
Securities, as applicable, for a Series may have on the yield to
investors in the Securities of such Series. See 'RISK
FACTORS--Ratings Are Not Recommendations.'
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
NO SECONDARY MARKET
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement, expects to make a
secondary market in the Securities, but has no obligation to do so.
PRIMARY ASSETS ARE ONLY SOURCE OF REPAYMENT
The Depositor does not have, nor is it expected to have, any significant
assets. The Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the Depositor or
any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, unless otherwise stated in the
related Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account or Distribution Account immediately after making all payments
due on the Securities of such Series and other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Although any Enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such Enhancement will be limited, as set forth in the related
Prospectus Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Holders may suffer losses. See 'ENHANCEMENT.'
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YIELD MAY VARY
The yield to maturity experienced by a Holder of Securities may be affected
by the rate of payment of principal of the Loans or Underlying Loans relating to
the Private Securities, as applicable. The timing of principal payments of the
Securities of a Series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the Loans or Underlying Loans
relating to the Private Securities, as applicable, which prepayments may be
influenced by a variety of factors; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See 'DESCRIPTION OF THE SECURITIES--Weighted
Average Life of Securities.' Prepayments may also result from repurchases of
Loans or Underlying Loans, as applicable, due to material breaches of the
Seller's or the Depositor's warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
PROPERTY VALUES MAY BE INSUFFICIENT
If the Mortgages in a Trust Fund are primarily junior liens subordinate to
the rights of the mortgagee under the related senior mortgage or mortgages, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, 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 at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no issuance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
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Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement, such Loans may have been originated more recently
than the Loans originally transferred to the Trust Fund and may be of a lesser
credit quality. As a result, the addition of subsequent Loans may adversely
affect the performance of the related Securities.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of clean-
up. In several states, such a lien has priority over the lien of an existing
mortgage or owner's interest against 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 that require remedy 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 a prior owner. A lender also risks such liability on foreclosure
of the Mortgaged Property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Loan to damages and administrative
enforcement.
The Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
'Holder in Due Course Rules'), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. See 'CERTAIN LEGAL ASPECTS OF THE LOANS.'
CONTRACTS WILL NOT BE STAMPED
In order to give notice of the right, title and interest of Securityholders
to the Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Home Improvement Contracts will not be stamped or
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otherwise marked to reflect their assignment to the Trust Fund. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
RATINGS ARE NOT RECOMMENDATIONS
It will be a condition to the issuance of a Series of Securities that they
be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. Such rating should not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. There is also no
assurance that any such rating will remain in effect for any given period of
time or may not be lowered or withdrawn entirely by the Rating Agency if in its
judgment circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the
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Holder requesting payment by wire transfer) in certain circumstances described
in the related Prospectus Supplement and (b) final payments of principal in
retirement of each Security will be made only upon presentation and surrender of
such Security at the office of the Trustee specified in the Prospectus
Supplement. Notice of the final payment on a Security will be mailed to the
Holder of such Security before the Distribution Date on which the final
principal payment on any Security is expected to be made to the holder of such
Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account. If provided in the related Prospectus
Supplement, such amounts may be net of certain amounts payable to the related
Servicer and any other person specified in the Prospectus Supplement. Such
amounts thereafter will be deposited into the Distribution Account and will be
available to make payments on the Securities of such Series on the next
Distribution Date. See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Primary Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The 'Assumed Reinvestment Rate,' if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360 day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
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PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which the principal thereof will be fully paid and
with respect to each Class of a Series of Certificates will be the date on which
the entire aggregate principal balance of such Class is expected to be reduced
to zero, in each case calculated on the basis of the assumptions applicable to
such Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See 'Weighted Average Life of
the Securities' below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities or low yields then available
for reinvestment the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement that the
amount available for the payment of interest that will have accrued on such
Securities (the 'Available Interest Amount') through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
Trustee will redeem a principal amount of outstanding Securities of such Series
as will cause the Available Interest Amount to equal the amount of interest that
will have accrued through such designated interest accrual date for such Series
of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a 'qualified liquidation'
under Section 860F of the Code.
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In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
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THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a 'Servicing
Agreement') between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the 'Mortgage Loans') secured by
mortgages primarily on Single Family Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Mortgage Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in the related Prospectus Supplement, interest on each Mortgage
Loan is calculated on the basis of the outstanding
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principal balance of such loan multiplied by the Loan Rate thereon and further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on such loan. Unless otherwise described in the related Prospectus
Supplement the original terms to stated maturity of Mortgage Loans will not
exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one-to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
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Additional Information. The selection criteria which will apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration ('FHA') or partially guaranteed by the Veterans
Administration ('VA'). Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Loans will be insured under various
FHA programs. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. Loans insured by the FHA generally require
a minimum down payment of approximately 5% of the original principal amount of
the loan. No FHA-insured Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ('HUD') and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon or
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the Loan (which payments are to be repaid by
the mortgagor to HUD) or by accepting assignment of the loan from the Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the Loan and HUD must have rejected any request for relief from
the mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, 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. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a 'VA Guaranty'). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
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veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average outstanding principal balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable; (e)
the range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by outstanding
principal balance as of the Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other enhancement relating to the Loans; (h) the percentage
(by principal balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by principal balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; and (l) the delinquency status and year of origination of the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the 'Underlying Loans') or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans
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may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the 'PS Trustee'). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the 'PS Servicer') directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and
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(ix) the terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding Account')
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the 'Pre-Funded Amount')
will be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the 'Pre-Funding Period'). The Primary Assets to be so
purchased will be required to have certain characteristics specified in the
related Prospectus Supplement. If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
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ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the Holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default. but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain
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expenses will not affect the total insurance proceeds paid to Holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See 'CERTAIN LEGAL ASPECTS OF
LOANS.' If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the 'bankruptcy bond') covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
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(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan next succeeding the date of
its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
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(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, 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. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a 'coinsurance' clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
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Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any obligor or will be maintained on REO Property acquired in
respect of a defaulted Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require such additional
insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit in the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer will
be required to liquidate any Property acquired through foreclosure within two
years after the acquisition of the beneficial ownership of such Property. While
the holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a
modification of such Loan (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable 'due-on-sale'
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
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 Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in
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connection with an assumption will be retained by the Servicer as additional
servicing compensation. The terms of a Loan may not be changed in connection
with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement throughout
the preceding calendar year.
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CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS-- Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement
a custodian on behalf of the Trustee (the 'Custodian'), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the 'Loan Schedule'). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
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Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See 'THE
TRUST FUNDS--Private Securities' herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
'Certificate Schedule'), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the
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Trustee of such breach, and if such breach is of a nature that materially and
adversely affects the value of such Primary Asset, the Depositor or such entity
is obligated to repurchase the affected Primary Asset or, if provided in the
related Prospectus Supplement, provide a Qualifying Substitute Primary Asset
therefor, subject to the same conditions and limitations on purchases and
substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Seller of such Primary Assets. See
'SPECIAL CONSIDERATIONS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series 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 has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See 'SERVICING OF LOANS--Evidence as to
Compliance' herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward
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such reports only to the entity or its nominee which is the registered holder of
the global certificate which evidences such book-entry securities. Beneficial
owners will receive such reports from the participants and indirect participants
of the applicable book-entry system in accordance with the practices and
procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Securities for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
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accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor 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 sixty (60) 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 Depositor
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, either 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 Zero
Coupon 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 Notes of such Series.
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 distributions 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 other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, 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 involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, 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 distribution to the
Noteholders may 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.
Unless otherwise specified in the related Prospectus Supplement, 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 which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series 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
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of the Indenture that cannot be modified without the waiver or consent of all
the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by such appointment; provided that the Trustee will
continue to be responsible for its duties and obligations under the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. 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.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under
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such Agreement or related Enhancement, (v) to add or amend any provisions of
such Agreement as required by a Rating Agency in order to maintain or improve
the rating of the Securities (it being understood that none of the Depositor,
the Seller, the Servicer or Trustee is obligated to maintain or improve such
rating), or (vi) to comply with any requirements imposed by the Code; provided
that any such amendment except pursuant to clause (vi) above will not adversely
affect in any material respect the interests of any Holders of such Series, as
evidenced by an opinion of counsel. Any such amendment except pursuant to clause
(vi) of the preceding sentence shall be deemed not to adversely affect in any
material respect the interests of any Holder if the Trustee receives written
confirmation from each Rating Agency rating such Securities that such amendment
will not cause such Rating Agency to reduce the then current rating thereof.
Unless otherwise specified in the Prospectus Supplement, the Agreement for each
Series may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 66 2/3% of the aggregate outstanding principal
amount of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may (a) reduce
the amount or delay the timing of payments on any Security without the consent
of the Holder of such Security; or (b) reduce the aforesaid percentage of the
aggregate outstanding principal amount of Securities of each Class, the Holders
of which are required to consent to any such amendment without the consent of
the Holders of 100% of the aggregate outstanding principal amount of each Class
of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
'Holders' under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such
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Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Primary Assets plus the fair market value of
any property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, to be set forth in the related Prospectus
Supplement, of the aggregate Principal Balance of the Primary Assets as of the
Cut-off Date. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Servicer or the
Trustee, as applicable, will give written notice of termination of the Agreement
to each Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. If so provided in the related Prospectus Supplement for a Series,
the Depositor or another entity may effect an optional termination of the Trust
Fund under the circumstances described in such Prospectus Supplement. See
'DESCRIPTION OF THE SECURITIES--Optional Redemption, Purchase or Termination'
herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as 'mortgage loans'), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), 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/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor 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 mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
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 occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
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 certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. 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 a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred
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in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
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 potential third party purchasers at the
sale 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 an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. 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. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized 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. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), 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,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event 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.
The standard form of the mortgage 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, 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 a junior mortgage.
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 appear 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 is
given the right under certain mortgages 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
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
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, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. 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.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a
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deficiency judgment. For example, with respect to federal bankruptcy law, the
filing of a petition acts as a stay against the enforcement of remedies for
collection of a debt. Moreover, a court with federal bankruptcy jurisdiction may
permit a debtor through a Chapter 13 Bankruptcy Code rehabilitative plan to cure
a monetary default with respect to a loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon his security (provided no sale of the property
has yet occurred) prior to the filing of the debtor's Chapter 13 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 loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule 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. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The 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 and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, 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 exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the 'window period' under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven 'window
period states,' five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, 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.
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In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. 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. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his 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 of 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 realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing 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 security agreements 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, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
'OTS') prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of such mortgage loans.
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. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
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THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
'contracts') generally are 'chattel paper' or constitute 'purchase money
security interests' each as defined in the Uniform Commercial Code (the 'UCC').
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Depositor will transfer physical possession of the contracts to the Trustee
or a designated custodian or may retain possession of the contracts as custodian
for the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such Home Improvement must generally be perfected by a timely fixture filing.
In general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose such characterization,
upon incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
'self-help' repossession that is 'peaceful' (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
Consumer Protection Laws. The so-called 'Holder-in-Due-Course' rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending
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pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. 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 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.
INSTALLMENT SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract ('Installment Sales Contract') the seller
(hereinafter referred to in this section as the 'lender') retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the 'borrower') for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the
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duration of military service and (iii) may have the maturity of such obligations
incurred prior to military service extended, the payments lowered and the
payment schedule readjusted for a period of time after the completion of
military service. However, the benefits of (i), (ii), or (iii) above are subject
to challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with such obligations is not materially impaired by military
service, the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a Loan included in a Trust Fund for
a Series is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of
1940, none of the Trust Fund, the Servicer, the Depositor nor the Trustee will
be required to advance such amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the Holders of the Securities of such
Series. Unless otherwise specified in the related Prospectus Supplement, any
shortfalls in interest collections on Loans or Underlying Loans relating to the
Private Securities, as applicable, included in a Trust Fund for a Series
resulting from application of the Soldiers' and Sailors' Civil Relief Act of
1940 will be allocated to each Class of Securities of such Series that is
entitled to receive interest in respect of such Loans or Underlying Loans in
proportion to the interest that each such Class of Securities would have
otherwise been entitled to receive in respect of such Loans or Underlying Loans
had such interest shortfall not occurred.
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THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
loans secured by certain first or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary is based on the opinion of Stroock & Stroock & Lavan,
special counsel to the Depositor ('Federal Tax Counsel') as to the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of Securities. The summary does not purport to deal with all aspects
of federal income taxation that may affect particular investors in light of
their individual circumstances, nor with certain types of investors subject to
special treatment under the federal income tax laws. This summary focuses
primarily upon investors who will hold Securities as 'capital assets'
(generally, property held for investment) within the meaning of Section 1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Securities.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series
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of Securities as a real estate mortgage investment conduit ('REMIC') under the
Internal Revenue Code of 1986, as amended (the 'Code'); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES
Status of Regular Interest Securities as Real Property Loans. The regular
interests in a REMIC ('Regular Interest Securities') will be 'real estate
assets' for purposes of Section 856(c)(5)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, 'qualifying assets') to the extent
that the REMIC's assets are qualifying assets. However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the Regular
Interest Securities will be qualifying assets. Similarly, income on the Regular
Interest Securities will be treated as 'interest on obligations secured by
mortgages on real property' within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Loans, the REMIC's assets will include payments on Loans held pending
distribution to holders of Regular Interest Securities, amounts in reserve
accounts (if any), other credit enhancements (if any) and possibly buydown funds
('Buydown Funds'). The Loans generally will be qualifying assets under both of
the foregoing sections of the Code. However, Loans that are not secured by
residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(c)(v) of the
Code. In addition, to the extent that the principal amount of a Loan exceeds the
value of the property securing the Loan, it is unclear and Federal Tax Counsel
is unable to opine whether the Loans will be qualifying assets. The regulations
under Sections 860A through 860G of the Code (the 'REMIC Regulations') treat
credit enhancements as part of the mortgage or pool of mortgages to which they
relate, and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Loans and held pending distribution to holders of Regular
Interest Securities ('cash flow investments') will be treated as qualifying
assets. It is unclear whether reserve funds or Buydown Funds would also
constitute qualifying assets under any of those provisions.
Interest and Acquisition Discount. Securities representing Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as 'Debt Securities.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended June 11, 1996 (the 'OID
Regulations'). A Holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the
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issue price for such class will be treated as the fair market value of such
class on the Closing Date. The issue price of a Debt Security also includes the
amount paid by an initial Debt Security Holder for accrued interest that relates
to a period prior to the issue date of the Debt Security. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute 'qualified stated interest.'
Under the OID Regulations, interest payments will not qualify as qualified
stated interest unless the interest payments are 'unconditionally payable.' The
OID Regulations state that interest is unconditionally payable if reasonable
legal remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than a late payment that occurs within a reasonable grace period) or nonpayment
of interest a remote contingency, as defined in the OID Regulations. It is
unclear whether the terms and conditions of the Loans underlying the Debt
Securities or the terms and conditions of the Debt Securities are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the
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payments during the accrual period of amounts included in the stated redemption
price of the Pay-Through Security, over the adjusted issue price of the
Pay-Through Security at the beginning of the accrual period. The present value
of the remaining payments is to be determined on the basis of three factors: (i)
the original yield to maturity of the Pay-Through Security (determined on the
basis of compounding at the end of each accrual period and properly adjusted for
the length of the accrual period), (ii) events which have occurred before the
end of the accrual period and (iii) the assumption that the remaining payments
will be made in accordance with the original Prepayment Assumption. The effect
of this method is to increase the portions of OID required to be included in
income by a Holder to take into account prepayments with respect to the Loans at
a rate that exceeds the Prepayment Assumption, and to decrease (but not below
zero for any period) the portions of OID required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
OID will be reported to Holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to Holders that Loans will be
prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such Holder in that
period. The Holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest-Only Debt Securities. The Trust Fund intends to report income
from interest-only classes of Debt Securities to the Internal Revenue Service
and to holders of interest-only Debt Securities based on the assumption that the
stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities Certificates will be treated as having original
issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a 'Variable Rate Debt Security') are subject
to special rules. A Variable Rate Debt Security will qualify as a 'variable rate
debt instrument' if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount, (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate and (iii) it does not provide for any principal
payments that are contingent, as defined in the OID Regulations, except as
provided in (i), above. Because the OID Regulations relating to contingent
payment debt instruments do not apply to REMIC regular interests, principal
payments on the REMIC Regular Certificates should not be considered contingent
for this purpose.
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A 'qualified floating rate' is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased
or decreased by a fixed rate will constitute a qualified floating rate for
purposes of the OID Regulations. In addition, under the OID Regulations, two or
more qualified floating rates that can reasonably be expected to have
approximately the same values throughout the term of the Variable Rate Debt
Security will be treated as a single qualified floating rate (a 'Presumed Single
Qualified Floating Rate'). Two or more qualified floating rates with values
within 25 basis points of each other as determined on the Variable Rate Debt
Security's issue date will be conclusively presumed to be a Presumed Single
Qualified Floating Rate. Notwithstanding the foregoing, a variable rate that
would otherwise constitute a qualified floating rate but which is subject to one
or more restrictions such as a cap or floor, will not be a qualified floating
rate for purposes of the OID Regulations unless the restriction is fixed
throughout the term of the Variable Rate Debt Security or the restriction will
not significantly affect the yield of the Variable Rate Debt Security.
An 'objective rate' is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Security will not constitute an objective rate if it is reasonably expected that
the average value of such rate during the first half of the Variable Rate Debt
Security's term will be either significantly less than or significantly greater
than the average value of the rate during the final half of the Variable Rate
Debt Security's term. Further, an objective rate does not include a rate that is
based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer (or
a party related to the issuer). An objective rate will qualify as a 'qualified
inverse floating rate' if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect contemporaneous variations in the qualified floating rate. The OID
Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a 'Presumed Single Variable Rate').
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a 'variable rate debt
instrument' under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a 'Single Variable Rate Debt Security'), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest, (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a 'Multiple Variable Rate Debt Security') that qualifies as
a 'variable rate debt instrument' will be converted into an 'equivalent' fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue
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discount and qualified stated interest on the Multiple Variable Rate Debt
Security. The OID Regulations generally require that such a Multiple Variable
Rate Debt Security be converted into an 'equivalent' fixed rate debt instrument
by substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate Debt Security with a
fixed rate equal to the value of the qualified floating rate or qualified
inverse floating rate, as the case may be, as of the Multiple Variable Rate Debt
Security's issue date. Any objective rate (other than a qualified inverse
floating rate) provided for under the terms of the Multiple Variable Rate Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Multiple Variable Rate Debt Security. In the case of
a Multiple Variable Rate Debt Security that qualifies as a 'variable rate debt
instrument' and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
'equivalent' fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
'equivalent' fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the 'equivalent' fixed rate debt instrument by applying the
original issue discount rules to the 'equivalent' fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the 'equivalent' fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the 'equivalent' fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a 'variable rate debt
instrument' under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income,
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including upon the sale, disposition, or repayment of the Security (or in the
case of a Pass-Through Security, an underlying Loan). A Holder may elect to
include market discount in income currently as it accrues, on all market
discount obligations acquired by such Holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a Holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the Internal Revenue
Service. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat all Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Federal Tax Counsel, if a REMIC election is
made with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as 'Regular Interests' or 'Residual Interests' in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute 'a regular or a
residual interest in a REMIC' within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government saturates, 'loans secured by an interest in real property,' and
other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute 'real estate
assets' within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered 'interest on obligations secured by
mortgages on real property or on interests in real property' within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the REMIC's
assets consist of assets described in (i) or (ii) above, then a Security will
qualify for the tax treatment described in (i) or (ii) in the proportion that
such REMIC assets are qualifying assets.
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REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
'pass-through interest holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be held 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 Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or 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.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A Holder of a Residual Interest Security
that is an individual or a 'pass-through interest holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the Loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such Holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such Holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the
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Startup Day (generally, the day that the interests are issued). Such aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest ecurities include such discount in income, but without regard to the de
minimis rules. See 'Taxation of Debt Securities' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The Holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
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associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as 'portfolio
interest' and is subject to certain additional limitations. See 'Tax Treatment
of Foreign Investors.'
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax
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years beginning after December 31, 1986, a taxpayer may elect to have these
provisions apply only with respect to tax years beginning after August 20, 1996.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Interest Security will be treated as an excess inclusion
if the Residual Interest Securities in the aggregate are considered not to have
'significant value.' The Treasury Department has not yet provided regulations in
this respect.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See '--Restrictions on
Ownership and Transfer of Residual Interest Securities' and '--Tax Treatment of
Foreign Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1399 of the Code, if
such entity is not subject to tax on its unrelated business income. Accordingly,
the applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no transfer
of a Residual Interest Security will be permitted unless the proposed transferee
shall have furnished to the Trustee an affidavit representing and warranting
that it is neither a Disqualified Organization nor an agent or nominee acing on
behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
'noneconomic residual interest,' as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a 'noneconomic
residual interest' unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest Security is disregarded, the transferor would be
liable for any federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See '--Tax Treatment of Foreign Investors.'
Mark to Market Rules. Prospective purchasers of a Residual Interest
Security should be aware that on December 28, 1993, the Internal Revenue Service
released temporary regulations (the 'Temporary 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 of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
'negative value' Residual Interest Security is not treated as a security and
thus may not be marked to market. In addition, a dealer is not required to
identify such Residual Interest Security as held for investment. In general, a
Residual Interest Security has negative value if, as of the date a taxpayer
acquires the Residual Interest Security, the present value of the tax
liabilities associated with holding the Residual Interest Security exceeds the
sum of (i) the present value of the expected future distributions on the
Residual Interest Security, and (ii) the present value of the anticipated tax
savings
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associated with holding the Residual Interest Security as the REMIC generates
losses. The amounts and present values of the anticipated tax liabilities,
expected future distributions and anticipated tax savings are all to be
determined using (i) the prepayment and reinvestment assumptions adopted under
Section 1272(a)(6), or that would have been adopted had the REMIC's regular
interests been issued with OID, (ii) any required or permitted clean up calls,
or required qualified liquidation provided for in the REMIC's organizational
documents and (iii) a discount rate equal to the 'applicable Federal rate' (as
specified in Section 1274(d)(1)) that would apply to a debt instrument issued on
the date of acquisition of the Residual Interest Security. Furthermore, the
Temporary Mark to Market Regulations provide the IRS with the authority to treat
any Residual Interest Security having substantially the same economic effect as
a 'negative value' residual interest as a 'negative value' residual interest.
On January 3, 1995, the IRS released proposed regulations under Section 475
(the 'Proposed Mark-to-Market Regulations'). The Proposed Mark-to-Market
Regulations provide that any REMIC Residual Interest acquired after January 3,
1995 cannot be marked to market, regardless of the value of such REMIC residual
interest. The Temporary Mark-to-Market Regulations described above still apply
to any REMIC Residual Interest acquired on or prior to January 3, 1995. Thus,
holders of positive value REMIC Residual Interests acquired on or prior to
January 3, 1995 may continue to mark such residual interests to market for the
entire economic life of such interests.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
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TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Federal Tax Counsel, the
Trust Fund relating to a Series of Securities will be classified for federal
income tax purposes as a grantor trust under Subpart E, Part 1 of Subchapter J
of Chapter 1 of Subtitle A of the Code and not as an association taxable as a
corporation (the Securities of such Series, 'Pass-Through Securities'). In some
Series there will be no separation of the principal and interest payments on the
Loans. In such circumstances, a Holder will be considered to have purchased a
pro rata undivided interest in each of the Loans. In other cases ('Stripped
Securities'), sale of the Securities will produce a separation in the ownership
of all or a portion of the principal payments from all or a portion of the
interest payments on the Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively, the 'Servicing
Fees')), at the same time and in the same manner as such items would have been
reported under the Holder's tax accounting method had it held its interest in
the Loans directly, received directly its share of the amounts received with
respect to the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Securities other than Stripped Securities, such income will
consist of a pro rata share of all of the income derived from all of the Loans
and, in the case of Stripped Securities, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the Holder owns an interest. The Holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent 'reasonable' compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
Holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such Holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deducible to any extent in computing such Holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The Holder's purchase
price of a Pass-Through Security is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans that it represents, since the Securities, unless otherwise specified
in the applicable Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Security, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See '--Taxation of Debt Securities; Market Discount'
and '--Premium' above.
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In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a Loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally 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 in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ('Ratio Strip Securities')
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of 'stripped bonds' with respect to principal
payments and 'stripped coupons' with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing Fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the 'Cash Flow Bond Method'), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments 'secured by' those Loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the Securities are
subject to the contingent payment provisions of the Proposed Regulations; or
(iii) each Stripped Security the payments on which consist primarily or solely
of a specified portion of the interest payments on Loans is composed of an
unstripped undivided ownership interest in Loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
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Character as Qualifying Loans. In the case of Stripped Securities there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. To the extent the Trust Fund's assets are
qualifying assets, Pass-Through Securities will be, and, although the matter is
not free from doubt, Stripped Securities should be considered to represent 'real
estate assets' within the meaning of Section 856(c)(6)(B) of the Code, and
'loans secured by an interest in real property' within the meaning of Section
7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent 'interest on obligations secured by
mortgages on real property or on interests in real property' with the meaning of
Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such Holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a Residual Interest Security, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the Holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a Holder who is not a United States person, as defined below,
('Nonresidents'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is
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a related person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984. For these
purposes, the term 'United States person' means (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate whose income is includable in gross income for United
States federal income taxation regardless of its source, and (iv) a trust for
which one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term 'United States person' shall include a trust whose
income in includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts described in (iv) above, unless the
trust elects to have its United States status determined under the criteria set
forth in (iv) above for tax year ending after August 20, 1996. Proposed Treasury
regulations, which would be effective with respect to payments made after
December 31, 1997 if adopted in their current form, would provide alternative
certification requirements and means by which a holder of a Security could claim
the exemption from federal income and withholding tax.
Interest and OID of Holders who are Nonresidents are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are Nonresidents
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Nonresidents should assume that such income
does not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See '--Excess Inclusions.'
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on counsel's conclusions that
(1) the Trust Fund will not have certain characteristics necessary for a
business trust to be classified as an association taxable as a corporation and
(2) the nature of the income of the Trust Fund will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations or the issuance
of the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
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If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Depositor that the
Notes will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for 'qualified stated
interest' under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a Holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the Holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the Holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a Holder other than a United States Person, as defined below, (a 'foreign
person') generally will be considered 'portfolio interest', and
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generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Seller (including a Holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust or the Seller is a 'related person' within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty. For these purposes, the term
'United States person' means (i) a citizen or resident of the United States,
(ii) a corporation or partnership (including an entity treated as a corporation
or partnership for U.S. federal income tax purposes) created or organized in or
under the laws of the United States or any State thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations are adopted
that provide otherwise), (iii) an estate whose income is includable in gross
income for United States federal income taxation regardless of its source, and
(iv) a trust for which one or more United States persons have the authority to
control all substantial decisions and for which a court of the United States can
exercise primary supervision over the trust's administration. In addition,
certain trusts that would otherwise not qualify as U.S. Persons under the
foregoing definition can elect to be treated as U.S. Persons. Recently adopted
Treasury regulations make certain modifications to the withholding, backup
withholding, and information reporting rules described in the prospectus. These
new regulations attempt to unify certification requirements and modify reliance
standards and are generally effective for payments made after December 31, 1998.
Prospective investors are urged to consult their own tax advisors regarding the
affect these regulations may have on their particular circumstances.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and remit the
withheld amount to the IRS as a credit against the Holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Federal Tax Counsel, the Trust
Fund might be treated as a publicly traded partnership that would not be taxable
as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to certain tax-exempt entities (including pension funds) would
be 'unrelated business taxable income', income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual Holders might be subject to certain limitations on
their ability to deduct their share of the Trust Fund's expenses.
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TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Depositor will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). Except as disclosed in the related
Prospectus Supplement, the Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass-Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable to
discount on the Loans that corresponds to any excess of the principal amount of
the Certificates over their initial issue price; (iii) prepayment premium
payable to the Certificateholders for such month; and (iv) any other amounts of
income payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
A Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will realize from a Certificate 'unrelated business taxable income' as a result
of the 'Debt Financed Income' rules under the Code.
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An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to contribute its assets to a new partnership in exchange for
partnership interests therein, and then dissolve and distribute the new
partnership interests to the partners. The Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Trust Fund may be subject to certain tax
penalties and may incur additional expenses if it is required to comply with
those requirements. Furthermore, the Trust Fund might not be able to comply due
to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
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The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to a Certificateholder which is a foreign person
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pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for Holders which are
foreign persons that are taxable as corporations and 39.6% for all other Holders
which are foreign persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a Holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each Certificateholder which is a foreign person might be required to file
a U.S. individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's income.
Each Certificateholder which is a foreign person must obtain a taxpayer
identification number from the IRS and submit that number to the Trust Fund on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
Certificateholder which is a foreign person generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust Fund
taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. As a result, Certificateholders
which are foreign persons will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a Certificateholder which is a foreign
person would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
and on persons who are parties in interest or disqualified persons ('parties in
interest') with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of such plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
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In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or partners)
or any entity, including an insurance company general account whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, (collectively, 'Plans(s)'), should consult with their legal counsel to
determine whether an investment in the Securities will cause the assets of the
Trust Fund to be considered plan assets pursuant to the plan asset regulations
set forth at 29 CFR 2510.3-101 (the 'Regulation'), thereby subjecting the Plan
to the prohibited transaction rules with respect to the Trust Fund and the
Trustee, or any entities providing services with respect to the operation of the
Trust, to the fiduciary investment standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund, unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ('DOL') applies to the purchase, sale, transfer or holding
of the Securities.
The Regulation contains rules for determining what constitutes the assets
of a Plan. The Regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an investment in an 'equity interest' will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the operation of the Trust Fund may be parties in interest, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and of Section 4975 of
the Code, with respect to transactions involving such assets unless such
transactions are subject to a statutory or regulatory exception or an
administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund. However, without regard to whether the Notes are treated as an equity
interest for such purposes, the purchase, holding or transfer of Notes by or on
behalf of a Plan could be considered a prohibited transaction if the Depositor
or the Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including both Plans and government plans), the investing Plan's
assets will not include any of the underlying assets of the Depositor or the
Trust Fund.
An additional exemption may also be available to the purchase, holding and
transfer of the Securities. The DOL granted to Bear, Stearns & Co. Inc., an
administrative exemption, Prohibited Transaction Exemption 90-30 (Application
No. D-8207, 55 Fed. Reg. 21461) (1990) (the 'Exemption'), from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of securities representing interests
in asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption, wherever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). The Exemption will
apply to the acquisition,
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holding and transfer of the Securities by a Plan, provided that certain
conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933. The Depositor assumes that
only Plans which are accredited investors under the federal securities laws
will be permitted to purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest generic rating categories of Standard & Poor's,
Moody's, D&P or Fitch for at least one year prior to the Plan's acquisition
of securities; 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 Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Depositor, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
In the event that the Exemption is not applicable, some other prohibited
transaction class exemption issued by the DOL, including PTCE 95-60 (relating to
insurance company general accounts), PTCE 91-38 (relating to
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bank collective funds), PTCE 90-1 (relating to insurance company pooled separate
accounts) and PTCE 84-14 (relating to investments by qualified plan asset
managers) may apply, depending on the circumstances.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences to their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ('Bear Stearns') or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Stroock & Stroock & Lavan, New York, New York.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
'Advance' means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
'Appraised Value' means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificate' means the Asset-Backed Certificates.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
'Combined Loan-to-Value Ratio' means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
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Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Loan' means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cooperative Loan' means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Bear Stearns Asset Backed Securities, Inc.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
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'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
purchase money security interest in the Home Improvement financed thereby.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
'Insurance Proceeds' means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'Lifetime Rate Cap' means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
'Loans' mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
'Loan-to-Value Ratio' means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
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'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Loan.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Loan' means a closed-end home equity loan secured by a Mortgaged
Property.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Loans) and the Trustee.
'Primary Assets' means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
'Property' means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
'PS Servicer' means the servicer of the Underlying Loans.
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'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series relating to Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
'Single Family Property' means property securing a Loan consisting of one
to four-family attached or detached residential housing, including Cooperative
Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
'Subordinate Securityholder' means a Holder of a Subordinate Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
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allocated losses and shorfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interest held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Underlying Loans' means loans of the type eligible to be Loans underlying
or securing Private Securities.
'Variable Interest Security' means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
OFFERED NOTES OFFERED HEREBY NOR AN OFFER OF SUCH OFFERED NOTES TO ANY PERSON IN
ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Securityholders..................... ii
Incorporation of Certain Documents by
Reference.................................... ii
Summary of Terms............................... S-1
Risk Factors................................... S-15
Use of Proceeds................................ S-24
Description of the Trust....................... S-24
The Home Loan Pool............................. S-26
FHA Insurance Holder........................... S-32
The Transferor and Servicer.................... S-32
The Master Servicer............................ S-36
Description of Credit Enhancement.............. S-36
Pool Factors and Trading Information........... S-40
Description of the Securities.................. S-40
Description of the Transfer and Servicing
Agreements................................... S-54
Prepayment and Yield Considerations............ S-63
Certain Legal Aspects of the Title I Program... S-72
Certain Federal Income Tax Consequences........ S-78
ERISA Considerations........................... S-78
Underwriting................................... S-80
Legal Investment Matters....................... S-80
Ratings........................................ S-81
Legal Opinions................................. S-81
Index of Terms................................. S-82
PROSPECTUS
Prospectus Supplement.......................... 3
Report to Holders.............................. 3
Available Information.......................... 3
Incorporation of Certain Documents by
Reference.................................... 4
Summary of Terms............................... 5
Risk Factors................................... 15
Description of the Securities.................. 18
The Trust Funds................................ 22
Enhancement.................................... 28
Servicing of Loans............................. 30
The Agreements................................. 36
Certain Legal Aspects of Loans................. 44
The Depositor.................................. 52
Use of Proceeds................................ 52
Certain Federal Income Tax Considerations...... 52
State Tax Considerations....................... 73
ERISA Considerations........................... 73
Legal Investment............................... 76
Plan of Distribution........................... 76
Legal Matters.................................. 76
Glossary of Terms.............................. 77
</TABLE>
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UNTIL 90 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
PROSPECTUS. THIS 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.
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$110,330,000
PSB LENDING HOME
LOAN OWNER TRUST 1997-4
[ LOGO ]
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
DEPOSITOR
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PROSPECTUS SUPPLEMENT
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BEAR, STEARNS & CO. INC.
DECEMBER 9, 1997
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