<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 19, 1997)
$350,460,000
MASTER FINANCIAL ASSET SECURITIZATION TRUST 1997-1
MASTER FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
[LOGO]
----------------------------------------------------------
The Master Financial Asset Securitization Trust 1997-1 will be established
pursuant to a Trust Agreement among Bear Stearns Asset Backed Securities, Inc.,
as Depositor, Wilmington Trust Company, as Owner Trustee, and The Bank of New
York, in its capacity as Co-Owner Trustee. The Trust will issue the ten classes
of Asset Backed Notes set forth below (the 'Notes'), pursuant to an Indenture
dated as of November 1, 1997 (the 'Indenture'), between the Trust and The Bank
of New York, in its capacity as Indenture Trustee. The Trust will also issue
three classes of Asset Backed Certificates (the 'Certificates') pursuant to the
Trust Agreement (as defined herein) and instruments evidencing the residual
interest in the assets of the Trust (the 'Residual Interest'). The Notes and the
Certificates are referred to together herein as the 'Securities.' Only the Notes
and the Class IO and Class B-1 Certificates (the 'Offered Securities') are
offered hereby.
(continued on next page)
----------------------------------------------------------
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BEFORE INVESTING IN
THE OFFERED SECURITIES, SEE 'RISK FACTORS' HEREIN AT PAGE S-8 AND IN THE
PROSPECTUS AT PAGE 15.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
ORIGINAL CLASS
PRINCIPAL INTEREST PRICE TO UNDERWRITING
BALANCE RATE(1) PUBLIC(2) DISCOUNT
<S> <C> <C> <C> <C>
Class A-1 Notes.............................. $ 77,380,000.00 Variable(5) 100.00000% 0.100%
Class A-2 Notes.............................. $ 44,710,000.00 6.63% 99.98684% 0.125%
Class A-3 Notes.............................. $ 35,040,000.00 6.71% 99.99013% 0.150%
Class A-4 Notes.............................. $ 34,300,000.00 6.81% 99.97135% 0.175%
Class A-5 Notes.............................. $ 11,270,000.00 6.87% 99.96619% 0.250%
Class A-6 Notes.............................. $ 18,980,000.00 7.12% 99.97861% 0.350%
Class A-7 Notes.............................. $ 13,170,000.00 7.16% 99.95154% 0.400%
Class A-8 Notes.............................. $ 15,350,000.00 7.50% 99.99091% 0.425%
Class M-1 Notes.............................. $ 46,969,000.00 7.61% 99.97905% 0.750%
Class M-2 Notes.............................. $ 23,484,000.00 7.80% 99.94220% 1.000%
Class IO Certificates........................ (4) 9.00% 19.92087% 0.350%
Class B-1 Certificates....................... $ 29,807,000.00 8.54% 99.98345% 1.150%
Total........................................ $350,460,000.00 $355,595,187.27 $1,479,595.50
<CAPTION>
PROCEEDS TO
DEPOSITOR(3)
<S> <C>
Class A-1 Notes.............................. 99.90000%
Class A-2 Notes.............................. 99.86184%
Class A-3 Notes.............................. 99.84013%
Class A-4 Notes.............................. 99.79635%
Class A-5 Notes.............................. 99.71619%
Class A-6 Notes.............................. 99.62861%
Class A-7 Notes.............................. 99.55154%
Class A-8 Notes.............................. 99.56591%
Class M-1 Notes.............................. 99.22905%
Class M-2 Notes.............................. 98.94220%
Class IO Certificates........................ 19.57087%
Class B-1 Certificates....................... 98.83345%
Total........................................ $354,115,591.77
</TABLE>
(1) The interest rate for each Class remaining outstanding will increase by
0.50% for Due Periods beginning after the Optional Termination Date (as
defined herein).
(2) Plus accrued interest (other than with respect to the Class A-1 Notes), if
any, at the applicable rate from November 1, 1997.
(3) Before deducting expenses, estimated to be $500,000.
(4) Interest will be calculated on the basis of a Class Notional Balance equal
to the product of 1.7 and the outstanding Note Principal Balance of the
Class A-8 Notes until the Payment Date in May 2000.
(5) Interest will accrue on the Class A-1 Notes with respect to each Payment
Date at a per annum rate equal to LIBOR for the related Accrual Period (each
as defined herein) plus 0.16%, subject to a maximum rate equal to the Net
Weighted Average Rate (as defined herein).
------------------------
The Offered Securities are offered by the Underwriters when, as and if
issued and accepted by the Underwriters and subject to their right to reject
orders in whole or in part. It is expected that delivery of the Offered
Securities will be made in book-entry form only through the Same Day Funds
Settlement System of The Depository Trust Company on or about November 25, 1997,
against payment therefor in immediately available funds.
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
RESIDENTIAL FUNDING SECURITIES CORPORATION
UNDERWRITER OF THE CLASS IO CERTIFICATES
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 19, 1997.
<PAGE>
(Continued from preceding page)
It is a condition to the issuance of the Offered Securities that they each
be rated by the Rating Agencies as described herein under 'Ratings.'
The assets of the Trust will consist primarily of Home Loans, which will be
secured by Mortgages. All of the Home Loans will be conventional loans (i.e.,
not insured or guaranteed by a governmental agency) ('Conventional Loans'). The
Home Loans will consist of loans for which the related proceeds were used to
finance (i) property improvements, (ii) debt consolidation, or (iii) a
combination of property improvements, debt consolidation, cash-out or other
consumer purposes. Substantially all of the Mortgages for the Home Loans will be
junior in priority to senior liens on the related Mortgaged Properties, which
will consist primarily of owner occupied single family residences. In addition,
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%). See 'Risk
Factors -- Adequacy of the Mortgaged Properties as Security for the Home Loans'
and ' -- Additional Factors Affecting Delinquencies, Defaults and Losses on Home
Loans' herein.
Payments on the Notes will be made to the holders of the Notes (the
'Noteholders') on the 20th day of each month, or, if such day is not a Business
Day, the next succeeding Business Day (each, a 'Payment Date'), beginning in
December 1997. The Notes will be secured by the assets of the Trust pursuant to
the Indenture. Interest on each Class of Notes will accrue at the applicable per
annum interest rate specified or described 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. See 'Description of
the Securities -- Payments' herein.
Payments of interest on the Class M-1 and Class M-2 Notes (the
'Subordinated Notes') will be subordinate in priority to payments of interest on
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7
and Class A-8 Notes (the 'Senior Notes'), and payments of interest on the Class
M-2 Notes will be subordinate in priority to payments of interest on all Classes
of Notes having a higher priority (including the Class M-1 Notes). Payment of
principal of the Subordinated Notes will be subordinate in priority to payments
of principal of the Senior Notes and payments of principal of the Class M-2
Notes will be subordinate in priority to payments of principal of all Classes of
Notes having a higher priority (including the Class M-1 Notes), all as described
herein.
The Certificates will represent undivided ownership interests in the Trust.
Interest on the Class IO and Class B-1 Certificates will accrue at the
applicable per annum interest rate specified on the cover hereof. Interest on
the Class B-2 Certificates will accrue at the applicable per annum interest rate
specified under 'Summary of Terms' herein. On each Payment Date, the holders of
the Certificates (the 'Certificateholders,' and together with the Noteholders,
the 'Securityholders') will be entitled to receive, from and to the extent that
funds are available therefor in the Certificate Distribution Account,
distributions in respect of interest and principal calculated as described
herein. Distributions of interest on the Class IO Certificates and distributions
of interest on and principal of the Class B-1 and Class B-2 Certificates will be
subordinate in priority to payments of interest and principal, respectively, on
the Notes, and distributions of interest on and principal of the Class B-2
Certificates will be subordinate in priority to payments of interest on the
Class IO Certificates and payments of interest and principal, respectively, on
the Notes and the Class B-1 Certificates. The Subordinate Notes and the
Certificates are referred to together herein as the 'Subordinate Securities.'
See 'Description of the Securities -- Payments' herein.
Credit enhancement with respect to the Offered Securities will be provided
by (a) the subordination of (i) the Residual Interest and the Class B-2
Certificates to the Offered Securities, (ii) the Class B-1 Certificates to the
Class IO Certificates, (iii) the Class IO and Class B-1 Certificates to the
Notes and (iv) the Class M-2 and Class M-1 Notes, respectively, to each Class of
Notes having a higher payment priority and (b) the overcollateralization feature
described herein. The Offered Securities are not insured by any financial
guaranty insurance policy. See 'Risk Factors -- Adequacy of Credit Enhancement'
and 'Description of Credit Enhancement' herein.
The yields to maturity on the Offered Securities will depend on (i) the
rate and timing of reductions of the outstanding principal balances of the
Offered 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) and payment of Excess
Spread, (ii) the prices paid for the Offered Securities by investors, (iii) in
the case of the Class M-1 and Class M-2 Notes and the Class B-1 Certificates,
the application of Allocable Loss Amounts thereto and the repayment of Deferred
Amounts in respect thereof as described herein, and (iv) the level of LIBOR from
time to time while the Class A-1 Notes are outstanding. THE YIELD ON THE CLASS
IO CERTIFICATES WILL BE EXTREMELY SENSITIVE TO HIGH RATES OF PRINCIPAL
REDUCTIONS OF THE HOME LOANS (INCLUDING SCHEDULED PAYMENTS, PREPAYMENTS,
DELINQUENCIES, LIQUIDATIONS, DEFAULTS, LOSSES, SUBSTITUTIONS, REPURCHASES AND
MODIFICATIONS). INVESTORS SHOULD CONSIDER THE ASSOCIATED RISKS INCLUDING THE
RISK THAT IF THE RATE OF PRINCIPAL REDUCTIONS OF THE HOME LOANS IS VERY RAPID,
SUCH INVESTORS COULD FAIL TO RECOVER THEIR INITIAL INVESTMENT. 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 yields to maturity on the Class M-1 and Class M-2 Notes and the Class
IO and Class B-1 Certificates will be sensitive, in varying degrees (and will
each be more sensitive than the yields to maturity on the Senior Notes), to
delinquencies and losses on the Home Loans. Investors should consider the
associated risks, including the risk that if the rate of delinquencies and
losses is sufficiently high, investors in one or more of such Classes of
Securities may fail to recover their initial investments.
The Class IO and Class B-1 Certificates may not be purchased by tax-exempt
entities or non-U.S. Persons, or employee benefit plans subject to ERISA (as
defined herein). See 'Certain Federal Income Tax Consequences' and 'ERISA
Considerations' herein and in the Prospectus.
Prospective investors should consult their own investment, legal, tax and
accounting advisors to determine whether the Securities constitute appropriate
investments for them and the applicable legal, tax, regulatory and accounting
treatment of the Securities.
PROCEEDS OF THE ASSETS OF THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED SECURITIES. THE NOTES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES
REPRESENT BENEFICIAL INTERESTS IN, THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN THE DEPOSITOR, THE TRANSFEROR, THE SERVICER, THE
INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE OFFERED SECURITIES NOR THE HOME LOANS ARE
INSURED OR GUARANTEED BY ANY FINANCIAL GUARANTY INSURER OR ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR OR THE TRANSFEROR OR ANY OF THEIR
RESPECTIVE AFFILIATES OR ANY OTHER PERSON.
Wherever reference is made in this Prospectus Supplement to a percentage of
the Initial Home Loans (as defined herein), such percentage is determined
(unless otherwise specified) on the basis of the Initial Pool Principal Balance
(as defined herein).
------------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Securities. Additional information is contained in the
Prospectus and prospective investors are urged to read the Prospectus and this
Prospectus Supplement in full. Sales of the Offered Securities may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
SECURITIES, INCLUDING STABILIZING AND THE PURCHASE OF OFFERED SECURITIES TO
COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'UNDERWRITING' HEREIN.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission'), on behalf of the Trust, a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the 'Registration
Statement') under the Securities Act of 1933, as amended. This Prospectus
Supplement and the related Prospectus, which form a part of the Registration
Statement, omit certain information contained in such Registration Statement in
accordance with the rules and regulations of the Commission. The Registration
Statement can be inspected and copied at the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding the
Depositor.
REPORTS TO SECURITYHOLDERS
Unaudited monthly and annual reports concerning the Offered Securities will
be sent by the Indenture Trustee to the Securityholders. So long as any Offered
Security 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 Offered Securities pursuant
to the Indenture and the Trust Agreement. DTC will supply such reports to
Security Owners (as defined herein) in accordance with its procedures.
iii
<PAGE>
<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 may be defined elsewhere in
this Prospectus Supplement or in the Prospectus. See the 'Index of Terms'
included as an appendix to this Prospectus Supplement and the Prospectus.
Capitalized terms that are used but not defined herein will have the meanings
assigned to such terms in the Prospectus.
<TABLE>
<S> <C>
Issuer...................................... Master Financial Asset Securitization Trust 1997-1 (the 'Trust' or
the 'Issuer'), a Delaware business trust established pursuant to a
trust agreement dated as of November 1, 1997 (the 'Trust
Agreement'), among the Depositor, the Owner Trustee and the Co-Owner
Trustee.
Depositor................................... Bear Stearns Asset Backed Securities, Inc. (the 'Depositor'), a
Delaware corporation, in its capacity as Depositor of the Home Loans
to the Trust. The Depositor is a wholly-owned subsidiary of The Bear
Stearns Companies Inc. and an affiliate of Bear, Stearns & Co. Inc.
None of the Depositor, The Bear Stearns Companies Inc., Bear,
Stearns & Co. Inc. or any affiliate of any of them has guaranteed or
is otherwise obligated with respect to the Offered Securities.
Servicer and Transferor..................... Master Financial, Inc. (the 'Servicer' or the 'Transferor'), a
California corporation, in its capacity as Servicer and Transferor
of the Home Loans.
Indenture Trustee........................... The Bank of New York, a banking corporation organized under the laws
of the State of New York, as trustee under the Indenture (in such
capacity, the 'Indenture Trustee'), and as co-owner trustee under
the Trust 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 November 25, 1997.
Cut-Off Date................................ November 1, 1997.
Payment Date................................ The 20th day of each month or, if such day is not a Business Day,
the next succeeding Business Day, commencing in December 1997.
Due Period.................................. With respect to a Payment Date, the calendar month immediately
preceding such Payment Date.
Determination Date.......................... The fifth Business Day prior to each Payment 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.
The Securities.............................. The Trust will issue the Notes pursuant to the Indenture, and will
issue the Certificates pursuant to the Trust Agreement. The initial
aggregate principal balance of each Class of Notes and the Class B-1
Certificates (the 'Original Class Principal Balance' of each such
Class) is set forth on the cover hereof. The Class IO Certificates
will not have an Original Class Principal Balance, and holders
thereof will not be entitled to any distributions in respect of
principal. Solely for purposes of calculating interest distribu-
tions, the Class IO Certificates will have a 'Class Notional
Balance' equal to (i) until the Payment Date in May 2000, the
product of 1.7 and the Class Principal Balance of the Class A-8
</TABLE>
S-1
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Notes and (ii) on and after the Payment Date in May 2000, zero. The
Original Class Principal Balance of the Class B-2 Certificates is
$10,840,000. The 'Class Principal Balance' of each Class of
Securities (other than the Class IO Certificates), as of any date of
determination, will be equal to the Original Class Principal Balance
thereof reduced by (i) all amounts previously paid to
Securityholders of such Class in reduction of the Class Principal
Balance thereof on all previous Payment Dates and (ii) in the case
of the Subordinate Securities, 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, will be senior in right of
payment to the Certificates and the Residual Interest. The
Certificates will represent undivided ownership interests in the
Trust and, as described herein, will be subordinate in right of
payment to the Notes. Interest will accrue on each Class of
Securities at the applicable per annum interest rate set forth or
described on the cover hereof, or, in the case of the Class B-2
Certificates, at a rate of 8.50% per annum (as to each Class, an
'Interest Rate').
Interest.................................. Interest on each Class of Securities will be payable on each Payment
Date in an amount equal to interest accrued for the applicable Ac-
crual Period at the applicable Interest Rate on the Class Principal
Balance or Class Notional Balance thereof immediately preceding such
Payment Date. See 'Description of the Securities -- Payments'
herein. To the extent funds are available therefor, interest
payments will be made in the order of priority set forth under
'Description of the Securities -- Payments -- Payment Priorities'
herein.
The Interest Rate applicable to each Class of Securities outstand-
ing will increase by 0.50% for Due Periods beginning after the
Optional Termination Date.
Principal................................. Principal of each Class of Securities entitled to principal will be
payable on each Payment Date as described herein under 'Description
of the Securities -- Payments' herein. To the extent funds are
available therefor, principal payments will be made in the order of
priority set forth under 'Description of the
Securities -- Payments -- Payment Priorities' herein.
Maturity Date; Final Scheduled
Distribution Date...................... The outstanding principal amount of, and all accrued and unpaid
interest on, each Class of Notes, to the extent not previously paid,
will be payable in full on the applicable maturity date specified
below (as to each Class, the 'Maturity Date'), although the actual
final Payment Date for each Class of Notes may occur earlier than
the applicable Maturity Date. See 'Prepayment and Yield
Considerations -- Maturity Dates; Final Scheduled Distribution Date'
herein.
</TABLE>
S-2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CLASS MATURITY DATE
------ ------------------
<S> <C>
A-1 December 20, 2007
A-2 November 20, 2010
A-3 August 20, 2012
A-4 April 20, 2014
A-5 May 20, 2015
A-6 July 20, 2018
A-7 April 20, 2021
A-8 January 20, 2029
M-1 January 20, 2029
M-2 January 20, 2029
</TABLE>
<TABLE>
<S> <C>
Based on the assumptions described herein, the Class Principal
Balance of the Class B-1 Certificates would be reduced to zero not
later than January 20, 2029 (the 'Final Scheduled Distribution
Date') and the Class Notional Balance of the Class IO Certificates
will be zero not later than May 20, 2000.
Form and Registration of the Offered
Securities................................ The Offered Securities will initially be issued only in book-entry
form. Persons acquiring beneficial ownership interests in the
Offered Securities ('Security Owners') will hold such Securities
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 Securities is in book-entry form, each such Class of Offered
Securities will be evidenced by one or more certificates registered
in the name of the nominee of DTC. The interests of Security Owners
will be represented by book-entries on the records of DTC and
participating members thereof. No Security Owner will be entitled to
receive a definitive certificate representing such person's
interest, except in the event that Definitive Securities (as defined
herein) are issued under the limited circumstances described herein.
All references in this Prospectus Supplement to any Class of Offered
Securities 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 Securities is
held by DTC. See 'Risk Factors -- Book-Entry Registration' and
'Certain Information Regarding the Securities -- Book-Entry
Registration' in the Prospectus. The Security Owners' interests in
each Class of Offered Securities 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 having an
aggregate principal balance of approximately $357,728,547.21 (the
'Cut-off Date Pool Principal Balance') as of the November 1, 1997,
Cut-Off Date from the Depositor pursuant to a Sale and Servicing
Agreement to be dated as of November 1, 1997 (the 'Sale and
Servicing Agreement') among the Trust, as Issuer, the Depositor, as
Depositor, Master Financial, Inc., as Transferor and Servicer, and
The Bank of New York, as Indenture Trustee and Co-Owner Trustee.
</TABLE>
S-3
<PAGE>
<PAGE>
<TABLE>
<S> <C>
The assets of the Trust will primarily include a pool (the 'Home
Loan Pool') consisting of loans ('Home Loans'), which will be
secured by mortgages, deeds of trust or other security instruments
(the 'Mortgages'), together with certain other property described
under 'Description of the Trust -- General' herein.
The Home Loan Pool.......................... The Home Loan Pool will consist of a pool of approximately 8,754
conventional, closed-end, fixed rate mortgage loans having a Cut-off
Date Pool Principal Balance of approximately $357,728,547.21. The
proceeds of the Home Loans generally were used by the related
borrowers for home improvement and/or debt consolidation.
For a further description of the Home Loans, see 'The Home Loan
Pool' herein.
Credit Enhancement.......................... Credit enhancement with respect to the Offered Securities will be
provided by (a) the subordination of (i) the Residual Interest and
the Class B-2 Certificates to the Offered Securities, (ii) the Class
IO and Class B-1 Certificates to the Notes, (iii) the Class B-1
Certificates to the Class IO Certificates and (iv) the Class M-2 and
Class M-1 Notes, respectively, to each Class of Notes having a
higher payment priority, and (b) the overcollateralization feature
described herein. The Offered 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 holders of the Subordinate Notes to receive payments
of interest on each Payment Date will be subordinate to such rights
of holders of each Class of Notes having a higher payment priority,
as described herein. The rights of holders of the Subordinate Notes
to receive payments of principal on each Payment Date will be
subordinate to such rights of holders of each Class of Notes having
a higher payment priority, as described herein. The rights of
holders of the Class IO Certificates to receive payments of interest
on each Payment Date will be subordinate to such rights of
Noteholders. The rights of holders of the Class B-1 Certificates to
receive payments of interest and to receive payments of principal,
respectively, on each Payment Date will be subordinate to such
rights of Noteholders and the Class IO Certificateholders, the
rights of holders of the Class B-2 Certificates to receive payments
of interest and principal on any Payment Date will be subordinate to
the rights of holders of the Offered Securities to receive payments
of interest and principal, respectively, as described herein. The
rights of holders of the Residual Interest to receive any amounts on
a Payment Date will be subordinate to the rights of the holders of
the Notes and the Certificates to receive all amounts due them as
described herein. Such subordination feature is intended to enhance
the likelihood of regular receipt of interest and principal by the
holders of the Senior Notes, and to a lesser extent the Subordinate
Notes and the Class IO and Class B-1 Certificates (in order of
priority). See 'Description of Credit Enhancement -- Subordination
and Allocation of Losses' herein.
</TABLE>
S-4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Application of Allocable
Loss Amounts........................... In the event that, on any Payment Date after the Initial
Undercollateralization Amount (as defined herein) has been reduced
to zero, (a) the aggregate of the outstanding principal balances of
the Securities on such Payment Date (after giving effect to all
payments on such date) exceeds the Pool Principal Balance as of the
end of the preceding Due Period (such excess, an 'Allocable Loss
Amount'), such Allocable Loss Amount will be applied in reduction of
the principal balances of the Subordinate Securities (other than the
Class IO Certificates) in inverse order of priority, until the
respective 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. Holders of any
Class of Certificates or Subordinate Notes will be entitled, to the
extent of Allocable Loss Amounts so applied thereto, to receive
payments of Deferred Amounts (as defined herein) under the
circumstances and to the extent provided herein. See 'Description of
the Securities -- Application of Allocable Loss Amounts' herein.
Initial Principal
Undercollateralization................. On the Closing Date, the aggregate principal balance of the
Securities is expected to exceed the Cut-off Date Pool Principal
Balance by approximately $3,571,500. The application of Excess
Spread in reduction of the outstanding principal balances of the
Securities as described herein is intended first, to eliminate such
initial principal undercollateralization, and then to create
overcollateralization and increase the Overcollateralization Amount
(as defined herein) over time until such amount is equal to the
Required Overcollateralization Amount (as defined herein). However,
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. While the Class A-1
Notes are outstanding, any increase in LIBOR will decrease the
amount of Excess Spread for the related Payment Date. See
'Description of Credit Enhancement -- Overcollateralization' and
'Risk Factors -- Adequacy of Credit Enhancement' herein.
Servicing of the Home Loans................. The Servicer will service the Home Loans pursuant to the Sale and
Servicing Agreement and will be entitled to receive a fee and other
servicing compensation, payable monthly as described under
'Description of the Transfer and Servicing Agreements -- Servicing'
herein.
Fees and Expenses of the Trust.............. Before any payments are made on the Securities on any Payment Date,
amounts otherwise payable to Securityholders will first be applied
to pay the compensation of the Servicer as described herein. The
Servicer will pay the fees and expenses of the Indenture Trustee,
Owner Trustee and Co-Owner Trustee. See 'Description of the Transfer
and Servicing Agreements -- Trust Fees and Expenses' and
'Description of the Securities -- Payments' herein.
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Optional Termination........................ 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 Cut-off
Date Pool Principal Balance (the 'Optional Termination Date') by
purchasing the Home Loans for the Termination Price. See
'Description of the Securities -- Optional Termination' herein.
Tax Status.................................. In the opinion of Brown & Wood LLP ('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) 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 pur-
poses. See 'Certain Federal Income Tax Consequences' herein and in
the Prospectus for additional information concerning the application
of federal income tax laws to the Offered Securities.
The Offered Securities may, depending on their issue price, be
treated as having been issued with original issue discount for
federal income tax purposes. For further information regarding the
federal income tax consequence of investing in the Offered
Securities see 'Certain Federal Income Tax Considerations' herein
and in the Prospectus.
The Class IO Certificates and the Class B-1 Certificates may not be
purchased by tax-exempt entities or non-U.S. persons.
ERISA Considerations........................ Subject to the considerations discussed under 'ERISA Considera-
tions' herein and in the Prospectus, the 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 and subsequent holding of a Note is
consistent with its fiduciary duties under ERISA and does not
constitute and will not result in a nonexempt prohibited transaction
as defined in Section 406 of ERISA or Section 4975 of the Code.
The Class IO and Class B-1 Certificates may not be acquired by (a)
an employee benefit plan subject to the provisions of Title I of
ERISA, (b) a Plan described in Section 4975(e)(1) of the Code or (c)
any entity whose underlying assets include plan assets by reason of
a Plan's investment in the entity or which uses plan assets to
acquire certificates. See 'ERISA Considerations' herein and in the
Prospectus. Any benefit plan fiduciary considering purchase of the
Certificates should, among other things, consult with its counsel in
determining whether all required conditions have been satisfied.
Legal Investment Considerations............. The Offered Securities will not constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ('SMMEA'). See 'Legal Investment
Matters' herein and in the Prospectus.
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Ratings of the Securities................... It is a condition to the issuance of the Offered Securities that (i)
each Class of Offered Securities receive at least the ratings set
out below from Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ('S&P') and Fitch Investors Service,
L.P. ('Fitch' and, together with S&P, the 'Rating Agencies'):
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CLASS STANDARD & POOR'S FITCH
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Class A-1 Notes AAA AAA
Class A-2 Notes AAA AAA
Class A-3 Notes AAA AAA
Class A-4 Notes AAA AAA
Class A-5 Notes AAA AAA
Class A-6 Notes AAA AAA
Class A-7 Notes AAA AAA
Class A-8 Notes AAA AAA
Class M-1 Notes AA AA
Class M-2 Notes A A+
Class IO Certificates AAAr AAA
Class B-1 Certificates BBB - BBB
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A security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to Securi-
tyholders. The ratings of the Class IO Certificates do not address
the possibility that investors therein may not recover their initial
investments. None of the Depositor, the Transferor, the Servicer,
the Indenture Trustee, the Owner Trustee or any other person is
obligated to maintain the rating on any of the Offered Securities.
The 'r' symbol is appended to the rating by S&P of the Class IO
Certificates because they are interest-only Certificates that S&P
believes may experience high volatility or high variability in
expected returns due to non-credit risks created by the term of such
Certificates. The absense of an 'r' symbol in the ratings of the
other Classes of Offered Securities should not be taken as an
indication that such Securities will experience no volatility or
variability in total return.
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RISK FACTORS
Prospective investors in the Offered Securities should consider the
following information (as well as the information set forth under 'Risk Factors'
in the Prospectus), which identifies certain significant sources of risk
affecting an investment in the Offered Securities.
PREPAYMENT AND YIELD CONSIDERATIONS
The Home Loans may be prepaid in whole or in part at any time. However, a
majority of the Home Loans require payment of a prepayment penalty in connection
with any prepayment during the period set forth in the related debt instrument
(ranging from the first through sixth year after origination) which, if not
waived by the Servicer, may affect the rate of prepayment of the Home Loans.
Loans similar to the Home Loans have been originated in significant volume only
during the past few years, and the prepayment experience of the Home Loans
cannot be predicted with certainty. The prepayment experience of the Home Loans
may differ significantly from that of first lien residential mortgage loans, or
junior lien mortgage loans with combined loan-to-value ratios at or below 100%.
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 to the holder thereof is sensitive to scheduled payments, prepayments,
liquidations, defaults, delinquencies, substitutions, modifications and
repurchases of Home Loans and to the payment of Excess Spread, (iii) in the case
of the Class M-1 and Class M-2 Notes and the Class B-1 Certificates, the
application of Allocable Loss Amounts thereto and the repayment of Deferred
Amounts in respect thereof as described herein, and (iv) the level of LIBOR from
time to time while the Class A-1 Notes are outstanding. In the case of an
Offered Security purchased at a discount, an investor should consider the risk
that a slower than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield and, in the case of an
Offered Security purchased at a premium, and particularly the Class IO
Certificates, an investor should consider the risk that a faster than
anticipated rate of principal payments could result in an actual yield 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 of principal on the Securities will,
unless offset by losses and delinquencies, accelerate the amortization of the
Securities relative to the amortization of the Home Loans; however, on the
Overcollateralization Stepdown Date, the distribution of any
Overcollateralization Reduction Amount to the holders of the Residual Interest,
as described herein, can be expected to result in a slower amortization of the
Securities and may delay principal payments to the Securityholders. In the event
that principal payments are made to Securityholders as a result of prepayments,
liquidations, repurchases and purchases of the Home Loans or payments of Excess
Spread, there can be no assurance that Securityholders will be able to reinvest
such payments in a comparable alternative investment having a comparable yield.
See 'Prepayment and Yield Considerations' herein.
Because each Class of Subordinate Securities is subordinate in right of
payment of interest and of principal, respectively, to each Class of Securities
having a higher payment priority, and because Allocable Loss Amounts will be
allocated to the Subordinate Securities (other than the Class IO Certificates)
in inverse order of payment priority, the yields to maturity of the Class M-1
and Class M-2 Notes and the Class IO and Class B-1 Certificates will be
sensitive, in varying degrees, to delinquencies and losses on the Home Loans. As
a result, holders of such Securities may incur a loss on their investments.
The yield on the Class IO Certificates will be extremely sensitive to high
rates of principal reductions of the Home Loans (including scheduled payments,
prepayments, delinquencies, liquidations, defaults, losses, substitutions,
repurchases and modifications). Investors should consider the associated risks
including the risk that if the rate of principal reductions of the Home Loans is
very rapid, such investors could fail to recover their initial investment.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Securities will be provided
by (a) the subordination of (i) the Residual Interest and the Class B-2
Certificates to the Offered Securities, (ii) the Class IO and the Class B-1
Certificates to the Notes, (iii) the Class B-1 Certificates to the Class IO
Certificates, (iv) the Class
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M-2 Notes to the Class M-1 Notes and (v) the Class M-2 and Class M-1 Notes to
each Class of Notes having a higher payment priority and (b) the
overcollateralization feature described herein. The Offered Securities are not
insured by any financial guaranty insurance policy. If the Home Loans experience
higher rates of delinquencies, defaults or losses than initially anticipated,
there can be no assurance that the amounts available from the applicable credit
enhancement will be adequate to cover the delays or shortfalls in payments that
result from such higher delinquencies, defaults or losses. If the amounts
available from the applicable credit enhancement are inadequate, Securityholders
will bear the risk of any delays in payment and losses.
The payment of Excess Spread to Securityholders in the manner specified
herein is intended, first, to eliminate the undercollateralization
(approximately 1%) that will exist on the Closing Date, and then to produce and
maintain a particular level of overcollateralization. However, 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. As a result of delinquencies and losses on the Home Loans, the amount of
interest received on the Home Loans during any Due Period may be less than the
amount of interest payable on the Securities on the related Payment Date. The
Servicer will not advance delinquent payments. As a result, delinquencies and
losses on the Home Loans may cause the aggregate principal balances of the
Securities 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 distributions of Excess Spread, regardless
of whether there are sufficient funds on a subsequent Payment Date to pay all
amounts then payable to Securityholders.
INITIAL PRINCIPAL UNDERCOLLATERALIZATION
At the Closing Date, the aggregate principal balance of the Securities is
expected to exceed the Cut-off Date Pool Principal Balance by approximately
$3,571,500. Such initial principal undercollateralization is expected to be
eliminated by the application of Excess Spread, which will then be applied to
produce overcollateralization as described herein. There can be no assurance,
however, that Excess Spread will be generated in sufficient amounts to eliminate
such initial principal undercollateralization, or to do so within the period of
time anticipated by investors.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE HOME LOANS
The combined loan-to-value ratios for the Home Loans ranged from
approximately 21.23% to 146.27%, with approximately 89.05% of the Cut-off Date
Pool Principal Balance consisting of Home Loans having combined loan-to-value
ratios in excess of 100%. The weighted average combined loan-to-value ratio of
the Home Loans was 114.49%. The Mortgaged Properties, therefore, are highly
unlikely 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 to Securityholders
to the extent such shortfalls are not covered by the applicable credit
enhancement. In addition, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the liquidation
proceeds otherwise available for payment to Securityholders. 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
Securityholders to the extent that the applicable credit enhancement is
insufficient to absorb all such losses.
RECENT ORIGINATION OF HOME LOANS
Approximately 0.04% of the Home Loans were more than 30 days delinquent in
payment as of November 1, 1997. However, approximately 29.40% of the Cut-off
Date Pool Principal Balance consists of Home Loans that have a first scheduled
monthly payment due date occurring after September 30, 1997, and it was
therefore not possible for such Home Loans to be more than 30 days delinquent in
payment as of November 1, 1997. See ' -- Additional Factors Affecting
Delinquencies, Defaults and Losses on Home Loans -- Limited Historical
Delinquency, Loss and Prepayment Information' below.
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HIGH COST LOANS
The Home Loans may be subject to special rules, disclosure requirements and
other provisions that were added to the federal Truth-in-Lending Act by the Home
Ownership and Equity Protection Act of 1994 (such Home Loans, 'High Cost
Loans'), if such Home Loans were originated on or after October 1, 1995, are not
loans made to finance the purchase of the mortgaged property and have interest
rates or origination costs in excess of certain prescribed levels. Purchasers or
assignees of any High Cost Loan, including the Trust, could be liable for all
claims and subject to all defenses arising under such provisions that the
borrower could assert against the originator thereof. Remedies available to the
borrower include monetary penalties, as well as rescision rights if the
appropriate disclosures were not given as required. The Transferor will
represent that all Home Loans were originated in compliance with all applicable
laws. See ' -- Limitations on Repurchase or Replacement of Defaulted Home Loans
by Transferor' 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 borrower is the
primary consideration in underwriting a Home Loan. The evaluation of the
adequacy of the value of the related Mortgaged Property, together with the
amount of liens senior to the lien of the Home Loan (i.e., the related 'combined
loan-to-value ratio') is given less 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 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 that would be experienced by
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. See ' -- Adequacy of Credit Enhancement'
above.
Although the creditworthiness of the 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
consideration in underwriting a 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.
The Transferor's underwriting requirements for certain types of home loans
may change from time to time, which in certain instances may result in less
stringent underwriting requirements. Depending upon the date on which the Home
Loans were originated or purchased by the Transferor, such Home Loans may have
been originated or purchased by the Transferor pursuant to 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 than other Home Loans. 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
pursuant to more stringent underwriting requirements.
No Servicer Delinquency Advances. In the event of a delinquency or a
default on a Home Loan, the Servicer will not have an obligation to advance
scheduled monthly payments of principal and interest with respect to such Home
Loan. As a result, 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 on the Securities on the related Payment Date. See
'Description of the Transfer and Servicing Agreements -- Servicing' herein.
Relocation and Reloading of Debt. With respect to Home Loans with combined
loan-to-value ratios near or in excess of 100%, there is a risk that if the
related borrowers relocate, such borrowers will be unable to pay off the Home
Loans in full from the sale proceeds of the related Mortgaged Properties and any
other funds available
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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 such 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. A significant portion of the Home Loans
will have been acquired by the Transferor through purchases from a network of
correspondent lenders or through a portfolio acquisition program. See 'The Home
Loan Pool -- General' herein. All of such Home Loans will have been reviewed for
compliance with the Transferor's underwriting guidelines and if not underwritten
by the Transferor, then re-underwritten by the Transferor. The Transferor may
have acquired certain Home Loans from an originator that, at the time of
origination, 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.
Such Home Loans may be subject to a higher incidence of delinquency or default.
Limited Historical Delinquency, Loss and Prepayment Information. At
September 30, 1997, the Servicer's servicing portfolio, which includes loans
other than conventional loans, was $747,917,320. Since May 1996, the Servicer
has substantially increased the volume of conventional home loans that it has
originated, purchased sold and/or serviced, and thus, it 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 portfolio of loans and in particular with respect to such
increased volume. Accordingly, the delinquency experience and loan loss and
liquidation experience set forth under 'The Transferor and Servicer -- Servicing
Experience' herein is unlikely to be indicative of the performance of the Home
Loans. There can be no assurance that the performance of the Home Loans will be
consistent with industry experience for similar types of loans. Prospective
investors should make their investment determination based on the Home Loan
underwriting criteria, the applicable credit enhancement described herein, the
characteristics of the 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. Such lack of historical information may
make it more difficult to analyze the future performance of the Home Loans and
may affect the market value or liquidity of the Offered Securities relative to
comparably rated securities backed by loans for which more historical
information is available.
Geographic Concentration. Approximately 38.02% of the Cut-off Date Pool
Principal Balance will consist of Home Loans that either are secured by
Mortgaged Properties located or have the related borrowers residing in the State
of California. Because of the relative geographic concentration of 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 in California (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 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, Mortgaged
Properties located in California may be more susceptible to 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. 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 the value of such Mortgaged Properties. Accordingly, the rates of
defaults and losses on such Home Loans secured by Mortgaged Properties located
in California could be higher than those experienced in the home lending and
consumer finance industry in general.
Dependence on Servicer for Servicing Home Loans. Upon the Servicer's
failure to remedy an Event of Default under the Sale and Servicing Agreement, a
majority of the Securityholders or the Indenture Trustee or the Owner Trustee
may remove the Servicer and appoint a successor servicer. Absent such a
replacement, Securityholders will be dependent upon the Servicer to adequately
and timely perform its 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 Servicer performs its servicing obligations will
affect the amount and timing of the principal and interest payments received on
the Home Loans. Such principal and interest payments are the
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primary source of funds for the payments due to Securityholders. See 'The
Transferor and Servicer -- Servicing 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. Adequate funds will generally 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 junior liens and based upon a determination
that the realization from a defaulted junior lien Home Loan may not be an
economically viable alternative, the Servicer will not, in most cases, (i)
pursue the foreclosure of a defaulted junior lien Home Loan, (ii) satisfy the
senior mortgage(s) at or prior to the foreclosure sale of the related 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 to make
payments due to the senior mortgagee(s). See 'Certain Legal Aspects of the Loan
Assets -- Foreclosure -- Junior Liens' in the Prospectus. The Servicer may
pursue alternative methods of realizing proceeds from defaulted junior lien Home
Loans or modification of such Home Loans, including the abatement of accrued
interest or the reduction of a portion of the outstanding Principal Balances.
Because substantially all of the Home Loans will have combined loan-to-value
ratios at the time of origination near or in excess of 100%, losses sustained
from defaulted Home Loans are likely to be more severe (and will frequently be
total losses). In fact, no assurance can be given that any proceeds will be
recovered from the liquidation of defaulted Home Loans.
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 Securities, in
particular the Subordinate Securities. 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.
Other Legal Considerations. The underwriting, origination, servicing and
collection of the Home Loans are subject to a variety of state and federal laws
and regulations. For example, the U.S. District Court for the Eastern District
of Virginia recently stated 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
that did not comply as of the date of its assignment to the Trust with
applicable state and federal laws and regulations. Depending on the provisions
of applicable law and the specific facts and circumstances involved, violations
of these laws and regulations may limit the ability of the Servicer to collect
all or part of the principal or interest due on the Home Loans, may entitle a
borrower to a refund of amounts previously paid or a rescission of the related
Home Loan, and, in addition, could subject the Servicer or any Subservicer to
damages and administrative sanctions. If the Servicer is unable to collect all
or part of the principal or interest due on any Home Loan because of a violation
of the aforementioned laws and regulations (and such Home Loan is not
repurchased by the Transferor as a Defective Home Loan), any related delays or
losses not covered by the applicable credit enhancement will be borne by
Securityholders. In addition, if damages are assessed against the Servicer or
the Transferor, such violations may materially impact the financial ability of
the Servicer to continue to act in such capacity or the ability of the
Transferor to repurchase or replace Home Loans as to which there exists
deficient documentation or as to which there has been an uncured breach of any
representation or warranty relating to the characteristics of the Home Loans
that materially and adversely affects the interests of the Securityholders in
such Home Loans (the 'Defective Home Loans'). 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
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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
The Transferor will agree 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 the 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. 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 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 Securityholders, 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. Such representations generally will be made as of the date of
acquisition by the Transferor and not as of the Closing Date. For a summary
description of the Transferor's representations and warranties, see 'The
Agreements -- Assignment of Primary Assets -- Repurchase and Substitution of
Non-Conforming Primary Assets' in the Prospectus.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing Defective
Home Loans as described above, or that, at any particular time, any unaffiliated
lender from whom the Transferor obtained the Defective Home Loans will
repurchase 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 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 borrowing arrangements that
provide funding for its operations, or the sale or other disposition of all or
any significant portion of its assets. If the Transferor does not repurchase or
replace a Defective Home Loan, and if applicable, an unaffiliated lender does
not repurchase or replace a Defective Home Loan it sold to the Transferor, then
the Servicer, on behalf of the Trust, will make other customary and reasonable
efforts to recover the maximum amount possible with respect to such Defective
Home Loan, and any resulting delay or loss will be borne by the applicable
credit enhancement or by Securityholders. See ' -- Adequacy of Credit
Enhancement' above and 'The Transferor and Servicer' herein.
TRANSFEROR'S (AND SERVICER'S) FINANCING ARRANGEMENTS
As a result of the Transferor's increasing volume of loan originations and
purchases and its 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 substantially all of its operations, including its loan originations and
purchases, from borrowings under the Transferor's arrangements with certain
third parties, including warehouse and term credit facilities with an affiliate
of Residential Funding Securities Corporation, one of the underwriters of the
Offered Securities offered hereby. See 'The Transferor and Servicer' and
'Underwriting' herein. There can be no assurance that as the Transferor's
existing borrowing 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 origination and 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.
S-13
<PAGE>
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of the Securities, net of certain expenses, will
be used by the Trust for the purchase of the Home Loans from the Depositor. The
Depositor will use all such proceeds from the sale of the Home Loans to the
Trust for the purchase of the Home Loans from the Transferor. The Transferor in
turn will use such proceeds from the sale of the Home Loans to repay certain
indebtedness under warehouse financing arrangements that have been utilized to
finance the acquisition of such Home Loans and are secured by such Home Loans.
See 'Underwriting' herein.
DESCRIPTION OF THE TRUST
GENERAL
The Issuer, Master Financial Asset Securitization Trust 1997-1, 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 collecting principal and interest on the Home Loans and
the other assets of the Trust and proceeds therefrom, (ii) issuing the
Securities and the Residual Interest, (iii) making payments on the Securities
and in respect of 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 undivided ownership interests in the Trust. The
Residual Interest will represent the residual interest in the assets of the
Trust. It is expected that a portion of the Residual Interest will be held by an
affiliate of Residential Funding Securities Corporation and the remainder of the
Residual Interest will be held by MFI Residential Holdings Corp., a wholly-owned
subsidiary of the Transferor. After the Closing Date, the holders of the
Residual Interest may sell the Residual Interest acquired by each of them.
On the Closing Date, the Trust will purchase Home Loans having an aggregate
principal balance of approximately $357,728,547.21 (the 'Cut-off Date Pool
Principal Balance') as of the November 1, 1997, Cut-Off Date from the Depositor
pursuant to a Sale and Servicing Agreement to be dated as of November 1, 1997
(as amended and supplemented from time to time, the 'Sale and Servicing
Agreement'), among the Trust, the Depositor, the Transferor, the Servicer, the
Co-Owner Trustee and the Indenture Trustee.
The assets of the Trust will primarily consist of Home Loans, which will be
secured by Mortgages. 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
Collection Account, Note Payment Account and Certificate Distribution Account;
and (iii) 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 its 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 will be zero. With
respect to any date, the 'Pool Principal Balance' will be equal to the aggregate
Principal Balances of all Home Loans as of such date.
The Servicer will service the Home Loans pursuant to the Sale and Servicing
Agreement (collectively, with the Indenture, the Administration Agreement (as
defined herein) and the Trust Agreement, the 'Transfer and Servicing
Agreements') and will be compensated for such services as described under
'Description of the Transfer and Servicing Agreements -- Servicing' herein.
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.'
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 19890-00001.
S-14
<PAGE>
<PAGE>
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by The Bank of New York, in its
capacity as Co-Owner Trustee, including maintaining the Certificate Distribution
Account and making distributions therefrom.
The Bank of New York 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, The
Bank of New York and the Servicer.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the Home Loans conveyed to the Trust on
the Closing Date. All of the Home Loans will be Conventional Loans. The Home
Loans will consist of loans for which the related net proceeds were used to
finance (i) property improvements, (ii) debt consolidation, or (iii) a
combination of property improvements, debt consolidation, cash-out or other
consumer purposes. Substantially all of the Mortgages for the Home Loans will be
junior in priority to senior 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 (i.e., the related combined loan-to-value
ratios approach or exceed 100%).
'Combined loan-to-value ratio' or 'CLTV' 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 the Servicer -- Underwriting Criteria').
Generally, the Home Loans will have been originated or acquired by the
Transferor in one of three ways: (i) the wholesale purchase of loans, on a flow
basis, originated by unaffiliated lenders, as correspondents ('correspondent
originations'), including delegated underwriting correspondents; (ii) the
origination of loans directly to consumers, including but not limited to
solicitations through advertising and telemarketing ('direct originations'); or
(iii) the purchase, on a bulk basis, of loan portfolios originated by other
unaffiliated lenders ('portfolio acquisitions'). All of the Home Loans will have
been underwritten or re-underwritten 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 have been originated or acquired by the Transferor and sold
by the Transferor to the Depositor and, pursuant to the Sale and Servicing
Agreement, the Depositor will sell 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 Noteholders. The Trust will be entitled to all
payments of interest and principal and all proceeds received in respect of the
Home Loans on or after the November 1, 1997, Cut-Off Date.
PAYMENTS ON THE HOME LOANS
The Home Loans have scheduled monthly payment dates that occur throughout a
month. Each Home Loan bears interest at a fixed rate (the 'Home Loan Rate').
Interest on 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.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that 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 such a Home Loan
received either earlier or later 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 will be applied to interest
calculated on the basis of the outstanding principal balance of the related Home
Loan, the
S-15
<PAGE>
<PAGE>
Home Loan Rate and the period elapsed since the preceding payment of principal
was made. As payments are received on 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 be had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In addition, in certain states a
late charge may be imposed with respect to the past due amount.
With respect to a Home Loan on 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 Securities than if such payment was
received as scheduled. 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 Securities than if such payment was
received as scheduled. This allocation will not affect the total amount of
principal due over the life of a Home Loan, but it may affect the weighted
average lives of the Securities. See 'Prepayment and Yield Considerations'
herein.
Substantially all of the Home Loans provide for a schedule of payments that
will be, if paid, sufficient to fully amortize the principal balance of the
related Home Loan on or before its maturity date. However, a de minimis amount
of the Home Loans, during a temporary period the Monthly Payments received
thereon were applied in a manner that reduced the rate of principal
amortization. As a result, each such Home Loan may have an unpaid principal
amount on its scheduled maturity date (assuming no prepayments) of greater than
1 time and not more than 6 times the related Monthly Payment.
CHARACTERISTICS OF HOME LOANS
Set forth below is certain statistical information regarding
characteristics of the Home Loans expected to be included in the Home Loan Pool
as of the date of this Prospectus Supplement. Prior to the Closing Date, the
Transferor may remove any of the Home Loans intended for inclusion in the Home
Loan Pool, substitute comparable loans therefor, or add comparable loans
thereto; provided, however, that the aggregate principal balance of Home Loans
so removed, replaced or added will not exceed 5% of the Cut-off Date Pool
Principal Balance. As a result, the statistical information presented below
regarding the characteristics of the Home Loans expected to be included in the
Home Loan Pool may vary in certain respects from comparable information based on
the actual composition of the Home Loan Pool at the Closing Date. A schedule of
the Home Loans included in the Home Loan Pool as of the Closing Date will be
attached to the Sale and Servicing Agreement.
The Home Loans expected to be included in the Home Loan Pool will consist
of approximately 8,754 loans having a Cut-off Date Pool Principal Balance of
approximately $357,728,547.21.
As of the Cut-off Date, a majority of the Home Loans were High Cost Loans.
Except as provided above, the Home Loans (by Cut-Off Date Pool Principal
Balance) are expected to have the approximate characteristics set forth in the
tables beginning on the following page. The sums of the amounts and percentages
in the following table may not equal the totals shown due to rounding.
Wherever reference is made in this Prospectus Supplement to a percentage of
the Home Loans, such percentage is determined (unless otherwise specified) on
the basis of the Cut-Off Date Pool Principal Balance.
S-16
<PAGE>
<PAGE>
HOME LOAN RATES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
HOME LOAN RATES (%) HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
10.001 to 11.000.............................................. 12 $ 520,427.31 0.15%
11.001 to 12.000.............................................. 310 12,497,887.88 3.49
12.001 to 13.000.............................................. 1,825 82,807,311.56 23.15
13.001 to 14.000.............................................. 2,731 115,226,065.06 32.21
14.001 to 15.000.............................................. 2,165 87,005,280.25 24.32
15.001 to 16.000.............................................. 1,291 45,844,091.53 12.82
16.001 to 17.000.............................................. 369 12,271,731.88 3.43
17.001 to 18.000.............................................. 48 1,478,294.77 0.41
18.001 to 19.000.............................................. 3 77,456.97 0.02
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The weighted average Home Loan Rate of the Home Loans as of the November 1,
1997, Cut-Off Date was approximately 14.03% per annum.
CURRENT PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000.00....................................... 45 $ 404,755.37 0.11%
10,000.01 to 20,000.00....................................... 729 12,412,107.52 3.47
20,000.01 to 30,000.00....................................... 2,079 54,766,709.40 15.31
30,000.01 to 40,000.00....................................... 2,142 76,524,110.85 21.39
40,000.01 to 50,000.00....................................... 1,894 88,714,598.47 24.80
50,000.01 to 60,000.00....................................... 696 38,687,315.09 10.81
60,000.01 to 70,000.00....................................... 447 29,177,950.19 8.16
70,000.01 to 80,000.00....................................... 548 40,873,002.58 11.43
80,000.01 to 90,000.00....................................... 74 6,347,262.40 1.77
90,000.01 to 100,000.00....................................... 100 9,820,735.34 2.75
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The average principal balance of the Home Loans as of the November 1, 1997,
Cut-Off Date was approximately $40,864.58.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF PRINCIPAL BALANCES NUMBER OF PRINCIPAL BY AGGREGATE
AT ORIGINATION ($) HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000.00....................................... 33 $ 308,882.61 0.09%
10,000.01 to 20,000.00....................................... 698 11,726,767.17 3.28
20,000.01 to 30,000.00....................................... 2,115 55,365,667.97 15.48
30,000.01 to 40,000.00....................................... 2,138 76,324,178.51 21.34
40,000.01 to 50,000.00....................................... 1,896 88,723,861.77 24.80
50,000.01 to 60,000.00....................................... 704 39,056,198.80 10.92
60,000.01 to 70,000.00....................................... 441 28,764,051.63 8.04
70,000.01 to 80,000.00....................................... 551 41,047,504.96 11.47
80,000.01 to 90,000.00....................................... 77 6,500,981.30 1.82
90,000.01 to 100,000.00....................................... 101 9,910,452.49 2.77
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The average principal balance of the Home Loans at origination was
approximately $41,098.29.
S-17
<PAGE>
<PAGE>
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF REMAINING NUMBER OF PRINCIPAL BY AGGREGATE
TERM TO MATURITY (MONTHS) HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
31 to 60.................................................... 129 $ 2,542,587.29 0.71%
61 to 90.................................................... 25 543,891.73 0.15
91 to 120.................................................... 459 13,736,636.28 3.84
121 to 150.................................................... 5 191,050.45 0.05
151 to 180.................................................... 2,429 90,113,703.56 25.19
211 to 240.................................................... 2,025 82,704,978.51 23.12
271 to 300.................................................... 3,678 167,734,732.03 46.89
301 or more................................................... 4 160,967.36 0.04
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The weighted average remaining term to maturity of the Home Loans as of the
November 1, 1997, Cut-Off Date was approximately 244 months.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF MONTHS NUMBER OF PRINCIPAL BY AGGREGATE
SINCE ORIGINATION HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
0 to 1....................................................... 1,028 $ 43,889,503.72 12.27%
2 to 12...................................................... 7,614 311,733,256.70 87.14
13 to 24...................................................... 63 1,351,218.17 0.38
25 to 36...................................................... 49 754,568.62 0.21
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The weighted average number of months since origination of the Home Loans
as of the November 1, 1997, Cut-Off Date was approximately 4 months.
S-18
<PAGE>
<PAGE>
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
STATE HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Alabama....................................................... 1 $ 74,518.96 0.02%
Alaska........................................................ 72 3,382,430.80 0.95
Arizona....................................................... 301 11,074,792.28 3.10
Arkansas...................................................... 23 911,375.59 0.25
California.................................................... 3,125 136,016,209.56 38.02
Colorado...................................................... 309 13,126,613.95 3.67
Connecticut................................................... 86 3,464,062.07 0.97
Delaware...................................................... 23 768,376.46 0.21
District of Columbia.......................................... 5 200,877.84 0.06
Florida....................................................... 658 24,959,428.13 6.98
Georgia....................................................... 1 23,414.55 0.01
Hawaii........................................................ 2 123,959.89 0.03
Idaho......................................................... 140 5,506,582.62 1.54
Illinois...................................................... 4 195,621.61 0.05
Indiana....................................................... 188 6,999,191.76 1.96
Iowa.......................................................... 75 2,783,061.24 0.78
Kansas........................................................ 21 723,959.87 0.20
Kentucky...................................................... 23 892,286.32 0.25
Louisiana..................................................... 14 407,499.51 0.11
Maine......................................................... 6 200,515.61 0.06
Maryland...................................................... 468 20,186,496.79 5.64
Massachusetts................................................. 100 3,947,329.98 1.10
Michigan...................................................... 461 17,222,247.19 4.81
Minnesota..................................................... 87 3,377,359.69 0.94
Mississippi................................................... 16 487,249.98 0.14
Missouri...................................................... 213 7,424,981.33 2.08
Montana....................................................... 32 1,274,313.90 0.36
Nevada........................................................ 483 19,606,364.15 5.48
New Hampshire................................................. 12 392,729.00 0.11
New Jersey.................................................... 15 611,138.00 0.17
New Mexico.................................................... 54 2,098,233.34 0.59
New York...................................................... 173 7,994,868.33 2.23
North Carolina................................................ 233 7,692,601.77 2.15
Oklahoma...................................................... 82 2,831,729.57 0.79
Oregon........................................................ 216 9,010,882.11 2.52
Pennsylvania.................................................. 54 1,961,702.14 0.55
Rhode Island.................................................. 53 1,875,580.87 0.52
South Carolina................................................ 43 1,498,014.37 0.42
Tennessee..................................................... 15 550,958.71 0.15
Utah.......................................................... 107 4,547,918.52 1.27
Virginia...................................................... 385 15,675,938.21 4.38
Washington.................................................... 295 12,469,090.41 3.49
West Virginia................................................. 1 38,122.39 0.01
Wisconsin..................................................... 50 1,999,200.89 0.56
Wyoming....................................................... 29 1,118,716.95 0.31
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
S-19
<PAGE>
<PAGE>
CREDIT SCORES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
CREDIT SCORES HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 619.................................................... 62 $ 1,856,497.27 0.52%
620 to 639.................................................... 1,678 59,418,246.72 16.61
640 to 659.................................................... 2,019 81,415,711.91 22.76
660 to 679.................................................... 1,969 85,769,530.12 23.98
680 to 699.................................................... 1,482 66,776,419.41 18.67
700 to 719.................................................... 827 34,606,784.07 9.67
720 to 739.................................................... 425 17,122,203.93 4.79
740 to 759.................................................... 186 6,846,866.57 1.91
760 to 779.................................................... 84 3,051,183.41 0.85
780 to 799.................................................... 20 758,725.46 0.21
800 or more................................................... 2 106,378.34 0.03
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The weighted average Credit Score of the Home Loans as of the November 1,
1997, Cut-Off Date was approximately 671.
DEBT-TO-INCOME RATIOS
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
DEBT-TO-INCOME RATIOS HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 20.00................................................ 69 $ 2,566,135.63 0.72%
20.01 to 25.00................................................ 308 11,163,676.20 3.12
25.01 to 30.00................................................ 822 30,786,676.33 8.61
30.01 to 35.00................................................ 1,435 55,735,623.18 15.58
35.01 to 40.00................................................ 1,941 77,523,486.94 21.67
40.01 to 45.00................................................ 2,783 114,575,119.07 32.03
45.01 to 50.00................................................ 1,227 57,831,903.98 16.17
50.01 to 55.00................................................ 152 6,870,676.17 1.92
55.01 to 60.00................................................ 13 535,329.28 0.15
60.01 to 65.00................................................ 3 120,328.80 0.03
65.01 to 70.00................................................ 1 19,591.63 0.01
---------- ----------------- -------
Total.................................................... 8,754 $ 357,728,547.21 100.00%
---------- ----------------- -------
---------- ----------------- -------
</TABLE>
The weighted average debt-to-income ratio of the Home Loans as of the
November 1, 1997, the Cut-Off Date was approximately 38.94%.
S-20
<PAGE>
<PAGE>
THE DEPOSITOR
Bear Stearns Asset Backed Securities, Inc. (the 'Depositor') is a Delaware
corporation organized in 1995. The Depositor was formed as a limited purpose
finance company 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.
The Depositor will acquire from the Transferor all of its right, title and
interest in and to the Home Loans. In turn, the Depositor will sell the Home
Loans to the Trust pursuant to the Sale and Servicing Agreement for the benefit
of the Securityholders.
THE TRANSFEROR AND SERVICER
GENERAL
Master Financial, Inc., a California corporation, was organized in 1981.
Master Financial, Inc., in its capacity as Transferor, will transfer the Home
Loans to the Depositor. Master Financial, Inc., in its capacity as Servicer,
also will service the Home Loans under the Sale and Servicing Agreement. Master
Financial, Inc. is primarily engaged in the business of originating, purchasing,
underwriting, selling and/or servicing loans including property improvement,
debt consolidation and other consumer loans. Master Financial, Inc.'s executive
offices are located in Orange, California.
Although Master Financial, Inc. is not an affiliate of Residential Funding
Securities Corporation, Master Financial, Inc. has a lending arrangement with an
affiliate of Residential Funding Securities Corporation, and in connection
therewith, such affiliate has the right to acquire an equity interest in Master
Financial, Inc. in accordance with specified terms and conditions. See
'Underwriting.'
As of September 30, 1997, the Transferor employed 255 persons, including 56
persons who work in loan servicing and collections. As of September 30, 1997,
Master Financial, Inc. administered and serviced approximately $747,917,320 in
principal balance of property improvement, debt consolidation and other consumer
loans. See 'Risk Factors -- Limitations on Liquidity of Transferor and Servicer'
herein. As of June 30, 1997, Master Financial, Inc. had total shareholder equity
of $16,217,600 and total assets of $161,679,842.
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the Home Loans originated by Master Financial, Inc.
MASTER FINANCIAL, INC.
Generally, the underwriting standards of Master Financial, Inc. with
respect to the mortgage loans originated or purchased by it place a greater
emphasis on the creditworthiness and debt service capacity of the borrower than
on the underlying collateral in evaluating the likelihood that a borrower will
be able to repay the related mortgage loan.
In many cases, Home Loans will have been made to borrowers that typically
have limited access to mortgage financing because of insufficient home equity
value. In addition, in some cases, Home Loans will have been made to borrowers
that typically have limited access to mortgage financing because of high ratios
of debt to income and unfavorable credit experience. With respect to home loans
originated or purchased by Master Financial, Inc. the collection of loan
payments from the related borrowers is subject to various risks from these
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borrowers, including without limitation the risk that a borrower will not
satisfy its debt service payments, including payments of interest and principal
on the related loan, and that the realizable value of the related mortgaged
property will not be sufficient to repay the outstanding interest and principal
owed on the loan. Master Financial, Inc. uses its own credit evaluation criteria
to classify the borrowers of mortgage loans by risk class as 'A+' through 'B'
grade credits. These criteria include, as a significant component, the credit
score of the prospective borrower (as determined based on a credit scoring model
utilized by Master Financial, Inc.). Additional criteria include the borrower's
debt-to-income ratio, mortgage credit history and consumer credit history. Under
Master Financial, Inc.'s underwriting standards, the most important credit
characteristic is the borrower's overall credit performance, including the
borrower's credit score and debt-to-income ratio, the latter of which in most
cases may not exceed 45% of the borrower's gross income.
Master Financial, Inc. relies on a number of guidelines to assist
underwriters in the credit review and decision process. Such underwriting
criteria 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-to-income ratio of the applicant. Income is verified through
various means, including without limitation applicant interviews, written and
oral verifications with employers, review of pay stubs or tax returns. The
borrower must demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
The underwriting standards require the mortgage loans originated or
purchased by Master Financial, Inc. to have been fully documented. A prospective
borrower is required to fill out a detailed application providing pertinent
credit information.
In determining the adequacy of the mortgaged property as collateral for a
mortgage loan originated or purchased by the Transferor, Master Financial, Inc.
requires a FNMA drive-by appraisal, a uniform residential appraisal report
completed within the last 12 months, a statistical property valuation, a
HUD-1/HUD-1A on the purchase transaction of the mortgaged property completed
within the last 12 months or a tax assessment provided by the title company be
considered for financing. The Home Loans originated or purchased by Master
Financial, Inc. and included in the Home Loan Pool generally were originated
subject to a maximum CLTV of 125%, and the related borrowers may have been
permitted to retain a limited amount of the proceeds of such Home Loans. In
addition, such Home Loans were in most cases subject to a maximum total monthly
debt-to-income ratio of 45%. There can be no assurance that the CLTV or the
debt-to-income ratio for any Home Loan will not increase from the levels
established at origination.
VARIATIONS
The underwriting standards of Master Financial, Inc. with respect to
mortgage loans originated or purchased by it may be varied in appropriate cases.
There can be no assurance that every Home Loan in the Home Loan Pool was
originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of the Home Loans will be
equivalent under all circumstances.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
The Transferor will have the option after the Closing Date either to
repurchase any Home Loan incident to foreclosure or default 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 (as defined below). The repurchase of any Home Loan (rather than the
replacement thereof through substitution) will result in accelerated principal
payments on the Securities. See 'Description of the Trust Property -- Additions,
Substitution and Withdrawal of Assets' in the Prospectus.
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
Due Date in the most recent Due Period 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 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
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payment to the Securityholders an amount (a 'Substitution Adjustment') equal to
such shortfall, which will result in a prepayment of principal on the Securities
for the amount of such shortfall. As used herein, a 'Qualified Substitute Home
Loan' is a home loan that (i) has an interest rate that differs from the Home
Loan Rate for the Defective Home Loan 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, and (vi) has a borrower with a comparable credit
grade classification to that of the borrower under the Deleted Home Loan;
provided, that with respect to a substitution of multiple loans, items (i),
(ii), (iii) and (vi) 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 termination of borrowing arrangements that provide funding for
its 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, any resulting loss will be borne by Securityholders to the
extent that such loss is not otherwise covered by amounts available from the
applicable credit enhancement. See 'Risk Factors -- Adequacy of Credit
Enhancement' and ' -- Limitations on Repurchase or Replacement of Defective Home
Loans by Transferor' herein.
SERVICING EXPERIENCE
Since May 1996, the Servicer has substantially increased the volume of
conventional home loans that it has originated, purchased, sold and/or serviced.
The Servicer has limited historical data with respect to the performance,
including the delinquency and loss experience and the rate of prepayments, of
the conventional loans included in its portfolio of loans. See 'Prepayment and
Yield Considerations' herein. Accordingly, the delinquency experience and loan
default and loss experience set forth below is unlikely to be indicative of the
performance of the Home Loans included in the Home Loan Pool.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
DELINQUENCY DATA 1997 1996
- ------------------------------------------ ------------- -------------
<S> <C> <C>
Delinquencies in Serviced Loan
Portfolio(1):
31-60 days........................... 0.67% 1.14%
61-90 days........................... 0.29 0.54
91 days and over..................... 0.93 1.03
----- -----
Total Delinquencies............. 1.89% 2.71%
----- -----
----- -----
Title 1 Claims Pending/In Process......... 0.41% 0.82%
Grand Total..................... 2.30% 3.53%
----- -----
----- -----
Serviced Loan Portfolio................... $747,917,320 $274,209,481
</TABLE>
- ------------
(1) As a percentage of the total number of loans serviced.
Although the preceding table indicates that Master Financial, Inc. has
experienced declining rates of delinquency on its serviced loan portfolio as a
whole, such rates have actually been increasing on a pool-by-pool basis. There
can be no assurance that such rates will not continue to increase. THE OVERALL
DECLINE IN THE RATE OF DELINQUENCY OF LOANS IN MASTER FINANCIAL, INC.'S
SERVICING PORTFOLIO IS PRIMARILY A RESULT OF THE INCREASED VOLUME OF LOANS
ORIGINATED AND SERVICED BY MASTER FINANCIAL, INC. BECAUSE MASTER FINANCIAL, INC.
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CALCULATES ITS DELINQUENCY, DEFAULT AND LOSS RATES BY DIVIDING THE DOLLAR AMOUNT
OF DELINQUENT OR DEFAULTED LOANS IN ITS SERVICING PORTFOLIO ON ANY DATE BY THE
TOTAL DOLLAR AMOUNT OF THE SERVICING PORTFOLIO ON SUCH DATE, THE ADDITION OF
MORE RECENTLY ORIGINATED LOANS WITH SHORTER PAYMENT HISTORIES HAS THE EFFECT OF
REDUCING THE OVERALL RATES OF DELINQUENCY, DEFAULT AND LOSS.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Securities will be provided
by (a) the subordination of (i) the Residual Interest and the Class B-2
Certificates to the Offered Securities, (ii) the Class B-1 Certificates to the
Class IO Certificates (iii) the Class IO and Class B-1 Certificates to the
Notes, and (iv) the Class M-2 and Class M-1 Notes, respectively, to each Class
of Notes having a higher payment priority, to the extent described below under
' -- Subordination and Allocation of Losses' and (b) the overcollateralization
feature described below under ' -- Overcollateralization.'
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 and third to the Class M-2
Notes, 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 and no interest
will be paid on the Class M-2 Notes until all required interest payments have
been made on the Senior Notes and the Class M-1 Notes. After all required
payments of interest have been made on the Notes on each Payment Date,
distributions of interest will be made first to the Class IO Certificates,
second to the Class B-1 Certificates and third to the Class B-2 Certificates,
such that no interest will be distributed on the Class B-1 Certificates until
all required interest distributions have been made on the Class IO Certificates
and no interest will be distributed on the Class B-2 Certificates until all
required interest distributions have been made on the Class IO and Class B-1
Certificates. On each Payment Date, payments of principal of the Notes will be
made first to the Senior Notes, in order of numerical Class designation, such
that no principal will be paid in respect of any Class of Senior Notes until the
principal balance of each Class of Senior Notes having a prior numerical Class
designation has been reduced to zero, and then to the Subordinate Notes and
Certificates (other than the Class IO Certificates) in the order set forth
above.
The rights of the holders of the Residual Interest to receive any
distributions on any Payment Date will be subordinated to such rights of
Securityholders. The subordination described above is intended to enhance the
likelihood of the regular receipt of interest and principal due to the holders
of the Offered Securities and to afford such holders protection against losses
on the Home Loans, with the greatest protection being provided to the Senior
Notes, less protection being provided to the Class M-1, and Class M-2 Notes and
the Class IO Certificates, and the least protection being provided to the Class
B-1 Certificates. See 'Risk Factors -- Adequacy of Credit Enhancement' herein.
On each Payment Date after the Initial Undercollateralization Amount has
first been reduced to zero, 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 on such Payment Date) over
(b) the Pool Principal Balance as of the end of the preceding Due Period. On
each Payment Date prior to the Payment Date on which the Initial
Undercollateralization Amount is first reduced to zero, the Allocable Loss
Amount will be zero.
On each Payment Date, any Allocable Loss Amount for such date will be
applied in reduction of the Class Principal Balances of the Certificates (other
than the Class IO Certificates), in inverse order of numerical Class
designation, until the Class Principal Balances thereof have each been reduced
to zero, and then will be applied first in reduction of the Class Principal
Balance of the Class M-2 Notes and second in reduction of the Class Principal
Balance of the Class M-1 Notes, until the respective Class Principal Balances
thereof have each been reduced to zero. Allocable Loss Amounts will not be
applied to the Senior Notes.
INITIAL PRINCIPAL UNDERCOLLATERALIZATION
On the Closing Date the aggregate principal balance of the Securities is
expected to exceed the Cut-off Date Pool Principal Balance by approximately
$3,571,500. A limited acceleration of the principal amortization of the
Securities relative to the principal amortization of the Home Loans has been
designed, first, to eliminate such principal undercollateralization, and then to
increase the Overcollateralization Amount over time by
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making additional payments of principal to the Securityholders from Excess
Spread, until the Overcollateralization Amount is equal to the Required
Overcollateralization Amount.
If on any Payment Date an Overcollateralization Shortfall (as defined
herein) exists, Excess Spread, if any, with respect to such Payment Date will be
applied to make additional payments of principal of the Securities entitled to
principal in the order of priority set forth under 'Description of the
Securities -- Payments' herein. Such payments of Excess Spread are intended,
first, to eliminate the undercollateralization (of approximately 1%) that will
exist on the Closing Date, and then to accelerate the amortization of the Class
Principal Balances of the Securities relative to the amortization of the Home
Loans, thereby increasing the Overcollateralization Amount. On any Payment Date
on which the Overcollateralization Shortfall is equal to zero, all or a portion
of the Excess Spread may be distributed to the holders of the Residual Interest
rather than as principal to the Securityholders, until such time as the
Overcollateralization Shortfall is greater than zero (due, for example, to a
reduction in the Overcollateralization Amount as a result of loan losses or
delinquencies, or to an increase in the Required Overcollateralization Amount as
a result of the failure to satisfy certain delinquency criteria as described
herein).
On the Overcollateralization Stepdown Date, the holders of the Residual
Interest will be entitled to distributions of all or a portion of the Regular
Principal Payment Amount that would otherwise be paid to Securityholders as
described below. Such amount, the 'Overcollateralization Reduction Amount,' will
equal the lesser of (x) the Overcollateralization Surplus (as defined herein)
for such Payment Date (after giving effect to all other payments on such Payment
Date), and (y) the Regular Principal Payment Amount (as determined without
deducting the Overcollateralization Reduction Amount therefrom) on such Payment
Date. Prior to the occurrence of the Overcollateralization Stepdown Date, the
Overcollateralization Reduction Amount will equal zero.
While the payment of Excess Spread to the Securityholders and the
distribution of any Overcollateralization Reduction Amount to the holders of the
Residual Interest as described above has been designed to produce and maintain a
particular 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. For
example, while the Class A-1 Notes remain outstanding, any increase in LIBOR
will decrease the amount of Excess Spread for the related Payment Date. In
particular, a high rate of delinquencies or losses 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 on the Securities
on the related Payment Date. In such a case, the Class Principal Balances of the
Securities 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.
DESCRIPTION OF THE SECURITIES
GENERAL
The Trust will issue the Notes pursuant to the Indenture. The Trust will
also issue the Certificates pursuant to the Trust Agreement dated as of November
1, 1997 (the 'Trust Agreement'), among the Depositor, 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 undivided ownership interests
in the Trust.
On each Payment Date, the Indenture Trustee or its designee and the Owner
Trustee or its designee will pay to the persons in whose names the Securities
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 Securityholder as described below. Payments on the
Offered Securities will be made to Beneficial Owners only through DTC and its
DTC Participants (except under certain limited circumstances). See 'Certain
Information Regarding the Securities -- Book Entry Registration' in the
Prospectus.
Beneficial ownership interests in each Class of Offered Securities will be
held in minimum denominations of $100,000 and integral multiples of $1,000 in
excess thereof.
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PAYMENTS
For the definitions of certain of the defined terms used in the following
subsection, see ' -- Related Definitions' below.
Available Collection Amount. Payments on the Securities on each Payment
Date will be made from the Available Collection Amount. The Servicer will
calculate the Available Collection Amount on the fifth 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 or the Transferor
(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) with respect to the final Payment Date, or an early
redemption or termination of the Securities by the Servicer, the Termination
Price or the proceeds from the sale of the Home Loans, and (iii) any income or
gain from investment of funds in the Collection Account.
Payments of Interest. Interest on the Class Principal Balance or Class
Notional Balance of each Class of Securities will accrue during each Accrual
Period at the applicable Interest Rate set forth or described on the cover
hereof (or under 'Summary of Terms,' in the case of the Class B-2 Certificates)
and will be payable to Securityholders on each Payment Date, commencing in
December 1997. The 'Accrual Period' for each Class of Securities will be (i) in
the case of the Class A-1 Notes, 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 the related Payment Date, and (ii) in the case of the other
Classes of Securities, the calendar month preceding the month in which the
related Payment Date occurs. 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. Interest on the other Classes of Securities will be calculated
on the basis of a 360-day year of twelve 30-day months. The Interest Rate
applicable to each Class of Securities outstanding will increase by 0.50% for
Due Periods beginning after the Optional Termination Date.
'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 herein. 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 the
Servicing Fee Rate.
Payments of interest on the Securities will be made from the Available
Collection Amount remaining after payment of the Servicing Compensation (other
than the Make Whole Servicing Fee paid to the Servicer pursuant to paragraph
(A)(xvi) under ' -- Payment Priorities' below) (the 'Available Funds'). Under
certain circumstances the amount available to make interest payments 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 on the Home Loans were exceptionally high or were
concentrated in a particular month. Any such interest deficiency with respect to
the Senior Notes will be allocated among such Notes pro rata in accordance with
the amount of interest otherwise payable on each such Note. Any such interest
deficiency with respect to any Class of Securities will be paid to holders of
each affected Class of Securities on subsequent Payment Dates to the extent that
sufficient funds are available therefor. The Issuer will remain obligated to pay
interest deficiencies on the Securities that are carried forward until such
deficiencies have been paid. See ' -- Rights of Noteholders Upon Occurrence of
Event of Default' herein.
Payments of Principal. Principal payments will be made to the
Securityholders (other than holders of the Class IO Certificates) 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 to Securityholders
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(other than holders of the Class IO Certificates) in respect of principal, as
described below, over (b) the Overcollateralization Surplus, if any. Principal
payments on the Securities (other than the Class IO Certificates) will be made
from the Available Funds remaining after the payment of the Noteholders'
Interest Payable Amount and the Certificateholders' Interest Distributable
Amount.
PAYMENT PRIORITIES
(A) On each Payment Date, the Regular Payment Amount will be applied in the
following order of priority:
(i) to the holders of the Senior Notes, pro rata, the portion of the
Noteholders' Interest Payable Amount required to be paid in respect of the
Senior Notes on such Payment Date;
(ii) to the holders of the Class M-1 Notes, the 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 the holders of the Class M-2 Notes, the 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 the holders of the Class IO Certificates, the portion of the
Certificateholders' Interest Distributable Amount required to be
distributed in respect of the Class IO Certificates on such Payment Date;
(v) to the holders of the Class B-1 Certificates, the portion of the
Certificateholders' Interest Distributable Amount required to be
distributed in respect of the Class B-1 Certificates on such Payment Date;
(vi) to the holders of the Class B-2 Certificates, the portion of the
Certificateholders' Interest Distributable Amount required to be
distributed in respect of the Class B-2 Certificates on such Payment Date;
(vii) to the holders of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6, Class A-7, and Class A-8 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;
(viii) 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;
(ix) 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;
(x) 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;
(xi) 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;
(xii) to the holders of the Class M-1 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(xiii) to the holders of the Class M-2 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(xiv) to the holders of the Class B-1 Certificates, the applicable
Deferred Amount, if any, until such Deferred Amount has been paid in full;
(xv) to the holders of the Class B-2 Certificates, the applicable
Deferred Amount, if any, until such Deferred Amount has been paid in full;
(xvi) to the Servicer, if the Servicing Fee Rate has been reduced to
0.75% as described under 'Description of Transfer and Servicing
Agreements -- Servicing' with respect to such Payment Date, the Make Whole
Servicing Fee; and
(xvii) any remaining amount to the holders of the Residual Interest.
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(B) On each Payment Date, the Excess Spread, if any, will be applied in the
following order of priority (in each case after giving effect to all payments
specified in paragraph (A) above):
(i) in an amount equal to the Overcollateralization Shortfall, if any,
in the order of priority, and in the amounts, specified in clauses (vii)
through (xi) of paragraph (A) above;
(ii) to the holders of the Class M-1 Notes the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(iii) to the holders of the Class M-2 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(iv) to the holders of the Class B-1 Certificates, the applicable
Deferred Amount, if any, until such Deferred Amount has been paid in full;
(v) to the holders of the Class B-2 Certificates, the applicable
Deferred Amount, if any, until such Deferred Amount has been paid in full;
(vi) to the Servicer, if the Servicing Fee Rate has been reduced to
0.75% as described under 'Description of Transfer and Servicing
Agreements -- Servicing' with respect to such Payment Date, the Make Whole
Servicing Fee; and
(vii) any remaining amount to the holders of the Residual Interest.
RELATED DEFINITIONS
Business Day: 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 is located are authorized or
obligated by law or executive order to be closed.
Certificateholders' Interest Carry-Forward Amount: With respect to any
Payment Date, the excess, if any, of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Payment Date and any Certificateholders'
Interest Carry-Forward Amount remaining outstanding with respect to prior
Payment Dates 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: 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 the Class B-1 Certificates is
reduced to zero through application of the Allocable Loss Amount, the amount of
the Certificateholders' Interest Distributable Amount will be equal to such
amount calculated without giving effect to this proviso, minus the portion, if
any, of the Allocable Loss Amount that otherwise would be applied to any Class
of Notes on such Payment Date in the absence of this proviso.
Certificateholders' Monthly Interest Distributable Amount: With respect to
any Payment Date, the aggregate of interest accrued for the related Accrual
Period at the applicable Interest Rate on the Class Principal Balance or Class
Notional Balance, as applicable, of each Class of Certificates immediately
preceding such Payment Date.
Class B-1 Optimal Principal Balance: 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 end of the preceding Due
Period minus the sum of (a) the aggregate of the Class Principal Balances of
each Class of the Senior Notes, the Class M-1 Notes and the Class M-2 Notes
(after taking into account payments made on such Payment Date in reduction of
such Class Principal Balances) and (b) the greater of (i) approximately 6.06% of
the Pool Principal Balance as of the preceding Due Period plus the Required
Overcollateralization Amount for such Payment Date (calculated without giving
effect to the proviso in the definition thereof) and (ii) 0.50% of the Cut-off
Date Pool Principal Balance.
Class B-2 Optimal Principal Balance: 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 end of the preceding Due
Period minus the sum of (a) the aggregate of the Class Principal Balances of the
Offered Securities (after taking into account any payments made on such Payment
Date in reduction of the Class
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Principal Balances of the Offered Securities) and (b) the Required
Overcollateralization Amount for such Payment Date.
Class M-1 Optimal Principal Balance: 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 end of the preceding Due
Period minus the sum of (a) the aggregate of the Class Principal Balances of
each Class of the Senior Notes (after taking into account payments made on such
Payment Date in reduction of such Class Principal Balances) and (b) the greater
of (i) approximately 35.85% of the Pool Principal Balance as of the preceding
Due Period plus the Required Overcollateralization Amount for such Payment Date
(calculated without giving effect to the proviso in the definition thereof) and
(ii) 0.50% of the Cut-off Date Pool Principal Balance.
Class M-2 Optimal Principal Balance: 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 end of the preceding Due
Period minus the sum of (a) the aggregate of the Class Principal Balances of
each Class of the 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 (b) the greater of (i) approximately 22.73% of the Pool
Principal Balance as of the preceding Due Period plus the Required
Overcollateralization Amount for such Payment Date (calculated without giving
effect to the proviso in the definition thereof) and (ii) 0.50% of the Cut-off
Date Pool Principal Balance.
Class Notional Balance: An amount equal to (i) until the Payment Date in
May 2000, the product of 1.7 and the Class Principal Balance of the Class A-8
Notes immediately prior to such Payment Date and (ii) on and after the Payment
Date in May 2000, zero. Reference to the Notional Principal Amount of the Class
IO Certificates is solely for convenience of certain calculations and does not
represent the right to receive any distribution allocable to principal.
Deferred Amount: With respect to any Payment Date, and as to any Class of
Subordinate Securities, the sum of any Allocable Loss Amounts previously applied
in reduction of the Class Principal Balance thereof (and not previously
reimbursed) plus, in the case of each Class of Subordinate Notes, interest
thereon at the applicable Interest Rate from the date when so applied through
the end of the Due Period immediately preceding such Payment Date.
Excess Spread: With respect to any Payment Date, the excess of (a) the
Available Funds over (b) the Regular Payment Amount.
Initial Undercollateralization Amount: With respect to any Payment Date, an
amount (not less than zero) equal to the excess, if any, of (a) the aggregate of
the Class Principal Balances of all Classes of Securities, after giving effect
to payments in respect of the Securities and the Residual Interest on such
Payment Date, over (b) the Pool Principal Balance as of the end of the preceding
Due Period. Notwithstanding the foregoing, on any date after the Payment Date on
which the Initial Undercollateralization Amount is first reduced to zero, such
amount shall be deemed to be zero.
Insurance Proceeds: With respect to any Payment Date and 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
incurred by the Indenture Trustee or the Servicer in connection with the
collection of such proceeds and not otherwise reimbursed, but excluding any such
proceeds 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.
Interest Payment Amount: The sum of the Noteholders' Interest Payable
Amount and the Certificateholders' Interest Distributable Amount.
LIBOR Business Day: Any day on which banks are open for dealing in foreign
currency and exchange in London and New York City.
Liquidated Home Loan: 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
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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.
Net Delinquency Calculation Amount: With respect to the Payment Date, the
excess, if any, of (x) the product of 1.7 and the Rolling Six-Month Delinquency
Average over (y) the aggregate of the amounts of Excess Spread for the three
preceding Payment Dates.
Net Liquidation Proceeds: With respect to any Payment Date, any cash
amounts received in respect of Liquidated Home Loans, whether through trustee's
sale, foreclosure sale, disposition of REO, whole loan sale 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 related to defaulted Home Loans, in each case, net of any
reimbursements to the Servicer made from such amounts for any 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: With respect to any Payment
Date, the excess, if any, of the Noteholders' Monthly Interest Payable Amount
for the preceding Payment Date and any Noteholders' Interest Carry-Forward
Amount remaining outstanding with respect to prior Payment Dates, 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: 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: With respect to any Payment
Date, the aggregate of interest accrued for the related Accrual Period at the
applicable Interest Rate on the Class Principal Balance of each Class of Notes
immediately preceding such Payment Date.
Overcollateralization Amount: With respect to any Payment Date, an amount
(not less than zero) equal to the excess, if any, of (a) the Pool Principal
Balance as of the end of the preceding Due Period over (b) the aggregate of the
Class Principal Balances of all Classes of Securities, after giving effect,
unless otherwise specified, to all payments in respect of the Securities and the
Residual Interest on such Payment Date.
Overcollateralization Shortfall: 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
on such Payment Date pursuant to paragraph (B)(i) under ' -- Payment Priorities'
above).
Overcollateralization Stepdown Date: The first Payment Date occurring after
the Payment Date in November 2000, as to which the aggregate of the Class
Principal Balances of the Senior Notes has been reduced to the excess of (a) the
Pool Principal Balance as of the preceding Due Period over (b) the greater of
(i) approximately 62.11% of the Pool Principal Balance as of the preceding Due
Period plus the Required Overcollateralization Amount for such Payment Date
(calculated without giving effect to the proviso in the definition thereof) and
(ii) 0.50% of the Cut-off Date Pool Principal Balance.
Overcollateralization Surplus: With respect to any Payment Date, the
excess, if any, of the Overcollateralization Amount for such Payment Date over
the Required Overcollateralization Amount.
Reference Bank Rate: With respect to any Accrual Period, the arithmetic
mean (rounded upwards, if necessary, to the nearest one sixteenth of a percent)
of the offered rates for United States dollar deposits for one month that are
offered by the Reference Banks as of 11:00 a.m., New York City time, on the
second LIBOR Business Day prior to the first day of such Accrual Period to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the outstanding Class Principal Balance of the Class A-1
Notes, provided that at least two such Reference Banks provide such rate. If
fewer than two offered rates appear, the Reference Bank Rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York City,
selected by the Indenture Trustee, as of 11:00 a.m., New York City time, on such
date for loans in U.S. Dollars to leading European Banks for a period of one
month in amounts approximately equal to the outstanding Class Principal Balance
of the Class A-1 Notes. If no such quotations can be obtained, the Reference
Bank Rate will be the Reference Bank Rate applicable to the preceding Accrual
Period.
Reference Banks: Three money center banks selected by the Indenture
Trustee.
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Regular Payment Amount: 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.
Regular Principal Payment Amount: 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, (ii) all partial and full principal
prepayments applied by the Servicer during such Due Period, (iii) the
principal portion of all Net Liquidation Proceeds, Insurance Proceeds and
Released Mortgaged Property Proceeds received by the Servicer during such
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 allocable
to 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
Securities immediately prior to such Payment Date.
Released Mortgaged Property Proceeds: With respect to any Payment Date and
any Home Loan, the proceeds received by the Servicer in connection with (a) a
taking of an entire Mortgaged Property by exercise of the power of eminent
domain or condemnation or (b) 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: 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 Cut-off Date 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 Cut-off Date Pool Principal Balance.
Rolling Six-Month Delinquency Average: With respect to any Payment Date,
the average of the applicable 60-day Delinquency Amounts for each of the six
immediately preceding Due Periods. The '60-Day Delinquency Amount' for any Due
Period is the aggregate of the Principal Balances of all Home Loans that are 60
or more days delinquent, in foreclosure or REO property as of the end of such
Due Period, excluding any Liquidated Home Loan.
Senior Optimal Principal Balance: With respect to any Payment Date 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 Due
Period minus the greater of (a) approximately 62.11% of the Pool Principal
Balance as of the preceding Due Period 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 Cut-off Date Pool Principal Balance.
Termination Price: An amount equal to the sum of (a) the aggregate of the
outstanding Class Principal Balances of the Securities plus all accrued and
unpaid interest thereon at the applicable Interest Rates, (b) all accrued and
unpaid interest on the Class IO Certificates and (c) any Servicing Compensation
due and unpaid on such date.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amount will be applied on each Payment Date in reduction of the
Class Principal Balances of the Class B-2 and Class B-1 Certificates and the
Class M-2 and Class M-1 Notes, in that order, until the Class Principal Balance
of each such Class has 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 a Class of Subordinate
Securities (other than the Class IO Certificates) by application of the
Allocable Loss Amount will entitle such Class to reimbursement in an amount
equal to the applicable Deferred Amount, in accordance with the payment
priorities specified herein. Payment of Deferred Amounts will not reduce the
Class Principal Balance of the applicable Class of Securities.
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PAYMENT OF DEFERRED AMOUNTS
Any Deferred Amounts payable to the holders of the Subordinate Securities
(other than the Class IO Certificates) as specified under ' -- Payment
Priorities' above will be paid to the holder of record of the related Securities
as of the applicable Record Date, or, in the case of Securities 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. Amounts
attributable to accrued and unpaid interest in respect of such Deferred Amounts
will be paid prior to amounts attributable to principal.
OPTIONAL TERMINATION
The Servicer may, at its option, effect an early redemption or termination
of the Securities on any Payment Date on or after which the Pool Principal
Balance declines to 10% or less of the Cut-off Date Pool Principal Balance (the
'Optional Termination Date') by purchasing the Home Loans for the Termination
Price. All proceeds from any such sale of the Home Loans will be paid first, to
the Servicer for payment of outstanding Servicing Compensation, second, to the
Noteholders in an amount equal to the aggregate of the outstanding Class
Principal Balances of the Notes, plus all accrued and unpaid interest thereon at
the applicable Interest Rates, third, to the holders of the Class IO
Certificates, all accrued and unpaid interest at the applicable Interest Rate,
fourth, to the holders of the Class B-1 and Class B-2 Certificates, in that
order, in an amount equal to the aggregate of the outstanding Class Principal
Balances of such Certificates, plus all accrued and unpaid interest thereon at
the applicable Interest Rates, and fifth, to the holders of the Residual
Interest.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
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 to (i) the failure to pay the full amount of the Noteholders'
Interest Payable Amount allocable to any Class of Notes not then having the
highest priority of payment (a 'Non-Priority Class') or (ii) allocation of an
Allocable Loss Amount 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.
Upon the occurrence of an Event of Default, holders of Senior Notes
representing more than 50% of the aggregate of the Class Principal Balances of
the Senior Notes then outstanding may exercise their remedies under the
Indenture; provided however, that 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 may exercise their remedies under the Indenture. These remedies
include the right to cause accrued interest to be paid pro rata in accordance
with the amount of unpaid accrued interest, and to cause principal on the
outstanding Notes to be paid (either in lump sum from proceeds of the
liquidation of the assets pledged to secure the Notes or from monthly
collections on the Home Loans) pro rata out of remaining Available Funds,
regardless of the allocation, or sequential nature, of principal payments that
would otherwise apply, based upon the Principal Balances of the Notes (an
'acceleration'). On each Payment Date on and after any such acceleration of the
Notes, and following the reduction to zero of the Class Principal Balance of all
Classes of Notes, any remaining Available Funds will be applied in repayment
first, of Deferred Amounts on the Notes, and then of any remaining amounts due
on the Certificates, pro rata. Such remedies will also 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. See 'The
Agreements -- Events of Default; Rights Upon Event of Default' in the
Prospectus.
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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'). Copies of the Transfer
and Servicing Agreements will be filed with the Commission following the
issuance of the Securities. 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. The following summary supplements, and to
the extent inconsistent therewith replaces, the description of the general terms
and provisions of the Transfer and Servicing Agreements set forth under the
headings 'The Agreements' and 'Servicing of Loans' in the Prospectus.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Transferor will sell the Home Loans to the
Depositor, and the Depositor will sell the Home Loans to the Trust. The Trust
will, concurrently with such sale of the Home Loans, deliver or cause to be
delivered the Securities to the Depositor. The Trust will pledge and assign the
Home Loans, to the Indenture Trustee in exchange for the Notes. Each Home Loan
will be identified in a schedule appearing as an exhibit to the Sale and
Servicing Agreement (the 'Home Loan Schedule').
In addition, the Depositor will, as to each Home Loan, cause the Transferor
to deliver to the Indenture Trustee the related 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'). Assignments of Home Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except in
states such as California where in the opinion of counsel such recording is not
required to protect the Trustee's interests in the Home Loan against the claim
of any subsequent transferee or any successor to or creditor of the Depositor or
the Transferor. The Indenture Trustee will 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.
TRUST FEES AND EXPENSES
The Servicer is entitled to the Servicing Fee and additional servicing
compensation and reimbursement as described under ' -- Servicing' below. The
fees and expenses of the Indenture Trustee Owner Trustee and Co-Owner Trustee
will be paid by the Servicer.
SERVICING
In consideration for the performance of the loan servicing functions for
the Home Loans, the Servicer is entitled to a monthly fee (the 'Servicing Fee')
equal to 1.25% per annum (the 'Servicing Fee Rate') of the Pool Principal
Balance as of the first day of the immediately preceding Due Period; provided,
however, that so long as the Required Overcollaterization Amount equals the Net
Delinquency Calculation Amount, the Servicing Fee shall be equal to 0.75% per
annum; provided further that, during any period when the Servicing Fee is so
reduced, the Servicer shall be entitled to receive a make whole servicing fee
equal to 0.50% per annum of the Pool Principal Balance as of the first day of
the immediately preceding Due Period (the 'Make Whole Servicing Fee') from
Excess Spread in the priority described under paragraph (A)(xvi) under
'Description of the Securities -- Payment Priorities' above. See 'Risk
Factors -- Additional Factors Affecting Delinquencies, Defaults and Losses on
Home Loans -- Dependence on Servicer for Servicing Home Loans' herein. The
Servicer may retain Subservicers to service certain of the Home Loans. The
Servicer will remain responsible for the servicing of any such Home Loans and
will pay the fees of any Subservicer out of its own funds. As of the Closing
Date, none of the Home Loans will be serviced by a Subservicer. 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 charges, late payment charges and
any other servicing-related penalties and fees, together with any income or gain
from investment of funds in the
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Collection Account (collectively, such additional compensation and Servicing
Fee, the 'Servicing Compensation').
In the event of a delinquency or default with respect to a Home Loan,
neither the Servicer nor any Subservicer will have an obligation to advance
scheduled monthly payments of principal or interest with respect to such Home
Loan.
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT AND CERTIFICATE DISTRIBUTION ACCOUNT
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, 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 redemption of the Notes and termination of the
Certificates. 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 Sale and
Servicing Agreement. The Collection Account may be maintained at any depository
institution that 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 the Indenture Trustee.
Amounts on deposit in the Collection Account will be invested in Permitted
Investments at the direction of the holders of the Residual Interest. All
interest and any other investment earnings on amounts on deposit in the
Collection Account will be paid to the Servicer on each Payment Date as
additional servicing compensation.
The Indenture Trustee 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 for payment
to the Noteholders will be deposited and from which all payments to the
Noteholders will be made (the 'Note Payment Account'). The Co-Owner Trustee 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 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 the Business Day prior to each Payment Date, 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.
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 to the Servicer of the Servicing
Compensation and all unpaid Servicing Compensation from prior Due Periods;
and
(ii) to provide for any payments to the Securityholders and the
holders of the Residual Interest of the amounts specified herein under
'Description of the Securities -- Payments.'
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities 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 upon 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, which will exercise and perform such
rights, powers, duties and obligations solely at the direction of the Owner
Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer 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 Servicer 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 Trust Agreement and Indenture will provide that the Owner Trustee and
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 or 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 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
Securities 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, Sale and Servicing
Agreement or Administration Agreement, which failure constitutes an Event of
Default, unless the Owner Trustee obtains actual knowledge of such failure.
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 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 Securities or the Home Loans, or the
investment of any monies by the Servicer before such monies are deposited into
the Collection Account or the Note Payment Account. So long as no Event of
Default under the Indenture or the Sale and Servicing Agreement has occurred or
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
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Agreement or Administration Agreement, which failure constitutes an Event of
Default under the Indenture or the Sale and Servicing Agreement, unless the
Indenture Trustee obtains actual knowledge of such failure.
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. No Noteholder will have any right under
the Indenture to institute any proceeding with respect to the Indenture, unless
such holder previously has given to the Indenture 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) Noteholders evidencing not
less than 25% of the voting interests of each such Class of Notes, acting
together as a single class, have made written request upon the Indenture Trustee
to institute such proceeding in its own name as the Indenture Trustee thereunder
and have offered to the Indenture Trustee reasonable indemnity, and the
Indenture Trustee for 30 days has neglected or refused to institute any such
proceedings. See 'Description of the Securities -- Rights of Noteholders Upon
Occurrence of Event of Default' herein.
The Indenture Trustee will appoint one or more co-trustees which shall be
national banking associations in order to comply with applicable licensing
requirements, if necessary.
DEPOSITOR
The Depositor will have no obligation to monitor, or supervise or enforce
the performance of the obligations of the Transferor, the Servicer, the Owner
Trustee, the Co-Owner Trustee or the Indenture Trustee and will not be obligated
to perform any such obligation or have any liability if the applicable entity
fails to do so.
PREPAYMENT AND YIELD CONSIDERATIONS
Except in the limited circumstances 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 higher payment priority has been reduced to
zero. No principal distributions will be made on any Class of Certificates
entitled to principal until required principal payments have been made in
respect of all Classes of Notes, and no principal distributions will be made on
the Class B-2 Certificates until required distributions of principal of the
Class B-1 Certificates have been made. See 'Description of the
Securities -- Payments' herein. As the rate of payment of principal of the
Securities entitled to principal depends primarily on the rate of payment
(including prepayments) of the principal balance of the Home Loans, final
payment of any Class of Securities could occur significantly earlier than the
applicable Maturity Date (or Final Scheduled Distribution Date). Securityholders
(other than holders of the Class IO Certificates) 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 Securities. 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 due to the rate of prepayment of the Home
Loans will be borne entirely by Securityholders.
The subordination of the Residual Interest to the Securities and of each
Class of Subordinate Securities to each Class of Securities having a higher
payment priority will provide limited protection to Securityholders against
losses on the Home Loans. The yields on the Class M-1 and Class M-2 Notes and
the Class IO and Class B-1 Certificates 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 on the Home Loans exceed the rate
and amount of such losses anticipated by an investor, the yields to maturity on
such Subordinate Securities may be lower than anticipated.
Each Home Loan is either a (i) 'simple interest' or (ii) 'actuarial method'
loan. 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 each
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
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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 each payment been made as scheduled. See
'The Home Loan Pool -- Payments on the Home Loans' herein.
Other than with respect to the Class A-1 Notes, the effective yield to
Securityholders will be lower than the yield otherwise produced by the
applicable Interest Rate, because the payment of interest accrued during the
applicable Accrual Period will not be made until the Payment Date occurring in
the month following such Accrual Period. See 'Description of the
Securities -- Payments' herein. This delay will result in funds being paid to
such Securityholders approximately 20 days after the end of the applicable
Accrual Period, during which 20-day period no interest will accrue on such
funds.
The yield to maturity of the Class A-1 Notes will be affected by the level
of LIBOR from time to time, and will be subject to a maximum rate equal to the
Net Weighted Average Rate. To the extent that Home Loans bearing relatively high
Home Loan Rates experience a more rapid rate of prepayment than Home Loans with
relatively low rates, the maximum rate applicable to the Class A-1 Notes will be
reduced.
The rate of principal payments on the Securities entitled to principal, the
aggregate amount of each interest payment on the Offered Securities and the
yields to maturity of the Securities will be directly affected by the rate and
timing of principal reductions on the Home Loans. Such principal reductions 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 disposition. On any
Payment Date on or after the Payment Date on which the Pool Principal Balance
declines to 10% or less, of the Cut-Off Date Pool Principal Balance, the
Servicer may effect a redemption of the Notes and prepayment of the Certificates
under the optional termination method described herein. See 'Description of the
Securities -- Optional Termination' herein.
The 'weighted average life' of a Class of Securities 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 Class is repaid. The weighted average life of each
Class of Securities 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 paid to Securityholders as described herein, and the extent to which
any Overcollateralization Reduction Amount is distributed to the holders of the
Residual Interest as described herein. If substantial principal prepayments on
the Home Loans are received as a result of unscheduled payments, liquidations or
repurchases, payments to Securityholders due to such prepayments may
significantly shorten the weighted average lives of the Securities. If the Home
Loans experience delinquencies and defaults in the payment of principal, then
Securityholders will experience a delay in the receipt of principal payments
attributable to such delinquencies and defaults, which in certain instances may
result in longer actual average weighted lives of the Securities 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
payable on the Securities, will be covered to the extent of amounts available
from the applicable credit enhancement. See 'Risk Factors -- Adequacy of Credit
Enhancement' herein.
The rate and timing of principal payments 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 Servicer intends to
enforce such provisions unless (i) the 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. 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, or may simply release its lien on the existing
collateral, leaving the related Home Loan unsecured. 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. A majority of the Home Loans are subject
to prepayment penalties in connection with certain prepayments during the period
set forth in the related debt instrument (ranging from the first through sixth
year after origination). Prepayment penalties, if enforced by the Servicer, may
have the effect of reducing the amount or the likelihood of prepayments on such
Home Loans.
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The remaining Home Loans may be prepaid in full or in part at any time without
penalty. The Servicer may, in its discretion, waive any prepayment penalty or
reduce the amount thereof.
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 Home Loan Rates on the Home Loans, the rate of
prepayment would be expected to increase. Conversely, if prevailing interest
rates were to rise significantly above the Home Loan Rates on the Home Loans,
the rate of prepayment on the Home Loans would be expected to decrease. 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 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 of principal at a faster rate than anticipated will decrease the
yield on Securities purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Securities purchased at a
discount. The effect on an investor's yield due to payments of principal
occurring at a rate that is faster (or slower) than the rate anticipated by the
investor during any period following the issuance of the Securities will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
payments of principal during any subsequent period.
The rate of delinquencies and defaults on the Home Loans and of recoveries,
if any, on defaulted Home Loans and foreclosed properties will affect the rate
and timing of principal payments on the Home Loans, and, accordingly, the
weighted average lives of the Securities, and could cause a delay in the payment
of principal to the holders of Securities. Certain factors may influence
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, or
on Home Loans 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. In addition, the rate and timing of prepayments, defaults and
liquidations on the Home Loans will be affected by the general economic
condition of the area 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 losses 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.
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 the Transferor's
experience with such Home Loans originated by it commenced in May 1996. 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 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 improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at
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origination the majority of the Home Loans had combined loan-to-value ratios
that approached or exceeded 100%, the related borrowers will generally have
significantly less opportunity to refinance the indebtedness secured by the
related Mortgaged Properties, including the Home Loans, and 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%.
SUBORDINATION
As described under 'Description of the Securities -- Payments -- Payment
Priorities' herein, on each Payment Date, the holders of any Class of Securities
having a higher payment priority will have a preferential right to receive
amounts of interest and principal, respectively, due to them on such Payment
Date before any payments 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 Class M-1 and Class M-2
Notes and the Class IO and Class B-1 Certificates will be more sensitive than
the yields of higher ranking Securities 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 Certificates, until the Class Principal Balance thereof
has been reduced to zero, then to the Class B-1 Certificates and the Class M-2
and Class M-1 Notes, in that order, until the Class Principal Balances thereof
have been reduced to zero. Any Deferred Amounts will be paid first to the Class
M-1 Notes, second to the Class M-2 Notes, third to the Class B-1 Certificates
and then to the Class B-2 Certificates.
OVERCOLLATERALIZATION
On any Payment Date on which the Overcollateralization Amount equals or
exceeds the Required Overcollateralization Amount, certain amounts otherwise
payable as principal to Securityholders (other than holders of the Class IO
Certificates) will instead be paid first to the Subordinate Securities in
payment of Deferred Amounts, and thereafter to the holders of the Residual
Interest, thereby slowing the rate of principal amortization of the Securities,
until the Overcollateralization Amount is reduced to the Required
Overcollateralization Amount. As described herein, the yield to maturity on
Securities purchased at a premium or discount will be affected by the extent to
which any Excess Spread is so applied, or is distributed to the holders of the
Residual Interest, in lieu of payment to Securityholders. If such Excess Spread
distributions to the holders of the Residual Interest occur sooner than
anticipated by an investor who purchases Securities at a discount, the actual
yield to such investor may be lower than anticipated. If such Excess Spread
distributions to the holders of the Residual Interest occur later than
anticipated by an investor who purchases Securities at a premium, the actual
yield to such investor may be lower than anticipated.
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 default and delinquency experience and
principal amortization of the Home Loans. 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
payable on the Securities on the related Payment Date. In such event, the
principal balances of the Securities 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.
REINVESTMENT RISK
During periods of falling interest rates, Securityholders (other than
holders of the Class IO Certificates) may receive an increased amount of
principal payments 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, Securityholders are likely
to receive a decreased amount of principal payments at a time when such holders
may have an opportunity to reinvest such payments in investments having a yield
and rating comparable to the Securities.
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MATURITY DATES; FINAL SCHEDULED DISTRIBUTION DATE
The Maturity Date of each Class of Notes and the Final Scheduled
Distribution Date of the Class IO and Class B-1 Certificates are as set forth
under 'Summary of Terms' herein. The Maturity Dates of the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Notes were determined
by calculating the final Payment Date with respect to each such Class on the
basis of the Modeling Assumptions (except that it is assumed that no Excess
Spread is applied to reduce the Class Principal Balances of the Securities) and
an assumed constant prepayment rate of 0% of the Prepayment Assumption, and
adding one year thereto. The Maturity Dates of the Class A-8, Class M-1 and
Class M-2 Notes and the Final Scheduled Distribution Date of the Class B-1
Certificates are January 20, 2009. The Final Scheduled Maturity Date of the
Class IO Certificates is May 20, 2000. The actual maturity of any Class of
Securities may be significantly earlier than the applicable Maturity Date or
Final Scheduled Distribution Date.
WEIGHTED AVERAGE LIVES
The following information illustrates the effect of prepayments of the Home
Loans on the weighted average lives of the Offered Securities under certain
stated assumptions and is not a prediction of the prepayment rate that might
actually be experienced on 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 Securities 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
unscheduled reductions of principal, including without limitation those
resulting from 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), the rate at which Excess Spread
is paid to Securityholders as described herein and the extent to which any
Overcollateralization Reduction Amount is distributed to the holders of the
Residual Interest 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
(the 'Prepayment Assumption') 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 2.0% per annum of the outstanding principal balance
of such loans in the first month of the life of the loans and an additional
approximately 1.0% (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 13.0% 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%, 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, commencing on November 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 prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the Securities
occurs (except in the case of the Weighted Average Life assuming an Optional
Termination) and no substitutions or repurchases of the Home Loans occur;
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(v) all prepayments of Home Loans include 30 days of interest thereon;
(vi) the Closing Date for the Securities is November 25, 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 are received by the Securityholders on the 20th day of
each month, commencing in December 1997;
(viii) the Required Overcollateralization Amount will equal approximately
$11,626,175 and will be reduced in accordance with the terms of the Indenture;
(ix) the Interest Rate for each Class of Offered Securities is as set forth
or described on the cover page hereof and the Interest Rate for the Class B-2
Certificates is as set forth herein;
(x) the difference between the initial Home Loan interest rate and the net
Home Loan interest rate is equal to the Servicing Fee and the net Home Loan
interest rate is further reduced by the Indenture Trustee fee;
(xi) no reinvestment income from any Trust account is available for payment
to Securityholders;
(xii) the Home Loan Pool consists of Home Loans having the following
characteristics;
(xiii) the Interest Rate on the Class A-1 Notes will remain constant at
approximately 5.8475% per annum; and
(xiv) all of the Home Loans are sold to the Trust on the Closing Date.
<TABLE>
<CAPTION>
INITIAL HOME NET HOME REMAINING
LOAN LOAN TERM ORIGINAL TERM
HOME LOAN PRINCIPAL INTEREST INTEREST TO MATURITY OF AMORTIZATION
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS)
- --------- --------------- ------------ -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1 $ 3,157,195.51 14.830% 13.580% 58 68
2 13,856,970.24 14.150% 12.900% 117 120
3 90,113,703.56 13.976% 12.726% 177 180
4 82,704,978.51 13.969% 12.719% 237 240
5 167,895,699.39 14.054% 12.804% 297 300
</TABLE>
The tables on the following pages indicate the percentage of the original
Class Principal Balance of each Class of Offered Securities (other than the
Class IO Certificates) that would be outstanding at each of the dates shown at
the specified percentages of the Prepayment Assumption and the corresponding
weighted average life of each Class of Offered Securities. These tables have
been prepared based on the Modeling Assumptions (including the assumptions
regarding the characteristics and performance of the Home Loans, which will
differ from the actual characteristics and performance thereof) and should be
read in conjunction therewith.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 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>
Initial Balance........................ 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1998...................... 74 51 40 28 17 5 100 100 100 100 100 100
November 20, 1999...................... 67 17 0 0 0 0 100 100 87 47 8 0
November 20, 2000...................... 59 0 0 0 0 0 100 72 13 0 0 0
November 20, 2001...................... 49 0 0 0 0 0 100 18 0 0 0 0
November 20, 2002...................... 38 0 0 0 0 0 100 0 0 0 0 0
November 20, 2003...................... 27 0 0 0 0 0 100 0 0 0 0 0
November 20, 2004...................... 14 0 0 0 0 0 100 0 0 0 0 0
November 20, 2005...................... 0 0 0 0 0 0 98 0 0 0 0 0
November 20, 2006...................... 0 0 0 0 0 0 68 0 0 0 0 0
November 20, 2007...................... 0 0 0 0 0 0 36 0 0 0 0 0
November 20, 2008...................... 0 0 0 0 0 0 3 0 0 0 0 0
November 20, 2009...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2010...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2011...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2012...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2013...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2014...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2015...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2016...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2017...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2018...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2019...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2020...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2021...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2022...................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2)
No Optional Termination.............. 3.8 1.2 0.9 0.8 0.7 0.6 9.6 3.4 2.5 2.0 1.7 1.4
Optional Termination................. 3.8 1.2 0.9 0.8 0.7 0.6 9.6 3.4 2.5 2.0 1.7 1.4
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Securities 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.
S-42
<PAGE>
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES CLASS A-4 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>
Initial Balance................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1998................. 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1999................. 100 100 100 100 100 61 100 100 100 100 100 100
November 20, 2000................. 100 100 100 46 0 0 100 100 100 100 80 17
November 20, 2001................. 100 100 31 0 0 0 100 100 100 47 0 0
November 20, 2002................. 100 58 0 0 0 0 100 100 52 0 0 0
November 20, 2003................. 100 0 0 0 0 0 100 97 0 0 0 0
November 20, 2004................. 100 0 0 0 0 0 100 38 0 0 0 0
November 20, 2005................. 100 0 0 0 0 0 100 0 0 0 0 0
November 20, 2006................. 100 0 0 0 0 0 100 0 0 0 0 0
November 20, 2007................. 100 0 0 0 0 0 100 0 0 0 0 0
November 20, 2008................. 100 0 0 0 0 0 100 0 0 0 0 0
November 20, 2009................. 56 0 0 0 0 0 100 0 0 0 0 0
November 20, 2010................. 0 0 0 0 0 0 100 0 0 0 0 0
November 20, 2011................. 0 0 0 0 0 0 35 0 0 0 0 0
November 20, 2012................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2013................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2014................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2015................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2016................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2017................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2018................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2019................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2020................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2021................. 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2022................. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2)
No Optional Termination......... 12.1 5.2 3.8 3.0 2.5 2.1 13.8 6.8 5.1 4.0 3.3 2.8
Optional Termination............ 12.1 5.2 3.8 3.0 2.5 2.1 13.8 6.8 5.1 4.0 3.3 2.8
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Securities 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.
S-43
<PAGE>
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-5 NOTES CLASS A-6 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>
Initial Balance........................ 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1998...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1999...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2000...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2001...................... 100 100 100 100 56 0 100 100 100 100 100 94
November 20, 2002...................... 100 100 100 45 0 0 100 100 100 100 81 41
November 20, 2003...................... 100 100 66 0 0 0 100 100 100 84 38 0
November 20, 2004...................... 100 100 5 0 0 0 100 100 100 47 3 0
November 20, 2005...................... 100 66 0 0 0 0 100 100 70 15 0 0
November 20, 2006...................... 100 13 0 0 0 0 100 100 39 0 0 0
November 20, 2007...................... 100 0 0 0 0 0 100 79 12 0 0 0
November 20, 2008...................... 100 0 0 0 0 0 100 52 0 0 0 0
November 20, 2009...................... 100 0 0 0 0 0 100 26 0 0 0 0
November 20, 2010...................... 100 0 0 0 0 0 100 1 0 0 0 0
November 20, 2011...................... 100 0 0 0 0 0 100 0 0 0 0 0
November 20, 2012...................... 57 0 0 0 0 0 100 0 0 0 0 0
November 20, 2013...................... 19 0 0 0 0 0 100 0 0 0 0 0
November 20, 2014...................... 0 0 0 0 0 0 86 0 0 0 0 0
November 20, 2015...................... 0 0 0 0 0 0 56 0 0 0 0 0
November 20, 2016...................... 0 0 0 0 0 0 22 0 0 0 0 0
November 20, 2017...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2018...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2019...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2020...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2021...................... 0 0 0 0 0 0 0 0 0 0 0 0
November 20, 2022...................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2)
No Optional Termination.............. 15.3 8.4 6.3 5.0 4.1 3.5 18.2 11.1 8.7 7.0 5.8 4.9
Optional Termination................. 15.3 8.4 6.3 5.0 4.1 3.5 18.2 11.1 8.7 7.0 5.8 4.9
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Securities 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.
S-44
<PAGE>
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-7 NOTES CLASS A-8 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>
Initial Balance........................ 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1998...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1999...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2000...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2001...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2002...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2003...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2004...................... 100 100 100 100 100 52 100 100 100 100 100 100
November 20, 2005...................... 100 100 100 100 61 14 100 100 100 100 100 100
November 20, 2006...................... 100 100 100 81 25 0 100 100 100 100 100 86
November 20, 2007...................... 100 100 100 47 0 0 100 100 100 100 97 66
November 20, 2008...................... 100 100 83 18 0 0 100 100 100 100 77 50
November 20, 2009...................... 100 100 51 0 0 0 100 100 100 94 60 38
November 20, 2010...................... 100 100 22 0 0 0 100 100 100 75 46 28
November 20, 2011...................... 100 66 0 0 0 0 100 100 96 58 35 20
November 20, 2012...................... 100 35 0 0 0 0 100 100 77 45 26 14
November 20, 2013...................... 100 14 0 0 0 0 100 100 64 36 20 11
November 20, 2014...................... 100 0 0 0 0 0 100 95 52 28 15 8
November 20, 2015...................... 100 0 0 0 0 0 100 77 41 22 11 5
November 20, 2016...................... 100 0 0 0 0 0 100 61 31 16 8 0
November 20, 2017...................... 84 0 0 0 0 0 100 46 23 11 5 0
November 20, 2018...................... 52 0 0 0 0 0 100 36 17 8 0 0
November 20, 2019...................... 15 0 0 0 0 0 100 26 12 5 0 0
November 20, 2020...................... 0 0 0 0 0 0 77 17 7 0 0 0
November 20, 2021...................... 0 0 0 0 0 0 35 7 0 0 0 0
November 20, 2022...................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2)
No Optional Termination.............. 21.0 14.7 12.1 10.0 8.4 7.1 23.7 20.2 17.8 15.5 13.5 11.8
Optional Termination................. 21.0 14.7 12.1 10.0 8.4 7.1 23.0 18.1 15.1 12.9 11.0 9.5
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Securities 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.
S-45
<PAGE>
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-1 NOTES CLASS M-2 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>
Initial Balance........................ 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1998...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 1999...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2000...................... 100 100 100 100 100 100 100 100 100 100 100 100
November 20, 2001...................... 100 100 100 100 96 83 100 100 100 100 96 83
November 20, 2002...................... 100 100 100 94 78 65 100 100 100 94 78 65
November 20, 2003...................... 100 100 98 79 64 51 100 100 98 79 64 51
November 20, 2004...................... 100 100 86 67 52 40 100 100 86 67 52 40
November 20, 2005...................... 100 98 74 56 42 31 100 98 74 56 42 31
November 20, 2006...................... 100 87 64 46 33 24 100 87 64 46 33 24
November 20, 2007...................... 100 77 55 38 26 18 100 77 55 38 26 18
November 20, 2008...................... 100 68 47 32 21 14 100 68 47 32 21 14
November 20, 2009...................... 100 60 39 26 16 10 100 60 39 26 16 10
November 20, 2010...................... 100 51 33 20 13 8 100 51 33 20 13 8
November 20, 2011...................... 100 43 26 16 9 5 100 43 26 16 9 5
November 20, 2012...................... 96 36 21 12 7 4 96 36 21 12 7 4
November 20, 2013...................... 88 31 18 10 5 3 88 31 18 10 5 2
November 20, 2014...................... 80 26 14 8 4 2 80 26 14 8 4 0
November 20, 2015...................... 70 21 11 6 3 0 70 21 11 6 2 0
November 20, 2016...................... 58 17 9 4 2 0 58 17 9 4 0 0
November 20, 2017...................... 47 12 6 3 0 0 47 12 6 2 0 0
November 20, 2018...................... 40 10 5 2 0 0 40 10 5 0 0 0
November 20, 2019...................... 31 7 3 0 0 0 31 7 3 0 0 0
November 20, 2020...................... 21 5 2 0 0 0 21 5 0 0 0 0
November 20, 2021...................... 10 1 0 0 0 0 10 0 0 0 0 0
November 20, 2022...................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2)
No Optional Termination.............. 19.9 14.0 11.6 9.7 8.2 7.1 19.9 14.0 11.6 9.7 8.2 7.1
Optional Termination................. 19.8 13.5 10.9 9.0 7.6 6.5 19.8 13.5 10.9 9.0 7.6 6.5
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Securities 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.
S-46
<PAGE>
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS B-1 CERTIFICATES
---------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- ---------------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance......................... 100 100 100 100 100 100
November 20, 1998....................... 100 100 100 100 100 100
November 20, 1999....................... 100 100 100 100 100 100
November 20, 2000....................... 100 100 100 100 100 100
November 20, 2001....................... 100 100 100 100 96 83
November 20, 2002....................... 100 100 100 94 78 65
November 20, 2003....................... 100 100 98 79 64 51
November 20, 2004....................... 100 100 86 67 52 40
November 20, 2005....................... 100 98 74 56 42 31
November 20, 2006....................... 100 87 64 46 33 24
November 20, 2007....................... 100 77 55 38 26 18
November 20, 2008....................... 100 68 47 32 21 14
November 20, 2009....................... 100 60 39 26 16 10
November 20, 2010....................... 100 51 33 20 13 7
November 20, 2011....................... 100 43 26 16 9 4
November 20, 2012....................... 96 36 21 12 6 1
November 20, 2013....................... 88 31 18 10 3 0
November 20, 2014....................... 80 26 14 8 1 0
November 20, 2015....................... 70 21 11 4 0 0
November 20, 2016....................... 58 17 9 2 0 0
November 20, 2017....................... 47 12 5 0 0 0
November 20, 2018....................... 40 10 2 0 0 0
November 20, 2019....................... 31 7 0 0 0 0
November 20, 2020....................... 21 2 0 0 0 0
November 20, 2021....................... 10 0 0 0 0 0
November 20, 2022....................... 0 0 0 0 0 0
Weighted Average Life(2)
No Optional Termination............... 19.9 14.0 11.5 9.6 8.1 7.0
Optional Termination.................. 19.8 13.5 10.9 9.0 7.6 6.5
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Securities 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.
YIELD SENSITIVITY OF THE CLASS IO CERTIFICATES
Because amounts distributable to the holders of the Class IO Certificates
consist entirely of interest, the yield to maturity of the Class IO Certificates
will be sensitive to the repurchase, prepayment and default experience of the
Home Loans, and prospective investors should fully consider the associated
risks, including the risk that such investors may not fully recover their
initial investment. In addition, the Class Notional Balance applicable to
interest calculations on the Class IO Certificates is (x) until the Payment Date
in May, 2000, an amount equal to the product of 1.7 and the Class Principal
Balance of the Class A-8 Notes and (y) thereafter, zero. Since the Class A-8
Notes will not begin to amortize until the Class A-1 through Class A-7 Notes
have been reduced to zero, the performance of the Class IO Certificates is
likely to be more stable than if such Class Notional Balance were calculated
using the underlying Home Loans directly, and consequently, the yield
sensitivity of such Certificates will only be impacted at extremely high rates
of prepayment.
S-47
<PAGE>
<PAGE>
The following tables set forth percentages for the sensitivity of the Class
IO Certificates to prepayments based on the modeling assumptions set forth
above.
PRE-TAX YIELD TO MATURITY(1) -- SENSITIVITY OF THE CLASS IO CERTIFICATES TO
PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGE OF THE PREPAYMENT ASSUMPTION
--------------------------------------------------------
0% 50% 75% 100% 125% 150%
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
At a Price of 19.81250%(2).............. 7.894% 7.894% 7.894% 7.894% 7.894% 7.894%
At a Price of 19.87500%(2).............. 7.637% 7.637% 7.637% 7.637% 7.637% 7.637%
At a Price of 19.93750%(2).............. 7.382% 7.382% 7.382% 7.382% 7.382% 7.382%
At a Price of 20.00000%(2).............. 7.128% 7.128% 7.128% 7.128% 7.128% 7.128%
At a Price of 20.06250%(2).............. 6.876% 6.876% 6.876% 6.876% 6.876% 6.876%
</TABLE>
- ------------
(1) Represented on a corporate bond equivalent basis.
(2) As a percent of the Class Notional Balance as of the Cut-Off Date. Accrued
interest will be added to such price after calculating the yields set forth
in the table.
The yields set forth in the preceding table were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flow to be paid on the Class IO Certificates would cause the discounted present
value of such assumed cash flows to equal the assumed purchase price of the
Class IO Certificates plus accrued interest and by converting such monthly rates
to corporate bond equivalent rates. Such calculations do not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as distributions on the Class IO
Certificates.
The Home Loans will not necessarily have the characteristics assumed above,
and there can be no assurance that (i) the Home Loans will prepay at any of the
rates shown in the table or at any other particular rate or will prepay
proportionately, (ii) the pre-tax yield on the Class IO Certificates will
correspond to any of the pre-tax yields shown above or (iii) the purchase price
of the Class IO Certificates will be equal to any of the purchase prices
assumed.
S-48
<PAGE>
<PAGE>
The paydown scenarios for the Offered Securities 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 resemble the actual
performance of the Home Loans and the Offered Securities, or that the actual
weighted average lives of the Offered Securities will not vary substantially
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 not expected 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 payments on the Offered
Securities 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 Securities are
likely to have weighted average lives that are shorter or longer than those set
forth in the foregoing tables.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Issuer will not make an election to be treated as a REMIC. In the
opinion of Brown & Wood LLP ('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) taxable as a corporation.
In addition, based on certain representations of the Depositor with respect to
collateral for the Home Loans and the use of Home Loan proceeds, Tax Counsel is
of the opinion that the Trust will not be treated as a taxable mortgage pool. If
the Issuer were treated as a taxable mortgage pool it would be taxed as a
corporation. Each Noteholder, by the acceptance of a Note, will agree to treat
the Notes as indebtedness for federal income tax purposes. See 'Certain Federal
Income Tax Consequences' in the Prospectus for additional information concerning
the application of federal income tax laws to the Trust and the Notes.
The Trust intends to treat all interest payments on the Notes as 'qualified
stated interest', but the Notes may be treated as having been issued with
original issue discount based on their issue price. However, it is unclear
whether the interest payments on the Class M-1 and Class M-2 Notes would
constitute 'qualified stated interest' and accordingly, all income on such Notes
may be required to be accrued under the original issue discount rules of the
Code. Accruing income under the 'original issue discount' rules under the Code
may require holders of Notes to recognize income with respect to such Notes 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. No
representation is made that the Home Loans will prepay at this rate or at any
other rate.
The Trust intends to treat the Class IO and Class B-1 Certificates as
equity interests in a partnership for federal income tax purposes and the
holders of these Classes agree to treat them consistently. See 'Certain Federal
Income Tax Consequences -- Tax Consequences to Holder of the Certificates' in
the Prospectus. The Class IO and Class B-1 Certificates may not be purchased by
tax-exempt entities or non-U.S. persons. Non-U.S. person means (i) a person
other than a citizen or resident of the United States, (ii) a partnership or a
corporation (including an, or entity treated as a partnership or corporation for
United States federal income tax purposes) not formed under the laws of the
United States, any State thereof, or the District of Columbia (unless in the
case of a partnership Treasury regulations provide otherwise), (iii) any estate
the income of which is not subject to United States income taxation regardless
of sources, and (iv) any trust other than a trust that a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. 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.
In general the tax year of a partnership is determined by reference to the
tax year of the partners with a majority interest in profits and capital with
the same tax year, or if no such partners exists in a manner that takes into
account the tax years of all partners. For purposes of determining its tax year
the Trust intends to use the
S-49
<PAGE>
<PAGE>
calendar year, but may, as a result of the tax years of the Certificateholders
and the Residual Interest holders be required to use a different taxable year,
or to change its taxable year as Certificateholders change.
The manner in which income should be allocated to the Class IO and Class
B-1 Certificates is unclear. With respect to the Class B-1 Certificate the Trust
intends to allocate income equal to the amount of stated interest that accrues
on the Class B-1 Certificates plus, in the first year, an amount equal to the
discount of the price to public from par stated on the cover hereof. With
respect to the Class IO Certificate, the Trust intends to allocate income, in
general, equal to the income such class would accrue each year if such class
represented a level pay bond with 30 equal payments (treating such payments as
if they occurred at the end of the Due Period rather than on the corresponding
Payment Date) issued for an amount equal to the price to the public stated on
the cover hereof. Appropriate adjustments in the amount of income accrued would
be made if the prepayments on the Home Loans was sufficient to cause the Trust
to reasonably project a reduction in the payments to the Class IO Certificates.
The Class IO and Class B-1 Cerfificateholders will be required to include such
amounts in income in its taxable year that ends with or includes the end of the
Trust's tax year. Although the Trust believes that allocating income to the
Class IO and Class B-1 Certificateholders in the foregoing manner is consistent
with the requirements of the partnership provisions of the Internal Revenue Code
of 1986, as amended (and the regulations promulgated thereunder), it is possible
the Internal Revenue Service would disagree.
Delinquencies will not affect the amount of income that the Class IO and
Class B-1 Certificates will be required to accrue. The manner in which losses
attributable to defaults should be allocated is unclear, and may not be
allocated to the Class B-1 Certificates even if its principal balance is written
down to reflect such losses. The character of any loss allocated to the Class IO
and Class B-1 is expected to be capital.
ERISA CONSIDERATIONS
THE NOTES
The Notes may be purchased by an employee benefit plan or an individual
retirement account (a 'Plan') subject to 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 and holding of a Note is consistent with its
fiduciary duties under ERISA and does not constitute, and will not result in a
nonexempt prohibited transaction as defined in Section 406 of ERISA or Section
4975 of the Code. In making such determination, a Plan fiduciary should consider
the possible relationship of the holders of the Residual Interest in the Trust
to such Plan and the fact that the Certificates are transferable. For additional
information regarding treatment of the Notes under ERISA, See 'ERISA
Considerations' in the Prospectus.
The Notes may not be purchased with the assets of a Plan if the Depositor,
the Servicer, the Indenture Trustee, the Owner Trustee 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.
THE CLASS IO AND CLASS B-1 CERTIFICATES
The Class IO and Class B-1 Certificates may not be acquired by (a) an
employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to
the provisions of Title I of ERISA, (b) a plan described in Section 4975(e)(1)
of the Code or (c) any entity whose underlying assets include plan assets by
reason of a plan's investment in the entity or which uses plan assets to acquire
Class IO and Class B-1 Certificates. By its acceptance of a Class IO or Class
B-1 Certificate, each holder of such Certificate will be deemed to have
represented and warranted that it is not subject to the foregoing limitation. In
this regard, purchasers that are insurance companies should consult with their
counsel with respect to the United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Bank and Trust (decided December 12, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be 'plan assets' for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Class IO Certificate or Class B-1
Certificates. For additional information regarding treatment of
S-50
<PAGE>
<PAGE>
the Class IO Certificates and the Class B-1 Certificates under ERISA, see 'ERISA
Considerations' in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the 'Underwriting Agreement'), the Depositor has agreed to sell to each of the
Underwriters named below (collectively, the 'Underwriters'), and each of the
Underwriters has severally agreed to purchase, the principal amount of Offered
Securities set forth opposite its name in the tables below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
--------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITER NOTES NOTES NOTES NOTES
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bear, Stearns & Co. Inc................... $25,794,000 $14,904,000 $11,680,000 $11,434,000
PaineWebber Incorporated.................. 25,793,000 14,903,000 11,680,000 11,433,000
Residential Funding Securities
Corporation............................. 25,793,000 14,903,000 11,680,000 11,433,000
----------- ----------- ----------- -----------
$77,380,000 $44,710,000 $35,040,000 $34,300,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
--------------------------------------------------------
CLASS A-5 CLASS A-6 CLASS A-7 CLASS A-8
UNDERWRITER NOTES NOTES NOTES NOTES
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bear, Stearns & Co. Inc................... $ 3,758,000 $ 6,328,000 $ 4,390,000 $ 5,118,000
PaineWebber Incorporated.................. 3,756,000 6,326,000 4,390,000 5,116,000
Residential Funding Securities
Corporation............................. 3,756,000 6,326,000 4,390,000 5,116,000
----------- ----------- ----------- -----------
$11,270,000 $18,980,000 $13,170,000 $15,350,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
------------------------------------------------------
CLASS M-1 CLASS M-2 CLASS B-1
UNDERWRITER NOTES NOTES CERTIFICATES
- ------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc................... $ 15,657,000 $ 7,828,000 $ 9,937,000
PaineWebber Incorporated.................. 15,656,000 7,828,000 9,935,000
Residential Funding Securities
Corporation............................. 15,656,000 7,828,000 9,935,000
------------ ------------ ------------
$ 46,969,000 $ 23,484,000 $ 29,807,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE INTEREST
-------------------
CLASS IO
UNDERWRITER CERTIFICATES
- ------------------------------------------ -------------------
<S> <C> <C>
Bear, Stearns & Co. Inc................... 100.00%
PaineWebber Incorporated.................. 0.00%
Residential Funding Securities
Corporation............................. 0.00%
-------
100.00%
-------
-------
</TABLE>
The Depositor has been advised by the Underwriters that they propose
initially to offer the Offered Securities to the public at the prices set forth
herein, and to certain dealers at such prices less the initial concession set
forth below for each Class. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of that set forth below for each Class.
After the initial public offering of the Offered Securities, the public offering
price and such concessions and reallowances may be changed.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Concessions.............................. 0.060% 0.075% 0.090% 0.105% 0.150% 0.210%
Reallowances............................. 0.040% 0.050% 0.065% 0.075% 0.100% 0.125%
</TABLE>
S-51
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8 CLASS M-1 CLASS M-2 CLASS IO CLASS B-1
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Concessions.............................. 0.240% 0.255% 0.450% 0.600% 0.210% 0.690%
Reallowances............................. 0.165% 0.175% 0.315% 0.400% 0.125% 0.475%
</TABLE>
Until the distribution of the Offered Securities is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Offered Securities. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Offered Securities. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Offered Securities.
If the Underwriters create a short position in the Offered Securities in
connection with the offering, i.e., if they sell more Offered Securities than
are set forth on the cover page of this Prospectus Supplement, the Underwriters
may reduce that short position by purchasing Offered Securities in the open
market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Offered Securities. In
addition, neither the Depositor nor the Underwriters makes any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Underwriters expect to make a secondary market in the Offered
Securities, but have no obligation to do so. There can be no assurance that any
such secondary market will develop or, if it does develop, that it will continue
or provide a sufficient level of liquidity.
In addition to the purchase of the Offered Securities pursuant to the
Underwriting Agreement, the Underwriters and their affiliates have several
business relationships with the Transferor and Servicer and its affiliates. One
or more affiliates of Residential Funding Securities Corporation will provide
warehouse financing and may provide repurchase arrangements to the Transferor
for its consumer and mortgage loans, including property improvement, debt
consolidation and combination loans. See 'Use of Proceeds' herein. In addition,
affiliates of the Underwriters may provide other term financing arrangements to
the Transferor for the Residual Interest retained by it and other residual
interest securities retained by it that were issued in connection with one of
the prior series of asset backed securities involving the Transferor.
As of the date of this Prospectus Supplement, the Transferor has a
warehouse credit facility and a working capital credit facility with an
affiliate of Residential Funding Securities Corporation. Immediately prior to
the sale of the Home Loans to the Depositor, the Home Loans were subject to
financing under such warehouse credit facility. The Transferor will apply the
proceeds it receives from the sale of the Home Loans to the Depositor to repay
such financing. In addition, pursuant to a stock option agreement, such
affiliate of Residential Funding Securities Corporation has an option, subject
to certain conditions and limitations, to purchase all or a portion of the
Transferor's issued and outstanding shares of common stock. Such affiliate of
Residential Funding Securities Corporation will also be issued a portion of the
Residual Interest in consideration for payment by such affiliate of certain
costs associated with the origination of certain Home Loans by the Transferor.
LEGAL INVESTMENT MATTERS
The Offered Securities will NOT constitute 'mortgage related securities'
under the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA').
Accordingly, many institutions with legal authority to invest in 'mortgage
related securities' may not be legally authorized to invest in the Offered
Securities.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Securities or to
purchase Offered Securities 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 Securities constitute legal
investments for such investors.
S-52
<PAGE>
<PAGE>
RATINGS
It is a condition to the issuance of the Offered Securities that the
Offered Securities receive at least the ratings from the Rating Agencies as
follows:
<TABLE>
<CAPTION>
CLASS STANDARD & POOR'S FITCH
- ------------------------ ----------------- ------
<S> <C> <C>
Class A-1 Notes......... AAA AAA
Class A-2 Notes......... AAA AAA
Class A-3 Notes......... AAA AAA
Class A-4 Notes......... AAA AAA
Class A-5 Notes......... AAA AAA
Class A-6 Notes......... AAA AAA
Class A-7 Notes......... AAA AAA
Class A-8 Notes......... AAA AAA
Class M-1 Notes......... AA AA
Class M-2 Notes......... A A+
Class IO Certificates... AAAr AAA
Class B-1 Certificates.. BBB - BBB
</TABLE>
The ratings on the Offered Securities address the likelihood of the receipt
by Securityholders of all payments on the Home Loans to which they are entitled.
The ratings on the Offered Securities also address the structural, legal and
issuer-related aspects associated with the Offered Securities, including the
nature of the Home Loans. In general, the ratings on the Offered Securities
address credit risk and not prepayment risk. The ratings on the Offered
Securities 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 Securities do not address
the possibility that Securityholders might suffer a lower than anticipated yield
in the event of principal payments on the Offered Securities (other than the
Class IO Notes) in the event that the Trust is terminated prior to the
applicable Maturity Dates of the Notes or the Final Scheduled Distribution Date
of the Class IO and Class B-1 Certificates. The ratings of the Class IO
Certificates do not address the possibility that investors therein may not
recover their initial investment.
The 'r' symbol is appended to the rating by Standard & Poor's of the Class
IO Certificates because they are interest-only Certificates that Standard &
Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks created by the terms of such Certificates. The
absence of an 'r' symbol in the rating of the other Classes of Offered
Securities should not be taken as an indication that such Securities will
experience no volatility or variability in total return.
The Depositor has not solicited ratings on the Offered Securities from 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 Securities, or, if
it does, what rating would be assigned by any such other rating agency. Any
rating on the Offered Securities by another rating agency, if assigned at all,
may be lower than the ratings assigned to the Offered Securities 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 Security ties 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 Securities.
LEGAL OPINIONS
The validity of the Offered Securities will be passed upon for the
Depositor and the Underwriters by Stroock & Stroock & Lavan LLP, New York, New
York. Certain legal matters will be passed upon for the Transferor and the
Servicer by Brown & Wood LLP. Brown & Wood LLP will also pass on certain federal
income tax matters for the Trust.
S-53
<PAGE>
<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Accrual Period...................................................................................... S-26
Administration Agreement............................................................................ S-15
Allocable Loss Amount............................................................................... S-5, S-24
Available Collection Amount......................................................................... S-26
Available Funds..................................................................................... S-26
Bankruptcy Code..................................................................................... S-12
Bankruptcy Commission............................................................................... S-12
Business Day........................................................................................ S-28
Certificate Distribution Account.................................................................... S-34
Certificateholders.................................................................................. S-i
Certificateholders' Interest Carry-Forward Amount................................................... S-28
Certificateholders' Interest Distributable Amount................................................... S-28
Certificateholders' Monthly Interest Distributable Amount........................................... S-28
Certificates........................................................................................ Cover
Class B-1 Optimal Principal Balance................................................................. S-28
Class B-2 Optimal Principal Balance................................................................. S-28
Class M-1 Optimal Principal Balance................................................................. S-29
Class M-2 Optimal Principal Balance................................................................. S-29
Class Notional Balance.............................................................................. S-1, S-29
Class Principal Balance............................................................................. S-2
CLTV................................................................................................ S-15
Code................................................................................................ S-6, S-50
Collection Account.................................................................................. S-34
Commission.......................................................................................... S-iii
Conventional Loans.................................................................................. S-i
Co-Owner Trustee.................................................................................... S-1
CPR................................................................................................. S-40
Cut-Off Date Principal Balance...................................................................... S-14
Cut-Off Date Pool Principal Balance................................................................. S-3, S-14
Defective Home Loan................................................................................. S-12
Deferred Amount..................................................................................... S-29
Definitive Securities............................................................................... S-3
Deleted Home Loan................................................................................... S-23
Depositor........................................................................................... S-1, S-21
Depositor Securities................................................................................ S-21
Determination Date.................................................................................. S-26
DTC................................................................................................. S-3
Due Period.......................................................................................... S-1
ERISA............................................................................................... S-6
Excess Spread....................................................................................... S-29
Final Scheduled Distribution Date................................................................... S-3
Fitch............................................................................................... S-7
High Cost Loans..................................................................................... S-10
Highest Priority Class.............................................................................. S-32
Home Loan Pool...................................................................................... S-4
Home Loan Rate...................................................................................... S-15
Home Loan Schedule.................................................................................. S-33
Home Loans.......................................................................................... S-4
Indenture........................................................................................... Cover
Indenture Trustee................................................................................... S-1
Indenture Trustee's Home Loan File.................................................................. S-33
Initial Undercollateralization Amount............................................................... S-29
</TABLE>
S-54
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Insurance Proceeds.................................................................................. S-29
Interest Payment Amount............................................................................. S-29
Interest Rate....................................................................................... S-2
Issuer.............................................................................................. S-1
LIBOR............................................................................................... S-26
LIBOR Business Day.................................................................................. S-29
Liquidated Home Loan................................................................................ S-29
Make Whole Servicing Fee............................................................................ S-33
Maturity Date....................................................................................... S-2
Modeling Assumptions................................................................................ S-40
Mortgages........................................................................................... S-4
Net Delinquency Calculation Amount.................................................................. S-30
Net Liquidation Proceeds............................................................................ S-30
Net Weighted Average Rate........................................................................... S-26
Non-Priority Class.................................................................................. S-32
Note Payment Account................................................................................ S-34
Noteholders......................................................................................... S-i
Noteholders' Interest Carry-Forward Amount.......................................................... S-30
Noteholders' Interest Payable Amount................................................................ S-30
Noteholders' Monthly Interest Payable Amount........................................................ S-30
Notes............................................................................................... Cover
Offered Securities.................................................................................. Cover
Optional Termination Date........................................................................... S-6, S-32
Original Class Principal Balance.................................................................... S-1
Overcollateralization Amount........................................................................ S-30
Overcollateralization Reduction Amount.............................................................. S-25
Overcollateralization Shortfall..................................................................... S-30
Overcollateralization Stepdown Date................................................................. S-30
Overcollateralization Surplus....................................................................... S-30
Owner Trustee....................................................................................... S-1
Payment Accounts.................................................................................... S-35
Payment Date........................................................................................ S-i
Plan................................................................................................ S-6, S-50
Pool Principal Balance.............................................................................. S-14
Prepayment Assumption............................................................................... S-40
Principal Balance................................................................................... S-14
Purchase Price...................................................................................... S-22
Qualified Substitute Home Loan...................................................................... S-23
Rating Agencies..................................................................................... S-7
Record Date......................................................................................... S-25
Reference Bank Rate................................................................................. S-30
Reference Banks..................................................................................... S-30
Registration Statement.............................................................................. S-iii
Regular Payment Amount.............................................................................. S-30
Regular Principal Payment Amount.................................................................... S-31
Released Mortgaged Property Proceeds................................................................ S-31
Required Overcollateralization Amount............................................................... S-31
Residual Interest................................................................................... Cover
Rolling Six-Month Delinquency Average............................................................... S-31
Sale and Servicing Agreement........................................................................ S-3
Securities.......................................................................................... Cover
Securityholders..................................................................................... S-i
Security Owners..................................................................................... S-3
Senior Notes........................................................................................ S-i
Senior Optimal Principal Balance.................................................................... S-31
</TABLE>
S-55
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Servicer............................................................................................ S-1
Servicing Compensation.............................................................................. S-34
Servicing Fee....................................................................................... S-33
Servicing Fee Rate.................................................................................. S-33
SMMEA............................................................................................... S-6, S-52
S&P................................................................................................. S-7
Subordinate Notes................................................................................... S-i
Subordinate Securities.............................................................................. S-i
Substitution Adjustment............................................................................. S-22
Tax Counsel......................................................................................... S-6, S-49
Termination Price................................................................................... S-31
Transfer and Servicing Agreements................................................................... S-14, S-33
Transferor.......................................................................................... S-1
Trust............................................................................................... S-1
Trust Agreement..................................................................................... S-1, S-25
Underwriters........................................................................................ S-51
Underwriting Agreement.............................................................................. S-51
60-Day Delinquency Amount........................................................................... S-31
</TABLE>
S-56
<PAGE>
<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>
<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>
<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>
<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>
<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
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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 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
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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 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
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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.'
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
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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 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
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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 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
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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.
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.
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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 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
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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 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 Prospec-
tus Supplement, will be reported by the Trustee on an accrual
basis, which may be prior to the receipt of cash associated with
such income.
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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 characteriza-
tions 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 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 otherwise marked to reflect
their assignment to the Trust Fund. Therefore, if, through negligence,
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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 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
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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.
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
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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.
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.
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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 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.
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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.
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
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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
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
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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 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.
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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 (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.
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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.
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.
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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 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.
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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
(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.
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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.
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
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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 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.
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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.
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.
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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.
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
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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 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.
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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 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.
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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 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.
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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 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
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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 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
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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 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
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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
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incurred 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.
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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 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
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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.
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 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
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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 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
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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 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
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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 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.'
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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 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
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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.
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
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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 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
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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, 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
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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.
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
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(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 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
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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
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
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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 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
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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 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
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is 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.
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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 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.
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
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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
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
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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.
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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.
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.
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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, 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.
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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 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 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
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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.
'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.
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'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.
'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.
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'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.
'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.
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'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 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 OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................................................... iii
Reports to Securityholders.............................................................................. iii
Summary of Terms........................................................................................ S-1
Risk Factors............................................................................................ S-8
Use of Proceeds......................................................................................... S-14
Description of the Trust................................................................................ S-14
The Home Loan Pool...................................................................................... S-15
The Depositor........................................................................................... S-21
The Transferor and Servicer............................................................................. S-21
Description of Credit Enhancement....................................................................... S-24
Description of the Securities........................................................................... S-25
Description of the Transfer and Servicing
Agreements............................................................................................ S-33
Prepayment and Yield Considerations..................................................................... S-36
Certain Federal Income Tax Consequences................................................................. S-49
ERISA Considerations.................................................................................... S-50
Underwriting............................................................................................ S-51
Legal Investment Matters................................................................................ S-52
Ratings................................................................................................. S-53
Legal Opinions.......................................................................................... S-53
Index of Terms.......................................................................................... S-54
PROSPECTUS
Prospectus Supplement................................................................................... 3
Reports to Holders...................................................................................... 3
Available Information................................................................................... 3
Summary of Terms........................................................................................ 5
Risk Factors............................................................................................ 15
Description of the Securities........................................................................... 18
The Trust Funds......................................................................................... 22
Enhancement............................................................................................. 27
Servicing of Loan....................................................................................... 30
The Agreements.......................................................................................... 36
Certain Legal Aspects of the Loan....................................................................... 44
The Depositor........................................................................................... 52
Use of Proceeds......................................................................................... 52
Certain Federal Income Tax Consequences................................................................. 52
State Tax Considerations................................................................................ 72
ERISA Considerations.................................................................................... 73
Legal Investment........................................................................................ 75
Plan of Distribution.................................................................................... 75
Legal Matters........................................................................................... 75
Glossary of Terms....................................................................................... 76
</TABLE>
$350,460,000
MASTER FINANCIAL ASSET
SECURITIZATION TRUST 1997-1
[LOGO]
MASTER FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
RESIDENTIAL FUNDING
SECURITIES CORPORATION
UNDERWRITER OF THE CLASS IO CERTIFICATES
BEAR, STEARNS & CO. INC.
NOVEMBER 19, 1997
_____________________________________ _____________________________________
